Earnings Call: Q3 2021

Oct 22, 2021

Good morning, everyone, and welcome to the Porto Levisas Third Quarter 2021 Conference Call. 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 in the earnings release. I will now turn the call over to Mr. Alfonso Ianguita Co, Chief Executive Officer of Grupo Televisa. Please go ahead, sir. Thank you, Sara. Good morning, everyone, and thank you for joining us. With me today are Pepe Tonio Gonzalez, CEO of Cable Alex Pena, CEO of Sky and Carlos Phillips Antonio Lara, Corporate Vice President of Finance and Administration, respectively. During the Q3, we experienced an overall positive economic environment in Mexico despite the 3rd wave of COVID-nineteen, relatively high inflation and raising interest rates. The economic recovery continues to be led by demand of products manufactured in Mexico from the United States, while remittances sent by migrants north of the border keep hitting new monthly records and have helped domestic consumers. In Mexico, around 66,000,000 people have received at least one dose of the COVID-nineteen vaccines, accounting for 51% of the population, while about 48,000,000 people have been fully vaccinated, representing 37% of the total. This has continued to a more benign outlook for mobility and a new normality going forward. Since the end of August, children returned to in person classes for the 2021, 2022 school year, while labor force is gradually going back to the office. So we're confident that the Mexican economy will experience a rebound of 6% in 2021, including growth of around 4% in the 4th quarter. Moreover, the economic recovery should set the ground for GDP growth of about 3% in 2022. Under this environment, our content business continues growing at a healthy pace. Advertising activity from the private sector continues to be robust. Cable and Sky continued to perform relatively well, but several factors have led to soft RGU net adds for both, such as an increase in out of home activities, price adjustments at cable and a still relatively high unemployment rate in Mexico. At the same time, some of these factors have translated into lower recharges at Sky's prepaid packages. Moving on to our financial results for the quarter. Consolidated revenue reached ARS 26,100,000,000, representing a year on year growth of 9.1%. While operating segment income reached ARS 11,000,000,000 equivalent to a year on year increase of 4.2%. Bernardo and I are glad to see that most of our assets retain positive momentum in the Q3. The Strategy to turn around our cable segment in 2021 has proven to be successful and will allow us to deliver year on year revenue and EBITDA growth for the full year. We are also excited about the opportunity that we have ahead of us to accelerate cable RGU net adds, more evidently in 2022, driven by the aggressive FTTH expansion plan implemented this year. Now turning to the 3rd quarter financial results in our Content division. By 15.8 percent as the economic recovery is causing a surge in activity in most industry verticals fueling an acceleration in advertising in the private sector. Most businesses are looking to reconnect their brands and products to consumers and Televisa's increased ratings during the Q3, particularly on prime time, gave us a great advantage. Private sector advertising revenues were strong, more than 16% year on year. On the other hand, government advertising revenues remained relatively weak, driven by ongoing austerity. As we have repeatedly mentioned, government advertising has been shrinking over the last couple of years. So today, Its share of total is already very low, particularly for Televisa. Royalties from Univision of $110,700,000 were 20.2% year on year, supported by materially higher ratings and the strong economic recovery in the United States. Univision's robust operating performance was also driven by several initiatives implemented by management, including a revamp of the sales team, the optimization of advertising inventory and focus on profitability. Univision's solid revenue growth should continue in 2022, given that historically We are confident that Univision's traditional media business will continue to grow in the medium term, supported by the initiatives implemented by Wade and to revamp these operations. We are also convinced that the global streaming platform to be launched next year will be Univision's main growth engine. All in, during the quarter, content revenue increased by 13.4% while operating segment income grew by 2.9%. Our content margin contracted to 37.2% due to a difficult comp associated with more production of content, including sporting events related to the Olympics and the Gold Cup. In 2020, the COVID-nineteen lockdowns led us to have less content production costs as we broadcasted several reruns and many sporting events were canceled. With advertising revenue up by 24% year on year during the 1st 9 months of 2021. We are confident that our full year advertising revenue will be very close to pre COVID levels. We believe this highlights that free to air Moving on to the performance of our content. During the Q3, the top 20 programs on Mexico's Broadcast television were produced and transmitted by Televisa. These included telenovelas, dramas, newscasts and companies. Televisa's top 3 programs during the