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Edited Transcript of EVC earnings conference call or presentation 16-May-19 9:00pm GMT

Q1 2019 Entravision Communications Corp Earnings Call

SANTA MONICA Jun 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Entravision Communications Corp earnings conference call or presentation Thursday, May 16, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher T. Young

Entravision Communications Corporation - CFO & Treasurer

* Walter F. Ulloa

Entravision Communications Corporation - Chairman & CEO

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Conference Call Participants

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* Gordon Hodge

* Michael A. Kupinski

NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the Entravision First Quarter 2019 Earnings Conference Call. (Operator Instructions) And please note that today's event is being recorded. And I would now like to turn the conference over to Walter Ulloa, Chief Executive Officer. Please go ahead.

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Walter F. Ulloa, Entravision Communications Corporation - Chairman & CEO [2]

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Thank you, William. Good afternoon, everyone, and welcome to Entravision's First Quarter 2019 Earnings Conference Call. Joining me on the call today is Jeff Liberman, our President and COO; and Chris Young, our Executive Vice President and Chief Financial Officer.

Before we begin, I must inform you that this conference call will contain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ. Please refer to our SEC filings for a list of risks and uncertainties that could impact actual results.

This call is the property of Entravision Communications Corporation. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Entravision Communications Corporation is strictly prohibited.

Also, this call will include non-GAAP financial measures. The company has provided a reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measures in today's press release. The press release is available on the company's website and was filed with the SEC on Form 8-K.

Our first quarter results were in line with our expectations with increased revenue in our television segment partially offset by decreased revenues at both our digital and radio segments. Looking beyond the general business environment, our balance sheet continues to be solid with approximately $175 million in cash and marketable securities on the books versus a total debt of $245 million.

During the quarter, we were also active in buying back our stock with approximately 2.1 million shares repurchased at an average price of $3.65 per share. We also continued to return capital to our shareholders through our quarterly dividend.

Now turning to our financial performance. Revenues decreased 3% to $64.7 million in the first quarter. Consolidated operating expenses were down 4%, and consolidated adjusted EBITDA was $8.1 million compared to $6.9 million last year. Free cash flow, which we define in our press release, was $1.3 million compared to $1.6 million. Our capital expenditures in the quarter were 2x more than last year's first quarter due to the FCC-mandated repack of several of our television signals.

I am pleased to announce that this past Monday we appointed Karl Meyer as Entravision's new Chief Revenue Officer. Karl is a 30-year media veteran with extensive radio, television, digital and advertising agency experience. He previously worked for Entravision from 2004 to 2014, first as the Vice President and General Manager of Entravision's Los Angeles radio cluster and later as Entravision's Executive Vice President of Integrated Marketing Solutions for the Western region. We are excited to have Karl back and look forward to his leadership of our revenue teams and goals.

Turning to our television segment operating results. Television revenues were up 11% during the first quarter compared to the prior year. Revenue from advertising and retransmission consent was down 4% during the first quarter primarily due to lower local sales. National advertising revenue was up 2%, while local advertising revenue was down 10% compared to last year's first quarter period. Retransmission revenues decreased 1% during the first quarter. Revenue generated from spectrum usage rights totaled $5.1 million during the first quarter, arising primarily from nonadvertising revenue related to a nonadvertising service agreement with a local telecom operator and spectrum leasing initiatives. Excluding retransmission spectrum usage rights and political revenues, core TV advertising revenues were down 3% with local down 8% and national up 4% during the quarter.

Automotive advertising was flat for our television segment and represented approximately 31% of our total television advertising revenue. We saw an increase of 10% in tier 2 expenditures that were offset by declines both in tier 1 and tier 3.

Beyond automotive, top 10 advertising categories that generated growth during the first quarter were media, which increased 12%; and groceries up 8%; and we saw a 32% increase in restaurants. Retail, travel and leisure, and paid programming, 3 of our top 10 categories for television, were particularly soft in the quarter, producing double-digit declines compared to the first quarter of last year.

Overall, we added 24 new advertisers who spent more than $10,000 during the first quarter, which totaled approximately $508,000 in advertising revenue. Notable new brands returning to our spot markets in the first quarter included Adventist Health Systems, Coca-Cola, The General and AT&T DIRECTV.

Turning to our ratings performance. Our Univision television affiliates built upon their market leadership in the February 2019 sweeps. For adults 18 to 49 in early local news, our Univision television stations finished ahead of their Telemundo competitor in 12 of 17 markets where we have head-to-head competition, plus 1 tie. In late local news, we finished ahead of Telemundo competitors among adults 18 to 49 in 10 markets among the 17 markets where we have head-to-head competition, plus 2 ties. Additionally, our early local newscasts are ranked #1 or 2 against English and Spanish competitors in 11 markets.

