Earnings Call: Q3 2020

Oct 23, 2020

Good morning, everyone, and welcome to Grupo de L'Evica's Third Quarter twenty twenty 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 and in the earnings release. I will now turn the call over to Mr. Alfonso de Angoidia, Co Chief Executive Officer of Grupo Televisa. Please go ahead, sir. Thank you, Victor. Good morning, everyone, and thanks for joining us today. With me today are Helter Folk, CEO of Cable Alex Pena, CEO of Sky Patricio Wilkes, Head of Televisa of Turlios and our CFO, Carlos Varelos. I will start with our consolidated financial results, followed with the financial results in our Content segment. Then I will turn it over to Patricio, Salvi and Alex. We will then use the time remaining to answer your questions. The macroeconomic environment continues to be challenging, and there is still uncertainty, but we're seeing signs of improvement. At Televisa, we are on our way to returning to normal activities. Cable and Sky have operated at full capacity throughout the year with administrative and call centers personnel either working from home or rotating in their offices. Our field personnel has continued to work nonstop under strict sanitary conditions to satisfy the needs of our customers for connectivity. In our Content division, the production of our newscast continued uninterrupted, and we resumed full production of non news content. We are currently producing six dramas, three realities and three daily shows. At our Sanache production facilities, our 16 sets are operating at full capacity under strict sanitary conditions. In spite of the difficult circumstances, Bernardo and I are encouraged by the milestones achieved by our Cable and Sky operations and the improving trends in our Content division during the quarter. In cable, we added 448,000 revenue generating units or RGUs, the highest pace of organic growth on record. Year to date, cable has added 1,200,000 RGUs, a year over year growth of 10.6%. Most importantly, half of the net additions have been in broadband. Sky added video customers for the consecutive quarter and a record 92,000 broadband customers. With a combined total of 8,100,000 RGUs, Sky closed the quarter with the highest number of RGUs on record. In content, our productions continue to work very well with our audiences both in Mexico and in The United States through Univision. Our flagship network delivered a year over year growth in weekday ratings of 30% during prime time. On the other hand, our other businesses segment continued to be significantly affected by the lockup. Our gaming sites, the points of sale of our magazines, our stadium and the movie theaters were all closed or partially closed. This all relates to COVID, and the impact should reverse as soon as we have a full opening of the economy. We have already seen that this is starting to happen. Let me now address our consolidated third quarter results. Revenues were down 7.1%, reaching MXN 23,900,000,000.0, and operating segment income was down 1.7%, reaching MXN 10,500,000,000.0. Excluding the results of our other businesses segment, which have been materially impacted by COVID, as I mentioned, the combined revenue of our three core operations, content, cable and Sky, was relatively flat, and the combined operating segment income was up by 5.3%. We think this is a great result considering the very difficult circumstances we experienced. As we mentioned in the previous call, in response to the impact of COVID, we implemented a comprehensive cost and expense reduction program across our organization. This was a massive effort by everyone at the company, which meant restructuring a number of areas, renegotiating contracts and learning to do things differently so that we could protect our margins. We put together a task force, which Bernardo and I had, to implement and enforce the cost reductions. In the case of our content operation, we are on track to deliver savings of approximately MXN 2,100,000,000.0 for the full year when compared to 2019. Along these lines, during the third quarter, content costs and expenses were lower by MXN $8.00 8,000,000. This made it possible for us to deliver a strong operating segment income growth of 5.9% and a margin of 41%. In our Cable and Sky operations, we also implemented many measures to eliminate redundancies and become leaner and more efficient. These initiatives allowed us to deliver an operating segment income margin of more than 40% in all three core businesses, Cable, Sky and Content, and reaching a consolidated operating segment income of almost 41%, the highest since 2016. Moving on to our Content segment. Let me briefly address the financial results. Throughout the quarter, our content business continued to be impacted by COVID, with revenue down 7.2%, which is an improvement when compared to the second quarter. Advertising revenue was down 13%, but substantially better than the drop of 33% in the second quarter. While government advertising remained weak, we saw a recovery across most categories among our private sector clients. Having said that, some of our clients are still not open for business or are not operating