quarter had audiences between 135 and 150% higher than the top rated program of our closest competitor. Throughout the week, Televisa's audiences were 97% higher than those of the 2nd largest broadcaster, while audiences at our flagship network, Las Estrellas, were 175% higher than those of our closest competitor. This shows that the audience gap with our closest competitor continues to increase compared to 89% and 151% higher audiences, respectively, during the Q2 given the solid result ratings of our program. During the Q3, our main newscast had 61% than those of the other 2 free to air television broadcasters combined. Finally, the 10 soccer matches with the highest audiences in Mexico during the Q3 were transmitted by Televisa. In the U. S, Univision's ratings on linear television increased by 16% year on year during the Q3, significantly exceeding ratings growth for all other media companies in the United States. We are very proud to report that the strength of Univision's ratings has been driven by Televisa content. Is 100% of Univision's prime time program in RIM. These audience metrics in Mexico and the United States are evidence that Televisa's strategy to revamp our content production implemented a couple of years ago has been very successful. Now let me turn the call over to Pettonio, CEO of Cable. Thank you, Alfonso. During the Q3, our Cable segment delivered year on year revenue growth of 5.8%, while operating segment income increased by 5.6%. Our Residential segment revenue grew by 5.8%, while our Enterprise segment, which accounts for around 15% of total cable revenue increased by only 0.6%, mostly due to the timing of revenue recognition. Our cable business keeps growing with higher average revenue per user, ARPU, in new sales and a strong improvement in the product mix. We added 52,000 revenue generating units, reaching a total of 14,400,000 RGUs at the end of the quarter. To put this in perspective, for full year 2019, we added 800,000 RGUs while the same number for 2020 was 1 point $4,000,000 This reflects that NetAct in 2020 were an outlier driven by an extraordinary surge in consumer demand for broadband. For 2021, as social distancing measures have eased and the demand cycle for our connectivity products returned to normal, Net adds have slowed down from a hangover effect, so to speak. Broadband continues to be the highest margin service, So we will continue to enhance its product offerings. We added 25,000 broadband RGUs during the quarter for a total of 5,600,000. For the 12th consecutive month, we have been number 1 in the Netflix ISP for the competitive service. We continue to observe good results with voice RGUs as we added 68,000 during the Q3. We've been very successful out of selling this service to our customers. We have 59,000 net video disconnections during the quarter, largely due to customers prioritizing broadband services and looking to reduce their monthly bills. We keep strengthening our Help in retaining video use in the future. Mobile customers continue to grow. At the end of the quarter, we had 139,000 RGUs, an increase of 18,000 from last quarter. Looking forward, as the economy keeps improving, we expect demand for our services to increase with potential opportunities in Small and medium sized business segment. On the other hand, we don't foresee the extraordinary surge in demand we experienced in 2020 because of the pandemic. We are strengthening our sales promotion strategies and our customer retention programs to take over of these simultaneous effects. In September, we made price realignment in 2 of our flagship broadband products. Our sales by the end of the quarter. We expect this positive trend to continue. Before turning the call back to Alfonso, let me 2,000,000 homes with fiber this year is on track. We ended the 3rd quarter with 65 completion of our full year goal, up from 25% at the end of the second quarter. This will help us to gradually accelerate RGU net adds from 20 2021, guys. By the end of the Q3, we have successfully launched fiber to the home services in the cities of Guadalajara, Toluca and Durango. We are convinced that the expansion to selective location makes a lot of sense for Izy, considering that we have a nationally recognized brand, exclusive content and high quality service with competitive offers. Thank you, PPT. Now let me turn the call over to Alex Pena. Thank you, Alfonso. At Sky, revenue declined by 2.5% year on year during the quarter, driven by lower recharges of prepaid packages as children are going back to school and Workers' Operating segment income fell by 7.2%, driven by the amortization of certain sporting events such as the UEFA Euro 2020 and the Commonwealth America Cup. Sky added 27,000 and RGUs despite having 2,000 video subs disconnections during the quarter. On the broadband side, we added 15,000 RGUs during the quarter, reaching a total of 722,000 broadband RGUs. In the aggregate, Including our MVNO service, which added 13,000 RGUs during the quarter, Thank you, Alex. Regarding CapEx, year to date, we have invested $918,000,000 of which $680,000,000 in cable. As we discussed during the call for the Q1, our CapEx target for 2021 includes $850,000,000 in cable or $200,000,000 more than what we invested in 2020 given that we will pass 2,000,000 homes with