Grupo Televisa, S.A.B. Q1 FY2022 Earnings Call

Good morning, everyone and welcome to Grupo Televisa's First Quarter 2022 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 Angoitia, Co-Chief Executive Officer of Grupo Televisa. Please go ahead, sir.

Thank you, Manuel. Good morning, everyone, and thank you for joining us. With me today are Jose Antonio Gonzalez, CEO of Cable, Luis Malvido, CEO of Sky, and Carlos Phillips, CFO at Grupo Televisa. While the macroeconomic environment remains volatile, we're confident that we will deliver solid operating performance at both Grupo Televisa and Televisa Univision throughout the year. Mexico's GDP growth is expected to slow to around 2% in 2022 from 4.8% last year. In addition, high inflation has proved more persistent than initially expected as headline inflation remains above 7%. This, coupled with the expected monetary policy tightening at the Fed, will keep pushing the Bank of Mexico towards further policy rate increases throughout the year. On a more positive note, consumption has been recovering since last year due to record high remittances of around $52 billion, an increase of approximately 27% year-on-year, which have remained strong in January and February growing by about 22%. Also, after more than two years, social distancing measures related to COVID-19 are continuing to decline allowing us to operate under normal circumstances. Despite the expected economic slowdown, we are confident that we will deliver strong revenue growth at Televisa Univision and improving operating performance at Grupo Televisa throughout the year. Still, it's important to highlight that we expect growth in 2022 to be back-end loaded, both at Televisa Univision and Grupo Televisa, driven by several factors such as the midterm elections in the United States, increased advertising spending in Mexico due to the Qatar World Cup during the fourth quarter, and the monetization of the World Cup rights. Solid RGU net adds in the remainder of the year at Cable and price increases at Sky. Before reviewing Grupo Televisa's operating and financial performance, let me walk you through the Televisa Univision's strong first-quarter results released yesterday morning after having successfully closed our transformative merger by the end of January. Building on our 2021 success and incredible momentum going into 2022, Televisa Univision delivered an outstanding inaugural quarter. Assuming the merger was effective for the entire quarter, Televisa Univision's performance revenue reached $1 billion, representing year-on-year growth of 12%, while EBITDA reached almost $400 million, equivalent to a year-on-year increase of 7%. Revenue growth at Televisa Univision was mostly driven by strong increases in consolidated advertising and subscription and licensing revenue of 12% and 14%, respectively. Advertising revenue in Mexico increased at a solid pace during the first quarter and we expect growth to accelerate by the end of the year due to the World Cup transmission. EBITDA growth was softer than that of revenue, mostly due to our investments in our streaming business that were fully funded by the strong growth in sales. Moving on to the performance. Our content in the U.S. Univision's prime time audiences increased by 9% year-on-year during the first quarter of 2022, outperforming all other U.S. networks regardless of language. This contributed to taking our share of prime time audiences in the United States up to 6.5% during the first quarter from 5.5% during the same period last year. Moreover, our share of Spanish language prime time viewing rose 430 basis points to 63.6%. In Mexico, our free-to-air television prime time audiences increased by 13% year-on-year, beating our closest competitor in Mexico by 115%. In the first quarter, prime time audiences at our flagship channel increased by 25% year-on-year, and the top 20 programs on Mexico's broadcast television were produced and transmitted by us. Also, we broadcast the top 10 most watched soccer matches for the quarter in Mexico. While our linear business continues to deliver great success and outperform the market, we could not be more excited about our streaming business and the enormous progress we have made over the last 12 months. April 1st marked another milestone for our streaming business with the launch of our completely redesigned and enhanced AVOD service; ViX, featuring the world's most extensive Spanish language video offering with over 100 channels, video on demand, and over 40,000 hours of content in its first year, including our classic novelas, megatrix, news content, soccer, and new and exclusive original programs. We've always viewed our streaming product as a natural complement to our linear business and an opportunity to broaden our reach across the Spanish language entertainment space. Streaming allows us to optimize across an entire volume spectrum and provide multiple entry points for viewing, beyond that, our traditional linear business. Our underlying economic model is materially different than the English language segment, particularly as it pertains to customer acquisition and content investments. Across the U.S. and Mexico, we have an unrivaled reach of more than 100 million Spanish speakers every day. This provides an enormous marketing platform for our streaming business that is efficient, cost-effective, and cannot be replicated. Our content model is equally differentiated. Beyond having the largest Spanish library in the world, we have a content production engine in-house to drive our streaming business which we can scale across most 600 million Spanish speakers. We are consistently recalibrating our content model to strike the optimal balance between appointment viewing such as our industry-leading software offering and our demand-driven content. Combined, these economic linchpins provide a clear and accelerated path to value creation. While this is new for us, streaming is not totally new to Televisa Univision, having launched its legacy streaming services last year. This was essentially a great test for ViX; we learned a lot from it. We learned how to sell at some streaming and how to program, all of which has been incorporated into ViX's launch. We also learned a lot about the underlying technology infrastructure. Our new platform built with our strategic partner on Google Cloud launched successfully. Moreover, we were able to migrate our legacy users into ViX, making the transition worthwhile in many ways. On the Cable side, we are seeing substantial success with our streaming ad sales efforts in onboarding new strategies, primarily focused on advertising while selling strongly to our linear ad buyers. Total advertisers on the platform increased by 38% or 130, while participation on linear averaged 50%, making significant advancements with strong participation from upfront buyers last year. Pricing trends remain equally impressive with ViX generating significant premiums to the linear market, and sell-out rates above 90%. In March, we delivered our best ad sales performance yet, up almost 30% against the next highest month, as we continue to gain traction in the marketplace and look to further accelerate with the launch of ViX. We look forward to continuing to capture this momentum throughout the rest of 2022 and as we approach our upfront in May. Our learnings from ViX have served us well, and we gear up to launch our worldwide service ViX Plus in the second half of this year. We have been investing in new content that is incredibly compelling, and we're really excited about the prospects of ViX Plus. We have longstanding relationships with distributors across the United States and Mexico that will allow us to bundle ViX Plus across cable and wireless providers. So, our streaming portfolio will be fully complete and very well-positioned to capture this massive global streaming opportunity. Overall, we've had a terrific quarter to kick off the year, and we're just getting started. We couldn't be more excited about the coming quarters with the combined team at Televisa Univision, who have been working tirelessly since day one of our merger to deliver this level of outstanding performance and position us for further success going forward. As we said before, we're uniquely prepared to maximize the opportunities we have ahead of us and we have already started to deliver on it. It's the opportunity that comes from tapping into a large, growing audience that's making strides and driving progress. Our initial results look like nothing else in media. We have become the fastest growing large media company and there is no better evidence of the power of our combined teams and assets than our newly launched global streaming platform, ViX. First quarter results at Televisa Univision put us on track to achieve similar revenue growth to that of 2021, which is 15% year-over-year growth and we had flat EBITDA of around $1.65 billion given the investments required to launch and promote our global streaming platform, ViX. Moving onto Grupo Televisa's pro forma, consolidated financial results for the quarter, consolidated revenue reached Mex$18.6 billion, representing year-on-year growth of 3.3%, while our operating segment income reached Mex$7.2 billion, equivalent to a year-on-year increase of 3.4%. Revenue growth at our MSO business multiple service operator operations in Cable, and our other businesses segment was particularly better, but was partially offset by declining revenue at our enterprise operations in Cable and Sky. But now, I feel confident that consolidated revenue growth will accelerate throughout the year. At Cable, RGU net adds accelerated for the second consecutive quarter. And we expect that to remain solid over the coming quarters. This should continue to gradually improve revenue growth at our MSO operations. Furthermore, over the coming quarters, we expect to sign new contracts. Our enterprise operations, allowing us to keep this revenue flat to slightly up for the full-year. At Sky, price increases implemented in the month of March and the phase-out of relatively strong recharge rates for prepaid packages over the first eight months of 2021 should allow us to gradually reduce the base of revenue decline, potentially stabilizing this revenue by the end of the year. Now, let me turn the call over to Jose Antonio, our CEO at Cable.

