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Morningstar | Televisa Posts Weak End to 2018; Lowering Fair Value Estimate to $17 to Account for Weaker Growth. See Updated Analyst Note from 25 Feb 2019

Grupo Televisa reported a weak end to a challenging 2018 as both revenue and EBITDA missed against consensus projections. Despite the issues, the company has made some strides in turning its businesses around. Televisa continues to gain traction in broadband, within both fixed line and fixed wireless. While ad revenue fell year over year in the quarter, breaking a three-quarter growth streak, the decline was due to the government's decision to decrease advertising spending across the board. We are maintaining our wide economic moat rating for Grupo Televisa but lowering our fair value estimate to $17 from $21 to account for lower growth expectations for both Sky and the content segments due to increased competition and expected lower government ad spending going forward.

Consolidated net sales increased to MXN 26.7 billion, up 3% year over year with growth driven by the cable segment. Revenue for the content segment was flat at MXN 10.6 billion, as the growth in both network subscription and licensing revenue was offset by lower ad revenue. Ad sales fell by 4% as the change in administration at the federal government led to much lower government ad buys. While ad revenue from private sources was up double-digits, the decision by the Obrador administration to lower spending on all ad platforms by up to 50% will cap ad revenue growth. Royalties from Univision improved by 22% for the full year as Televisa benefited from the higher 16.5% royalty rate. Operating margin for the content division improved by 90 basis points from last year to 37.9% due to cost controls.

The cable segment posted another a strong quarter as revenue hit MXN 9.5 billion, up 11% versus the same quarter last year. The firm added 316,000 subs in the quarter, the seventh straight quarter with positive sub growth. Broadband demand remains strong with subs up more than 18% year over year. The firm added 229,000 voice subs in the quarter as the uptake for the firm’s triple-play offering continues to improve. The firm has now passed 15.6 million households but still has only 4.4 million video subs and 4.5 million broadband customers, meaning that the firm has room to increase penetration which should generate strong returns on its network investment. We expect that management will continue to invest in expanding its cable footprint as broadband penetration is only at about 53% in Mexico.

The Sky satellite business revenue declined by 2% from the fourth quarter of 2017 to MXN 5.5 billion as video sub losses hit 198,600 due the post-World Cup hangover. While the service lost over 365,000 video subs in 2018, the fixed wireless broadband segment added almost 92,000 customers over the same time, a strong start for the new line of business. Sky’s operating margin for the quarter fell by 120 basis points to 40.5%, as cost controls were more than offset by the lost subscribers and the costs for the new video and broadband bundles.

Management also announced that the firm completed its strategic review and has decided to not spin out any of the business lines. Management indicated that spinning out any specific segment would not create shareholder value and could hurt Televisa's long-term competitive position. We were not surprised by this decision as the new co-leader of the firm helped devise the firm’s current structure. Additionally, management could point to the recent M&A in the U.S. in which comparable firms like AT&T and Comcast further consolidated content delivery and content creation. While we think the Sky business is the weakest of the three lines (content, cable, and Sky), we believe that the fixed wireless broadband offering may help the firm offset the loss of some video subscribers.