at full capacity, which means that they have reduced their advertising spend substantially. Network subscription revenue was up 7.5%. As in the prior quarter, this growth was mostly driven by a price increase and to a lesser extent, by the 14.7% depreciation of the peso and the portion other revenues that are dollar denominated. Finally, licensing and syndication revenue was down by 2.7% when compared to last year. Innovation royalties reached $92,000,000 or 8.1% lower than the same quarter last year, but 15.6% higher than the prior quarter. The balance of this line item, mostly exports of our content to the rest of the world, was around 36% lower as most of our clients continue to deal with a slowdown in their own markets. Both these effects were partially compensated by the depreciation of the peso. Let me now turn it over to Patricio Wills, Head of TeleInfas Studios. Thank you, Alfonso. During the quarter, fuel received our €90,000,000 program remained very strong with more than twice the period of our closest competitor. On average of the quarter, the year over year growth in mid-eight prime time ratings for our flagship netbook was 10%, Also, the last episode of our drama in the release was the most watched program in the 09:30 p. M. Time slot since 2016. In response, our programming has expanded to cover not only software products, but also MDA, NFL and NLP. In the Mexican facility, all of the scheduled gains of this business have taken place, and the ratings have been very strong. In The U. S, the success of our company continues to be a strong ratings driver and as the fastest growing family of TV networks with 8% year over year growth in pipeline rates. Innovation Systems Network in March was the fastest growing major broadcast network during the twenty nineteen-twenty twenty season with double digit year over year audience growth in prime time among all key demographics. Also, And now during the quarter, Univision continued to see improvement in advertising revenue and stability in distribution revenues. Thank you, Patricio. Before turning it over to Salvi, I would like to mention that we are extremely happy with the relationship we have developed with Wade Davis, the next CEO of Univision and Eric Sinterhofer from Searchlight Capital, who leads the investor group verifying Univision from the current partners. They have a very clear vision for Univision, which Bernardo and I share. Over the last few months, Univision has made significant progress on many fronts. They undertook a massive cost and expense reduction plan very similar to ours. They renewed their affiliation agreements with six of the top seven paid television distributors. They also entered into a series of refinancing transactions to extend the maturity profile and made many programming changes that have allowed them to make better use of our content and deliver ratings growth and regain leadership. We are ready to implement together with Eric and Ray a series of transformational initiatives as soon as the transaction closes. You will see very soon a very different universe. Now let me turn it over to Simon Folk, CEO of Cable. Thank you, Alfonso. During the third quarter, we were able to deliver strong operating and financial results. Total RGUs reached 13,900,000.0 after adding 448,000 RGUs. Net product additions were 234,000. This is the fastest pace of growth for a quarter on record. Vapor usage among our customers remains strong at close to 300 gigs per month. With important investments we have made over time, our solid and reliable network has had the capacity to satisfy this increase in demand. Social distancing measures have increased the demand for broadband services, including larger uplink and downlink data requirements for our customer base. DSL is at a significant technological disadvantage in this front, especially in uplink speeds, and this represents an opportunity for us to continue gaining market share. According to the telecom regulator, approximately 35% of existing broadband customers in Mexico are still connected via DSL. This continues to present us with a valuable pool of potential broadband cost. In the quarter, we continued to gain market share in a growing market, which is great news. We also continued adding voice services at a solid pace with 189,000 new customers in the quarter. As it happens with profit, we continue to gain market share. In video, the number of RGUs remained flat at around 4,300,000. There is no doubt that video is the service that has paid more headwinds. We continue to work on strengthening our OTT offer and including relevant sports content. In this front, during the quarter, we added additional exclusive matches of the Mexican Football League and a weekly NFL game to our Aficionados channel. Additionally, we are deploying our new video set of BOBs based on Android TV technology. Our bottom strategy continues to deliver great results. Three years ago, less than onethree of our customer base was subscribed to a triple play offer. That figure has grown to about 50% of our total customer base at the end of the third quarter. Finally, in mobile, our R D and O service launched