fiber, $250,000,000 in Sky $75,000,000 in Content and Other Businesses. I'm happy to share with you that in September, Mexico's telco regulator, IFT, and the antitrust commission, Confess approved the merger of our content assets with Univision. The transaction is still pending some required regulatory approvals in the United States. In the meantime, we have been working closely to prepare the integration with Univision ahead of the closing, which will allow us to execute the digital transformation strategy and the launch of the global streaming platform as planned. Also on September 13, we announced an agreement with Live Nation Entertainment to move forward with the sale of our unconsolidated 40 percent equity stake in Nocesa for a total consideration of MXN 5,200,000,000. Although this transaction has already been approved by regulators, the time for its closing has elapsed. Therefore, we are waiting for new regulatory approvals to close, which we expect could be received before year end. To wrap up, with consolidated segment income growing by 7.4% and 9.2% year on year, respectively, during the 1st 9 months of 2021. Bernardo and I feel confident that our operating performance for the full year will show strong recovery. In addition, the strategic initiatives implemented this year, including the merger of our content assets with Univision, the expansion of our FTTH network and the monetization of noncore assets will materially strengthen our competitive position to achieve sustainable growth over the coming years. Now we are ready to take your questions. Sara, could you please provide instructions for the Q and A? We will now take our first question from the line of Fred Mendez of Bank of America. Please go ahead. Your line is open. Hello. Good morning, everyone, and thanks for the call. I had two questions here on my side. The first one is, CapEx is increasing. Obviously, it does take some time between getting the homestead and getting the net adds. But despite the strong increase in CapEx to reach your goal of 2 new homespegged, net adds beginning about our trend. So how should we expect, how do you see This might add as we move forward. This will be my first question. And then the second question on cable as well. If there is a major difference That you already observing between the performance where you have FTTH and the performance where you have cable. If FTTH is based on having a stronger performance over cable or not really? Thank you. Fred, you're absolutely right that, of course, the expansion of the FTTH Network and the deployment of fiber takes time and takes aggressive investments. And so it takes time to pick up the To install the network, to deploy the fiber and pick up the subscribers. What I can say conceptually is that The need for in home connectivity in Mexico is still huge, and broadband penetration is still Very low at around 60%. So these factors plus the additional 2,000,000 homes that we're passing with FTTH, as you With FTTH, as you described, this year should allow us to accelerate RGU net adds. And that will, because of this lag, become more evident in 2022. I'll ask Pepe Tonio to expand on this. Yes. Thank you. Thank you, Fred. One part as a bit of background. Let's remember that the net adds for 2020 were an outlier, and we're suffering from what we kind of call a hangover effect in 2021. Lots of people contracted broadband last year, and therefore, we're not having as many people contract or hire broadband this year. To put this in perspective, in 2019, we added 800,000 RGUs while the number in 2020 was close to 1,400,000. But in 2021, we see 2 effects. On the one hand, the demand for connectivity has returned to pandemic levels And on the other, the economy is bouncing back. So we're trying to serve these two effects, Strengthening our sales promotion and our customer retention programs. There's also a new issue that it kind of explains your question, which is we made a small adjustment in our one of our flagship broadband products in September. And the September number is markedly different than the net adds numbers for the previous 4 months. So we expect that the twitch or the change in the price in the broadband flagship product and The building that we're doing should move us in the future towards more solid net adds in broadband. Very clear, Fonsen and Anaya. Thank you. Thank you. We will now take our next question from the line of Alejandro Chaveras of Credit Suisse. Please go ahead. Your line is open. Hello, Talisa, thanks for taking my questions. Congratulations on the results. I just wanted to get a little bit more color on the RGV losses Pay TV, they seem to accelerate a little bit sequentially. I was wondering if it was related to a change In pricing of package or something, I think you have mentioned in the past that consumers tend to save a lot when they cut their pay TV Subscription will be in a certain place. So a little bit more color on that would be helpful. And I have another question after. Hi, Alejandro. I'll ask Pepe Tonio to talk about the video RGU disconnections. Thank you, Alejandro. As we've mentioned before, the new video platforms Linear TV presents the challenge not only in Mexico, but all over the world. In addition, the economic environment has been difficult. Most of our households I have