Thank you very much, Alfonso. During the first quarter of 2022, our cable segment saw a continuation of the important turnaround in operating metrics experienced in the fourth quarter of 2021. We have obtained a strong performance foothold for two consecutive quarters now. In terms of net adds, the first quarter was 319,006 revenue-generating units and 17,000 mobile RGUs. It was the strongest quarter since the peak of the pandemic in the second and third quarters of 2020, and the highest since 2018, excluding the two quarters of the pandemic. The quarter closed with 14.9 million total RGUs, comprised of 14.76 million fixed-line and 170,000 mobile RGUs. The result was largely driven by the realignment of some of our flagship products, the resumption of our customer retention programs, as well as the home pass expansion plan we implemented last year. Our residential segment continued to grow due to our higher levels of sales, cable turn, and improved product mix. In video, we confirmed the turnaround experienced in the fourth quarter of 2021. We added 89,000 video RGUs during the quarter because of our improved product mix from the product realignment. Today, 77% of sales are triple play. In broadband, we added 83,000 RGUs for a total of 5.7 million RGUs. Broadband continues to be our highest margin service which we will continue to offer. Now, for the financial metrics. During the first quarter, our residential segment grew 3.4% while our enterprise segment, which accounts for 13% of total Cable revenue, declined by 10.1% mainly due to tough comps. As a reminder, our enterprise segment revenue grew by 7.4% when excluding the construction of a sizable project called Red Jalisco, which was developed for the Government of the State of Jalisco to build a fiber network owned by the State. Nevertheless, we are looking for new projects to replace it. Overall, our Cable segment delivered year-on-year revenue growth of 1.1% while operating segment income increased 3%. Again, I want to emphasize this part: if we were to exclude Red Jalisco, revenue would have increased 3.5% and operating segment income would have increased 6%. Moreover, we expect the strong operating metrics results to translate into stronger financial results later in the year. Before turning the call back to Alfonso, let me say that we are confident that the expansion into selective locations last year should allow us to keep delivering solid RGU net adds over the coming quarters.