last quarter. We added 26,000 new RGUs during the quarter, reaching 40,000 subscribers. In terms of host path, we closed the quarter with approximately 15,700,000. That means that the penetration of our broadband services within our footprint is still low at close to 34%. Our financial results were also strong. Revenue was up 7.9%, reaching MXN11.4 billion, and operating segment income was up 7%, reaching MXN4.8 billion. Within our cable operation, revenue in our MSOs business grew 6.5%, while our enterprise business growth was strong at 20.6%. Household income in the markets where we operate is under significant pressure. So far, we have not seen an impact on collections, but it's something that we continue to watch very closely. In our Enterprise segment, the acceleration in growth is related to some new contracts with large customers and it's in line with our plan to consolidate the turnaround of this business. Our capital expenditures are being driven in large majority by the growth in the number of RGUs and in the number of new customers on the enterprise business. Capital expenditures for our division reached EUR173 million during the quarter, in line with last year. Given the acceleration of growth, both in the enterprise segment and the higher than expected pace of growth in RGU people in our MSO business, we estimate that our capital expenditures for 2020 will be approximately $650,000,000 which is lower than the CapEx that we had last year. Thank you, Salvi. Great results. Now let me turn it over to Alex Pena, CEO of Sky. Thank you, Alfonso. During the quarter, we remained very focused on satisfying the needs of our existing and new customers. And this resulted in continued growth in the number of video and broadband customers. Our video subscriber base remained healthy, adding 15,000 during the quarter. It has now been six consecutive quarters that Sky has added video customers. Collections among our video customer base were strong, and those in prepaid plans are recharging their services at a slightly faster pace than before. Our broadband RGUs continued growing steadily, adding 92,000 in the quarter, reaching close to 600,000. The success of our broadband offer confirms the strength of our brand, the efficacy of our operations and the loyalty of around 7,500,000 video customers. As of the third quarter, we closed with a combined 8,100,000 video and broadband RGUs, which is the highest number on record for Sky. In terms of revenue, it grew 4.9% to billion. This is now the fastest pace of revenue growth in fifteen quarters. Operating segment income reached billion, and the margin was 43.5%. Our capital expenditures reached $65,000,000 during the quarter. Given the fast pace of adoption of our broadband offer, our CapEx for 2020 are now estimated to reach $250,000,000 Thank you, Alex. Great results as well. Moving on, we're happy to report that we maintained our strong balance sheet and closed the quarter with a liquid position of around billion. Given the solid performance of Cable and Sky, the improved pricing content and the gradual reopening of the economy, on October 6, we prepaid our revolving credit facility, which we can reborrow through March of twenty twenty two. Even after prepaying the facility, we continue to maintain a strong position of liquidity of approximately ARS 37,000,000,000, a net leverage ratio of 2.7x operating segment income, and we have no significant maturities until 2024. In terms of our capital expenditures, we believe that we will close the year with approximately $950,000,000 This figure is higher than our previous guidance, but slightly lower than last As Saile and Alex mentioned just now, capital expenditures are being driven almost entirely by growth. In the case of Cable, year to date, we have added more than 1,200,000 RGUs. This is equivalent to a year over year growth of 10.6%. In Sky, year over year, we have added 250,000 RGUs. Both of these metrics have exceeded our expectations and are likely to remain strong through the balance of the year. In closing, in the third quarter, we continued operating in a very fast and uncertain environment. Fernando and I focused on day to day execution to keep all the businesses running and making sure we delivered on the aggressive and comprehensive cost reduction plan we promised. This was while maintaining morale high, we saw basically the crisis as an opportunity. We remain absolutely focused on delivering results. The company continued operating at almost full capacity under the new normal, installing our services through Sky and Cable to an average of 12,000 new customers per day all over the country, transmitting our newscasts nonstop and generating entertainment for our audiences. Our mantra became execution, execution, execution. We achieved good operating results. In cable, as Harry mentioned, we reached close to 14,000,000 in RGUs, with RGUs expanding at the highest pace of organic growth on record. In Sky, as Harry mentioned, we added video customers for the consecutive quarter. In total, video and broadband RGUs reached a new record of 8,100,000. In constant, our programming continued delivering solid