a few points to make on this. Most of our households continue to be our broadband customers. A bundle is competitive, offering affordable pay TV services. So we believe that once the economy improves, This will be covered. And we are seeing some incipient results that our triple play sales have remained robust in the last few months. So we're very encouraged by that. As a strategy, following the global tendency, We are continuing to push our strategy to become a content aggregator on top of our linear TV content, which is pretty popular. We're including several streaming services in our cable packages such as Blame, Netflix, Disney and Amazon Prime. So that way we're trying to set up Some of those offerings. I think another issue that is very important is we are strengthening Our video platform to improve the customer experience in navigating the different streaming services. I think that will be a key differentiator for us. If people can serve the different streaming services without having to leave I set a box and then come back and change inputs, etcetera, that's going to make a big difference for us. So I think In all of this, we should be able to maintain our video customers in the future. Thank you, Alex. Great. Perhaps just a follow-up. This one is on the increasing content costs. Obviously, you had already mentioned that we will see a common cost rise, which is difficult in 2021. But I was wondering How much of this is related perhaps to developing the new series for the global streaming platform? Yes. Well, as you might remember, we had a full plan to revamp Our content production some years ago. And of course, we're investing more in content. We have new series. We have what we have now called serielas, which is a shorter version and a modernized Version of the traditional telenovela stories, but those have a faster pace, Those have less episodes, have less a little less drama, so and they have proven to be very successful. Univision's prime time, as I mentioned in my opening remarks, now it's 100% based on Televisa content. So Univision will rely less on acquiring content from third parties, and this content has proved to be very successful if you look at Univision's numbers during the Q3. So I think, of course, we'll continue to invest in producing content and That content will be better. We have the tremendous advantage of having the best And most effective fact, production of content in Spanish in the world in Mexico City, and we'll use that very efficient tool to produce More content. So I think streaming, of course, We will produce content ourselves for the streaming platform, and we will also produce through 3rd parties. That will be key to the launching of the global streaming platform together with Univision. You'll be seeing very exciting products on the streaming platform. Of course, higher quality products. So I think you'll be happy with the product And we'll see a lot of subscriptions and a lot of sales. Thanks. We will now take our next question from the line of Matthew Hiringen from Benchmark. Please go ahead. Your line is open. Thank you. Congratulations on the results. A couple of days ago, Netflix reported fairly modest results for the Latin American region in terms of their additions, and I think there's a consensus there as far as mature businesses maturing. Is there any read through there to the potential of your business? I mean, clearly, you're much more AVOD focused and you have more Content that Netflix does, particularly outside scripted programming. But can you talk a little bit more about the can down there? And do you have any comments on Peacock in the U. S. Looking to do a lot more Spanish language programming? Thank you. Hi, Nat. Yes, what I can tell you is that we're very excited about the product. Of course, we're going to be 100% focused on Spanish language, which as we have mentioned, the 2nd most spoken language in the world aside from Mandarin. So we're focusing on this operation, which is which has a GDP of more than $7,000,000,000,000 And of that, dollars 3,500,000,000,000 is just the Mexican economy and the U. S.-Hispanic market GDP. So we're going to focus 100% on the production of Spanish content. We have moved a long way in these very few months to launch this product, this global product Next year, of course, we're already working on the production of original content. The new premium subscription Here of our global streaming platform will feature more than 6,000 hours of Spanish language content With more than 30 original productions throughout next year, we're going to feature globally recognized Producers, creators, writers, including Maria Duenas, Santiago Limon, Even Mario Vargas Llosa, who was the Nobel Literature Award winner, we just closed a first look deal with Eugenio Verdes, who is a top comedian in Latin America, who is Mexican. So We have basically, I mean, we're speaking to renowned actors, producers, sliders, etcetera. So we're going to focus 100% of our attention to the Spanish language. And we believe that having the huge library of Televisa Plus, this new premium productions that are going to be appearing exclusively on our new platform, This will be a success throughout the region. That's great. Thank you. We will now take our next question from the line of Alejandra Galloestra