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Morningstar | Televisa Reports In-Line 3Q; Broadband Penetration Continues to Increase

Grupo Televisa posted an in-line third quarter as revenue and EBITDA met consensus projections. The company continues to gain traction in broadband, both with fixed line and a fixed wireless solution with AT&T. Ad revenue grew year over year for the third consecutive quarter, providing more evidence that the switch of the advertising sales model to a U.S.-style structure is working. We will wait for a few more quarters of growth before anointing the change as a success. We are maintaining our wide economic moat rating and our fair value estimate of $21 per share.

Consolidated net sales increased to MXN 25.0 billion, up 10.5% year over year, with growth driven by the content and cable segments. Revenue for the content segment excluding the relicensing revenue from World Cup rights grew 8.4% to MXN 8.7 billion, driven largely by the double-digit growth in both network subscription and licensing revenue. Ad sales growth was 2.2%, down sequentially from 9.1% in the second quarter. While management claimed the impact of the World Cup on advertising was difficult to separate out because advertisers may have shifted ad budget spending into the second quarter, we note that ad revenue was up 3.5% in the first quarter, implying much of additional growth we saw in the second quarter may have been driven by the football matches and 2%-3% may be the upper range of ad revenue growth going forward. Royalties from Univision improved 21% as Televisa benefited from the higher 16.5% royalty rate. Operating margin for the content division excluding the impact of the relicensing revenue fell 220 basis points from last year to 35.8% as the revenue gains were more than offset by the increased content costs, including the World Cup rights.

The cable segment continued to report strong growth, as revenue in the quarter hit MXN 9.2 billion, up 10.8% versus the same quarter last year. The firm added 274,000 subscribers in the quarter, the sixth straight quarter with positive subs. Broadband demand continues to drive growth, with subs up over 14.5% year over year. The firm has now passed 14 million households but still has only 4.3 million video subs and 4.2 million broadband subs, meaning that it has room to increase penetration, which should generate excess returns on its network investment. The firm added 247,000 voice subs in the quarter as its triple offering is seeing improved uptake. Third-quarter operating margins for the segment improved 10 basis points to 42.4% as the revenue growth and improved leverage from consolidating brands was mostly offset by the costs associated with the World Cup.

The Sky satellite business revenue declined 0.7% from the third quarter of 2017 to MXN 5.4 billion as sub losses hit 125,824 due the post-World Cup hangover. We note that management expected sub growth to accelerate in 2018 as Sky was the only satellite service in Mexico to offer all 64 games of the World Cup. We expect that the sub losses will continue in the fourth quarter. Sky’s operating margin for the quarter fell 140 basis points to 47.5%, as cost controls and the modest revenue growth were more than offset by the rights costs for all 64 games of the World Cup.

Management provided an update on its fixed wireless broadband offering in partnership with AT&T, which launched a year ago. The service, which is sold under the Blue Telecomm brand, now has over 51,000 subscribers with over 40,000 added in the third quarter. The service costs $10 per month for 5 megabits/s or $20 per month for 10 megabits/s. The company recently signed a deal with Altan’s Red Compartida to expand the coverage area for Blue Telecomm. Televisa expects the service to appeal to price-sensitive prepaid users as well as the 10 million homes not passed by cable. We expect that the company will gain share as we believe fixed wireless broadband offerings have a hard time competing against cable but can compete against DSL, particularly at lower price points.