ratings growth both in Mexico and in The United States. Our flagship network delivered a year over year growth in retail ratings of 30% during prime time. Our content offering is the strongest it has been in over five years. Our sales team is working with our advertising partners every day to reactivate their investments, especially during the Christmas season. On the financial side, Cable, Sky and Content delivered a combined growth in operating segment income of 5.3%, and each of those businesses operated with a margin higher than 40%. With that, I'd like to turn the call over to the operator to take your questions. Thank you. And our question will come from the line of Arturo Lange from Itau BBA. I have two. is I would love to hear your thoughts on Disney plus and its arrival in Mexico. I think it's expected to come into the market around November. But just from a broad perspective, and maybe this is for Salvi, do you see this new competitor coming into the market and its impact positively or negatively for the cable business? And then in the Content division, the cost savings have been pacing ahead of at least my expectations. But I was wondering, these cost savings, how permanent they can be thinking about the MXN2.4 billion you intend to save this year? And how we should think about that for 2021? Thank you. Thanks, Arturo. Yes, as to Disney plus and Salvi will expand on that, we cannot basically talk about it because we have signed a confidentiality agreement with Disney. However, it's going to be important for us, and it's going to be a complementary service for our cable for our easy products. Zara, you can expand on that, please. Yes. Thank you, Ernesto. Well, what I would say is that the way that people is consuming video is changing everywhere, and the pandemic has only accelerated. But we are very well positioned to be the place where you can watch OTT content regardless of who the provider is. We are now pretty strong on distribution of Netflix in Mexico, for example. For our customer base, it's great that they can watch Netflix on their TV set because for many people, Netflix was just being used on their personal devices rather than on the TV set. We are very happy with the growth that we have experienced in terms of the use of subscriber VOD. So we have Blim, we have Noggin, we have Starz, we have Netflix, Disney. It's going to be an additional service that will be offered to the customer base in Mexico. So rather than just seeing it as a competitor, well, there are ways that we can all benefit, including business and cost from new entrants in the market, right, because OTTs have been seeing that we can work as a distributor of their own content. So I think that there's great expectation, but we should see this as an opportunity to become aggregators of content. Yes. And Arturo, as to your question, we're happy to have exceeded your expectations in terms of the cost and expense reduction program. We have been really focused on delivering what we promised. We committed to MXN 2,100,000,000.0 on the content side, and we will get there. As to next year, we have we're finalizing our 2021 budget right now. There are costs and expenses that were permanently eliminated as part of the reduction effort. However, there are areas that we're focusing on as sports and entertainment. We didn't have costs related to those as sports events were canceled this year, and we used new ones in our library even on prime time on our flagship. Next year, we will hopefully have all the sports events back on a regular basis, including the Olympic Games. We will also be producing more than this year, especially for our prime time and for Univision. So specifically as to those two, sports and entertainment, our costs will look more like 2019 than this 2020. However, I mean, as I mentioned, there are many things that we have eliminated on a permanent basis. Great. Thank you very much. I appreciate your answers. Thanks. And our next question comes from the line of Rodrigo Villanueva from Bank of America. You may begin. Thank you. Good morning. My questions are related to cable. I was wondering if considering the solid demand for Internet services that you have experienced, are you expecting to raise prices in the near future? And the question is related to basically your updated thoughts with respect to the potential to see further consolidation of the cable market in Mexico. Thank you, Rodrigo. Charlie will answer the question. Yes. Well, I mean, Rodrigo, we did increase prices. We increased prices on September one of this year, the same that last year. You're right. At the beginning of the year and with the pandemic, we were not sure if we were going to be able to increase prices. But the business has been pretty resilient, especially on the broadband side. Customers have been looking for cheaper packages, right, because their household income has declined. But that's why it's important to compensate on the ARPU with the price increase. So within the industry, I think that we were the one that they decided to do it. Now MegaCalix has announced that they will increase prices. I don't know about what the others will