from BBVA. Please go ahead. Your line is open. Hi, good morning everyone. Thank you for taking my questions. First and forward, I know if you can make Your comments about the good performance of Univision, which royalties increased 20% this quarter? And second, if you could be more specific about the timing to launch the new streaming platform of Univision and how you plan to read it, if you plan To launch several platforms at once, Ableton export or if you plan to do it globally Or maybe you don't launch it in the U. S. And Mexico simultaneously in the rest of the world later on. And 34 May, I was wondering if your content margins will improve Once you launch this streaming platform since I understand that you're already spending in producing content for this new streaming platform that you will be launching next year and you're still not generating revenues out of it. I was wondering if margins should improve once you launch the service. Thank you. Hola, Alejandro. Yes, we're what I can tell you is we're very excited about what's happening at Univision. In essence, Wade Davis has revamped the whole team, but more specifically, the sales team. He brought in Donna Speciale from Warner, and she's doing a spectacular Job in selling advertising and positioning this advertising. Of course, this is all based on the tremendous Success of our content, of the ratings that the content is producing, the success also of the Mexican Soccer League games that Univision is transmitting. So we are very excited about what's going on both on the traditional Business of selling advertising and also on what we're seeing in terms of the new streaming platform. What I can tell you, and you're absolutely right, we're delighted to see that the royalties from Univision amounted this quarter to $110,000,000 And you're right to point out that they were 20% higher than Last year, but more importantly because of the easy comp as a result of COVID, This was 10% higher than 2019 royalties for the Q3. So that only demonstrates that Univision is doing a tremendous job in the traditional business. And we believe that this will continue next year because we saw the upfront results, and They look spectacular. They were the we had the best upfront in the history of the company, Both in terms of pricing and in terms of volume, we can compare this upfront to what happened in 2016, 2017. So we're very Which has to do with the launching of the screening platform, will be launched In early 2022, as well platform in the second half of twenty twenty two. We will start with Mexico and the United States and then expand throughout the region and other Countries and territories. Of course, as I mentioned, of the Spanish speaking GDP, That is our addressable market. Half of that, dollars 3,500,000,000,000 is just Mexico and So of course, we'll begin there and then we'll expand to other places. Thank you very much. And I was wondering maybe you could comment on The potential margin improvement in the content division, since I understand that you're standing in producing content for this new platform, We're still not generating revenues yet. Yes. I think what I can tell you, Alejandro, we're not giving guidance as to Our margin and however, what I can tell you is that in Merge with Univision, the combined company will See an expansion. Okay, thank you very much. Thank you. We will now take our next question from the line of Gordon Lee at BTG. Please go ahead. Your line is open. Yes. Good morning. Thank you very much for the call. Most of my questions were on the content side and they've been answered. But I was wondering if you could just give Not precise guidance, but would it be fair to say thinking about CapEx going forward at the consolidated level that we should be thinking about 1,000,000,000 That's sort of the new run rate given the outlook for the cable business? Gordon, Yes, it will be around there. Perfect. Very clear. Fair enough. Thank you. We will now take our next question from the line of Hidbar Togastia at Barclays. Please go ahead. Your line is open. Hi, good morning. Thank you for the call. On the closing of the Univision transaction, can you provide any color on any potential And it's like going to look like once the transaction is completed. And also on a press conference A couple of weeks ago, the President mentioned that the government is expecting around ARS 10,000,000,000 as A tax payment for the transaction. Can you confirm whether this number is final or if it's still in flux? Thank you. Hola, Gilberto. Yes, of course, the corporate expenses will be reduced appropriately Once we resize the what we have called the RemainCo, or that is Grupo Televisa, And you will see the effect next year. As to the payment of taxes, it will be Around there or I mean a little Gilberto, are you still there? Yes. I'm sorry. I couldn't hear you. You said it would be Around there or a little, and then it got cut off. Yes, it will be around there or a little higher than that number, But around that figure. All right. Brilliant. Thank you very much. Thank you very much for participating in the call. And of course, As always, we're here to answer any other questions you might have. So thank you very much. This concludes today's conference call. Thank you for participating. You may all disconnect.