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Morningstar | Televisa Posts in Line Start to Transition Year; Broadband Remains a Key Growth Source

Grupo Televisa reported an in line start to 2019, a slight relief after a challenging 2018 for the Mexican media giant. The company continues to make strides in turning its businesses around. Broadband, both fixed line and fixed wireless, remains a bright spot for the firm. The government's decision to slash advertising spending by 50% across the board continues to hamper the outlook for advertising revenue growth. We are maintaining our wide economic moat rating for Grupo Televisa and our fair value estimate of $17. With shares trading in 4-star territory, the current levels may provide an attractive entry point for investors willing to wait out the transitional year of 2019.

Consolidated net sales increased to MXN 23.4 billion, up 3% year over year with growth driven once again by the cable segment. Revenue for the content segment fell by 9% to MXN 7.2 billion, as the growth in network subscription was more than offset by lower ad and licensing revenue. Ad sales fell by 15% due largely to expected lower government ad buys. More worrying was the 2% decline in ad revenue from private sources which were waiting on sidelines due to worries about the macroeconomic climate. Royalties from Univision decreased to $88 million from $96 million a year ago as the blackout on Dish, now resolved, impacted Univision’s revenue. Operating margin for the content division plummeted by 410 basis points from last year to 31.6% due to the lower revenue.

The Sky satellite business revenue declined by 4% from the first quarter of 2018 to MXN 5.3 billion as video sub losses hit 251,000 due to the post-World Cup hangover. The fixed wireless broadband segment added 73,000 customers in the quarter, continuing its strong start. Sky’s operating margin for the quarter fell by 90 basis points to 43.7%, as the ongoing cost controls were more than offset by the lost subscribers and the launch costs for the broadband service.

The cable segment continues to post strong results as revenue hit MXN 9.8 billion, up 14% versus the same quarter last year. The firm added 285,000 subs in the quarter, the eighth straight quarter with positive sub growth. Broadband demand remains strong as the subscriber base grew to over 4.6 million. The firm has now passed 15.6 million households but still has only 4.4 million video subs and 4.6 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 with Televisa’s share of the fixed broadband hitting 24%.