be doing. But yes, we did increase prices on our different packages, on average, on about 5%. But it's for those that do when you buy a package, you try to fix for the twelve months. So this does not apply to many of the new customers, but we did increase price. And Rodrigo, to your question, we have always been open as to our goal or aspiration about having a national cable presence. I think basically, you can accomplish that through consolidation or overgoing. We have those paths going forward. So that's our aspiration. That's our goal. It makes a lot of sense to have a national presence from the synergies perspective, operating nationally, the whole territory, having a single brand, etcetera. So we will continue that path via consolidation or via building in areas where we don't operate. Our next question will come from the line of John Belton from Evercore. John, your line is open. I guess his question might have been answered. All right. And our next question will come from the line of Marcelo Santos from JPMorgan. You may begin. Hi, good morning. Good morning. Thanks for taking the question. Actually two. The is you're discussing the changing way that people consume video. So could you make some comments on how do you see the video penetration going forward since users are going more to OTT. Do you think there is room for further expansion? What's the time frame that we could see? So any comments on there would be very good. And the question is the strategy for the upfront season. So last year, that front was delayed, it was coincided more in the first quarter. Should we see more normalization this year? Or because of COVID, should also be a delayed upfront? Any comment there would also be helpful. Thank you, Marcelo. I'll ask both Salvi and Alex to take your question about daily and daily penetration. Please go ahead. Thank you, Marcelo. Well, what I think is that the video the programming of the linear channels in the Mexican market is pretty strong, especially over the air channels. As you are aware, Televisa has a lot of relevant content that people want to watch. And it's not only watching it linear as it is completed, but with the new ways of watching in out of home or with the new rights where they can pause or watch a problem whenever they want. I think that what's compelling for customers is to be able to watch both linear channels and a strong OTT or VoD offer available for them to see on any device, anywhere at any time. The cost of video packages in Mexico is relatively low compared to other markets. So that's why what we see is that video remains pretty compelling. And for those that want to consume video on demand, anyway, they need a bottom connection. So the triple play offer becomes very attractive or double play. We describe that it's also appealing for many of the customers. So I think the penetration of video, yes, it's facing more headwinds than the other services and especially broadband. But anyway, I think that we continue to have a very appealing and strong profit. Just to complement a little bit what Saundi just said. In the case of Sky, people can get a better reach prepaid ATV offer with roughly 80 channels for only two ninety guests or less than $10 per month. It's very inexpensive entertainment for the whole family. This offer is very compelling, and this explains why it accounts for the majority of our customer base. Also, it made very easy for our customers to skip a payment if they cannot afford the package in a particular month. On average, our customers recharge their prepaid service about 70% of the time. So comparing our bid due offer with the cost of the most popular OTT packages in Mexico, which range from $7 to $9 per month, and you also need a solid broadband connection. So, all these alternatives do not have a material price advantage over our PayTV offer. That's why I believe that there is still potential for continuing growing our video subscriber base. Thank you, Alex. As to your question, Marcelo, for 2020, we had indeed a delayed upfront. It was a very complicated upfront and very complicated negotiations with the largest client with all clients. We accomplished a lot of things which got distorted because of COVID and what has been going on this year. But in general, I would say that in that in both very complicated negotiations, we accomplished increasing prices. We took all the clients to a CPM buying model, which I mean, you might be surprised by, but some clients, including large ones, were not buying on a CPM basis. And we also reduced the targets. We had many targets, and it was unmanageable. So that was also a tough negotiation. So because of the still uncertain environment we're living in, We launched the upfront last week. So for 2021, we will see a more normalized upfront taking place this year. And it will also be a simpler proposal to our customers, a simpler outcome. Perfect. Thanks a lot for all the answers. Thank you. Our next question comes from the line of Carlos De La Gareta from GBM. You may begin. Hi, thank you. Thank you for taking the questions. There are actually two. The one on cable. So Saudi, your main competitor will be