Thank you, Antonio, great results. Now, let me turn the call over to Luis Malvido, who has been in the job as CEO of Sky for 108 days.

Okay. Thank you very much, Alfonso. As Alfonso said, I've been in the job for a few months now, and it is my first quarter as CEO at Sky and my sixth role as CEO in 25 years across Latin America and Europe. I arrived in Mexico on the first day of January and was pleasantly surprised by this coverage company with many advantages. The brand we know are under Globe, the largest footprint scattered throughout the vast territory of Mexico and Central America. A great portfolio of products, including the most affordable leading prepaid entertainment platform, and an extensive library of exclusive content. We also have a very professional sales force and a highly motivated and committed team. Happy with my discoveries during this first quarter, we started to build on our strengths. We refreshed the leading team to face the new challenges ahead. We are in the process of restructuring our sales channel compensations to better align their incentives with our objectives. During the first quarter, we secured exclusive rights to several important soccer properties, including exclusive rights for the Spanish La Liga, Copa del Rey, UEFA national team tournaments, and the Bundesliga. Sky also has the most comprehensive coverage of the FIFA World Cup, Qatar 2022 at the end of the year, including a large number of exclusive games and features. These initiatives will further enhance Sky’s position as the ultimate sports provider in Mexico. During the first quarter, we also launched several promotions and commercial initiatives for both prepaid and postpaid products that allowed us to reverse the negative trend in video gross ads. On the prepaid side, the initiative with the largest impact was the elimination of a subscription fee in January. On postpaid, also in January, we launched an attractive promotion and we are developing a new entry-level single and double-play product, Sky Silver, which will be launched later this quarter. Additionally, on March 1st, we launched a 14-day recharge package and shifted all our advertising strategy towards increasing recharges and enhancing customer retention. On the other hand, we increased prices in prepaid to keep up with inflation. So far, customer adoption of these price increases has been positive. As a result, we reversed the negative trend in prepaid top-line, and we expect prepaid revenues to increase in the following quarter. In broadband, we've seen a deceleration in additions due to several factors; first, a delay in coverage expansion, second, signs of network saturation in certain areas, and third, the price increase in broadband that we implemented in February. As a result, we lost 8,000 broadband RGUs during the quarter, reaching a total of 719,000. Regarding our mobile service, we're working on improving our offerings and plan to relaunch the service later in the year with valuable exclusive benefits for our video customers, which will increase stickiness, and reduce our acquisition costs. On the cancellation side, we experienced an increase due to pandemic activation and low-quality acquisition during the last year's second half. Overall, we lost 175,000 RGUs during the quarter. In terms of our financial performance versus the same quarter last year, revenue declined 6.2% driven primarily by lower prepaid recharges due to the decline in the economic climate tied to the pandemic. Consequently, operating segment income fell by 13.6% year-on-year due to these reduced revenues. Looking ahead, we expect second-quarter revenues to increase on a sequential basis driven primarily by the improvements we have made in our prepaid products. Before turning back to Alfonso, I would like to add that we are developing a long-term plan to enhance our product portfolio, customer experience, and selling capabilities that will allow Sky to better protect its customer base and compete in the new highly competitive telecom and media landscape.

Thank you, Luis. To wrap up, Bernardo and I are very optimistic about our growth prospects for 2022. At TelevisaUnivision, the very strong upfront already announced both in Mexico and the United States, along with new licensing contracts with regional players in the United States, the Qatar World Cup, and the successful launch of our global streaming platform should allow us to deliver double-digit revenue growth for the second consecutive year. And at Grupo Televisa, the ongoing strong RGU net adds momentum should contribute to gradually accelerate revenue growth over the coming quarters. Now, we are ready to take your questions. Raul, could you please provide the instructions?

Yes, your first question is from David Joyce from Barclays. Your line is now open.

Thank you very much. Two questions, please. First for Luis, I appreciate all of the actions that you've made so far in adjusting packages and pricing, and that you've got more plans you want to unveil in the future. But for now, could you help us understand where the loss of subscribers is coming from? Is it more from something seasonal, or are they going to other satellite or cable entities in particular? Just wondering what the trends are on the subscribers there. And then secondly, on Cable for Pepe, where you've been building out into new areas and upgrading, what has the ARPU experience been like versus your legacy subscriber base? Thank you very much.

Thank you, David, for your questions. I'll ask Luis to answer the first one, and Prep Antonio can take the second.

Thank you for the question. Our gross additions are coming from both prepaid and postpaid. Of course, prepaid represents over 85% of our assets in video. We are declining in gross acquisitions because of the refinance already explained, of course, not having new areas to sell our services has made this a challenge for us. And we are positive about resolving our financial struggles and making improvements in the second half of the year, but this is something we need to prove to be true. As said, most of our gross assets coming from prepaid and we're working heavily to improve the quality of those sales in order to stop the decline.

Thank you, Luis. And I would add that traditional subscribers of Sky are, of course, being challenged by triple-play offerings that are being met by cable and telco providers. The lower-tier package, which is measured basically in terms of recharges every month or half a month, depends highly on the economy. The larger packages offered are the most cost-efficient entertainment offerings available in Mexico for Mexican families. So that is being challenged particularly in terms of the recharges by the economy itself. And for your second question, Antonio can take it.

Thank you, David, for your question. The ARPU is about the same to slightly higher than the rest of the country, and let me explain why. In the new areas where we have expanded, we're expanding with fiber to the home, resulting in a higher quality of service, so we can slightly increase ARPU. However, these are very competitive markets we're entering, so our pricing on our products needs to remain very competitive. So the answer is that it's similar to the rest of the country with applied margin upwards. Thank you very much.

Thank you very much for the color.

Your next question is from the line of Marcelo Santos from J.P. Morgan. Your line is now open.

Hi, good morning. Thanks for taking my questions. The first question is if you could please comment on the competitive environment in Mexican broadband and if that is putting pressure on your ARPUs? The second question would be if you could address the weak results of Netflix. Does it impact management’s thinking on the best view of the opportunity? Thank you.

Thank you, Marcelo, for your question. Of course, there is a competitive environment in Cable in Mexico and I'll ask Antonio to expand on this. But what we can say is that the capital investments we made in previous years have positioned us very competitively with a reliable network, various services, and good products with packages on which Antonio and the team have been working. We believe that, of course, it is competitive, but we're seeing different products and different pricing depending on the region. We believe that we are gaining traction; the net adds we experienced in this quarter were impressive, and we feel comfortable saying that this pace will continue. So, even though there's a lot of competition, we feel confident. I'll ask Antonio to provide more details.

Thank you, Alfonso. As said, we feel very comfortable that our investments have led us to a reliable network. Our customer experience is rated highly, and the realignment of our products has made us competitive. The market is relatively gaining competitiveness, but we're not seeing any significant effects on our ARPUs. We are well-placed and have two good results in a row. We expect this level to sustain somewhere between the last quarter and this one, closer to this one. Things are looking good, and we feel optimistic with our position. Thank you very much for your question, Mr. Marcelo.

Marcelo, to your second question about Netflix and the events in that sector, I believe what's happened to Netflix this quarter validates what we're doing with ViX and Televisa Univision. As we have announced, we're going to have a hybrid product, which will include an AVOD product, ViX, and a subscription product, ViX Plus. This hybrid product will include linear channels and is focused on sports—specifically, targeting the U.S. Hispanic market and Mexico. So, we believe that, unlike Netflix, which has launched an AVOD offering, we are concentrating on our niche, the Spanish-speaking world, which still has low penetration of this type of service. Our total addressable market remains significant, and we have numerous advantages as highlighted. So, we think this validates what we're doing and reinforces our strategy.