focusing on increasing its fiber footprint, focusing on basically having half of their homes passed with fiber. So out of the 15 or so homes passed that Yvesi has, how many of those are rich with fiber? Yes. Thank you, Carlos, for your question. I reach with fiber, it's about 10% of our overall home spend. However, I don't think that the right way of looking at it is just looking at what is reached with fiber. Because if we go fiber to the node or fiber deep, then it's what we have, then we're at about 60% of our footprint with fiber data. The technology that we use with DOCSIS three point zero and most of the network being ready for DOCSIS 3.1 allows us to have a good network to be very competitive. One of the main challenges in our market is that ARPUs are low compared to other markets. So in order to have a good return on investment, we need to charge additional for higher speeds. So even in the areas where we have fiber, the ARPU and the demand of customers is very price sensitive. So the most sold product is usually among the cheapest offers. So we are well prepared to compete with the technology. There's going to be additional deployments of fiber coming both from the incumbent and from other players that are deploying fiber. But we knew that this was coming. And over time, we have prepared and made the investments. And we think that we have good products to compete. And if in any of the places where we are, we need to make changes, investments, reconstructions of the network, well, that's what we have been doing over time to compete constantly. Okay. So basically, with the current levels of CapEx, you feel comfortable? Yes. I mean, the cost is 3.1% terminal equipment costs, I would say, about 80% more than the terminal equipment of DOCSIS three point zero. But DOCSIS three point zero allows us to give speeds of 200 megs with no problem If we want to move to speeds higher than that, we would simply change the terminal equipment. And then we will have to decide if there's an installation cost to help us pay for the additional CapEx that it requires. But we feel that with the CapEx that we have, we will be able to continue being very competitive. That's very clear. And if I may, a follow-up on content. I don't know if Alfonso or Patricio, I read something on the press about relaunch of the content strategy for Blimp, the online distribution. If you could talk about a little bit about that, I would agree. Yes. Thank you, you, Carlos, for your question. In the case of GIM, we have a hybrid direct to consumer platform. We have both direct consumers and also customers carried by both Sky and Yeezy in their television everywhere apps. It has VOD offering of 41,000 assets in 35 live television channels, including our sports network and also kids programming. And that has allowed us to offer an appeal to the entire family. And Pelarista has the largest library of content in the world in Spanish, I would say. We have more than 200,000 programming assets. So much of this content will continue to be added to our platform over time. So one of the advantages that Televisa has being a fully integrated media company is that we have access to all content windows. So we prioritize those windows where we monetize our content more effectively. At this moment, particularly in Mexico, I would say that the platform continues to be free to air television. But we are seeing, I mean, the trends, and we will be migrating to digital in the near future as the market requires. BlimTV is very well positioned to capture viewers as the adoption of OTT develops a critical mass among our viewer base. We will follow our viewers and migrate, as I was saying, our key content to this platform when it makes sense. BIM is getting good traction, and we will keep making adjustments to strategy as the market demands us. I can say that during the last quarter, we had very exciting results. The number of users who viewed content on BIM TV during year over year over 400% And registered users signing up for the free trial are up 64%. So year over year, we saw the corresponding impact on our overall subscriber numbers. So today, we have over 1,000,000 users, and we're working on our AVOD offer, which we hope will continue to accelerate the pace of growth. We will be launching our AIDA offer through Bloom TV in the early part of twenty twenty one. We have seen very strong demand of our content on social media platforms. For example, in a single month, the number of views of our content in Facebook and YouTube exceeds 4,000,000,000 views. So this only shows that we have great appetite for our content, and this is a key indicator for us and why we believe that we can monetize this content more effectively through our network products. Thank you for the comments. Thank you. And I'm not showing any further questions at this time. I'd like to turn the call back over to Alfonso for any closing remarks. Yes. Well, this concludes our call today. Thank you for joining us. If you have any follow-up questions, please contact our Investor Relations team. And thank you again. Have a nice day, stay safe. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.