Perfect. Thank you very much for the comprehensive answers.

Your next question is from the line of Leonardo Olmos from UBS. Your line is now open.

Hi, good morning, everyone. My question is regarding Televisa Univision's margins. If you could clarify those margins, particularly in Mexico, how do you expect them to perform, and how do they compare to last year? Moreover, what will be the normalized level of margins for both Mexican and new subscribers of Televisa Univision?

Thank you, Leonardo, for your question. We are no longer discussing margins of each market. What I can tell you is that margins for Televisa Univision as a whole should remain in line with 2021, around 40%. Of course, we have EBITDA losses due to our investments in streaming, but our traditional business continues to grow double digits, generating significant EBITDA that finances our streaming investments. We expect double-digit revenue growth because of what we have observed in our upfront sales in both Mexico and the United States. In Mexico, we have seen our upfront grow by 14% versus 2021, a historical number for us.

Yes. Thank you. Just a quick follow-up. You mentioned margins around 40% going into 2021, but now we're seeing mid-30s. How should we interpret that?

The margins for traditional media will differ from those of streaming. But overall, we expect margins for Televisa Univision as a whole to be around 40%.

Okay. Thank you. Very good. Thank you very much. Have a good day.

Thank you.

Your next question is from the line of Soomit Datta from New Street Research. Your line is still open.

Hi guys, two or three quick questions. Sorry to go back to the content profitability, but could you confirm the pro forma full-year 2021 EBITDA for Televisa Univision, please? Additionally, I was confused about whether EBITDA is projected to be flat for the full-year 2022 or if the multi-room is expected to flatten. I know that you mentioned growth around double digits, and that does not seem entirely consistent. Could you clarify?

Thank you, Soomit. Yes, the consolidated pro forma EBITDA for Televisa Univision in 2021 was $1.65 billion, and we believe that this EBITDA for Televisa Univision will be flat in 2022, even after all the investments we are making in our streaming platform both in technology and content.

Okay, that's great. Thank you. Secondly, regarding the ViX launch, could you share any sense of the number of users that ViX was born with? What trends have you seen in the short time it's been in the market? Any interesting developments between the U.S. and Mexico versus the rest of Latin America would also be very interesting.

We're not disclosing yet the specific numbers, but we're very happy with the progress we're observing. Of course, these are early stages, but in terms of unique users on the platform, both daily and monthly, we're pleased with the progress in the U.S., Mexico, and throughout Latin America. So, it is working; the content is resonating well. We had an extremely successful draw for the Qatar World Cup, and that helped us grow the user base.

Okay, thank you.

Your last question is from the line of Matthew Harrigan from Benchmark. Your line's now open.

Thank you for taking my question. I know that Comcast and Charter formed a streaming initiative in the U.S. not long ago. Are you likely to provide programming for that, notwithstanding Comcast's ownership of Telemundo? And secondly, with all the dislocations in the equity markets right now, you are one of the top five VC companies in Mexico. Does that present opportunities for you, or do you think you will be constrained in replicating some of the past successful investments you've made in the venture side in Mexico?

Thank you, Matthew. As to your first question, we will certainly expand our distribution of the ViX service with anyone interested in distributing it. You have seen that cable companies in the United States have become aggregators of streaming services and the content attached. Thus, any party that would like to establish a distribution deal with us for ViX is welcome. Regarding your second question, I understand you're referring to the venture capital our efforts started in late 2019. That has been successful for us and essentially involves exchanging available advertising time slots for equity stakes in high-growth startups or B2C companies that need to advertise on free-to-air television and our other platforms. We have taken this approach with select companies based on their potential, developing brands and their products. We've seen great success stories using this mechanism, closing eight investments in seven companies, four of which have become unicorns. We plan to continue pursuing this as part of our venture capital line and anticipate significant growth from these efforts.

Thank you. Looks like an exciting year ahead. Congratulations.

Thank you.

That concludes our call today. Presenters, please go ahead.

Well, thank you very much for participating in our call. If you have any additional questions, feel free to call us for more information. Thank you very much.

This concludes today's conference call. Thank you for attending. You may now disconnect.