During a full week, our Univision and UniMás combined have a cumulative audience of 4.1 million persons 2 plus in our markets combined, compared to Telemundo's 3.1 million persons 2 plus. We have 32% more viewers than Telemundo in our footprint, and I want to add to that, that this advantage that we hold over Telemundo of having 32% more audience is consistent with past quarters.

During weekday prime time, when comparing to all stations in total, we had higher ratings than at least 1 of the big 4 networks in 11 markets among adults 18 to 49, in 14 markets among adults 18 to 34 and in 9 markets among adults 25 to 54. Telecast for Univision's Premio Lo Nuestro music awards show on February 2019 was among the top 10 primetime programs for the night among adults 18 to 34 in 14 markets. Among adults 18 to 49 and 25 to 54, the show ranked among the top 10 in 9 and 7 markets respectively.

Turning to our audio division. Audio revenue was down 15% during the first quarter compared to the prior year. Local revenues were minus 3%, and national revenues decreased [32%] in the quarter. Automotive advertising declined by 1% for our audio segment and represented approximately 21% of our total audio advertising revenue. We saw an increase in tier 1 and tier 2 expenditures that were offset by a decline in tier 3. Advertising categories increased -- increasing their ad spend with us year-over-year during the first quarter were services, which increased 4%; restaurants, up 7%; and paid programming saw an 8% increase. Travel and leisure, media and retail, 3 of our top 10 categories for audio, were particularly soft in the quarter, producing double-digit declines compared to the first quarter of last year. Overall, our audio business added 14 new advertisers who spent more than $10,000 during the first quarter, which totaled approximately $272,000 in advertising revenue. Notable new brands in the first quarter included Shoreline Automotive, Nissan of Downtown L.A. and City Beverage Distributors.

Looking at our audio division ratings performance for winter 2019 among Spanish language radio stations, the Erazno y La Chokolata show is ranked #1 in 4 of our 6 markets released for winter among Hispanic adults 18 to 49 and Hispanic adults 18 to 34, and #1 or #2 in 5 markets among Hispanics 25 to 54. Across our 6 O&O stations, the Erazno y La Chokolata show reached more than 590,000 Hispanics 18 to 49.

During the first quarter, we combined KLYY-FM and KSSE-FM and KSSD-FM in Los Angeles to create a superstation under the successful Jose format. With this strategic change, Entravision solidifies its position in the Los Angeles market. Looking at first quarter 2019 averages, Jose ranked as a top 5 Spanish language radio station among Hispanic adults 18 to 49 during a.m. drive time and a top 4 Spanish language station during p.m. drive time.

Earlier this week, Nielsen released its April ratings release, and the Jose format continues to perform. In Hispanic adults 18 to 49, KLYY is tied for #1 in morning drive, #5 in mid-day and #1 in afternoon drive. With this continued success, we should see better results from our Los Angeles cluster. Our L.A. cluster historically has been the engine pool in our radio assets. We expect to see our audio business improve in the coming quarters.

Now let's move over to our digital business. Our first quarter digital revenues decreased 21% versus the same period last year. Our digital revenue declined greater than anticipated in Q1. Some of the decrease in digital revenue in Q1 versus the comparable period last year was due to our increased focus on producing greater cash flow from our digital businesses and therefore being more selective about the advertising transactions that Headway pursues in order to enhance margins. Last year particularly in quarters 1 through 3, there was more focus on driving revenue growth, including low-margin transactions. We have shifted our focus to higher-margin revenue transactions at the expense of revenue growth.

The decrease in digital revenue in the quarter was also a result of an accelerated global trend of digital advertising moving over to programmatic platforms in recent months. We anticipated this shift in digital advertising when we acquired Smadex in the middle of 2018. Smadex is a mobile-first programmatic DSP, is the first programmatic platform fully optimized for mobile user acquisition and reengagement. Smadex's discovery engine finds the best-performing audiences for advertisers' app and optimizes audience engagements with the app while filtering out audiences that are not relevant to the advertisers' business and goals. Smadex, our mobile-first DSP, was recently recognized by the objective mobile measurement platform, Kochava, for its excellent high-value user acquisitions and long-term retention of users, earning a quality score of A and ranking second globally in the category of quality traffic. We are confident with Smadex our programmatic business will grow in the coming quarters as we continue to integrate Smadex's technology in the Headway offering.

As consumption and interaction trends evolve, digital platforms keep shifting to the center of advertisers' marketing strategies. Client feedback shows an increasing interest in reaching users at different stages of the value chain from micro moments on mobile devices to television and radio. As it was mentioned in past calls, brands and advertisers are looking for a holistic approach to their marketing needs. Entravision is in a unique position to provide omnichannel solutions that anticipate customers starting in one channel and moving to another in their journey.

On the digital side, these solutions include influencer marketing. We are focusing on new ways to engage with customers. By expanding our influencer marketing platform to 3 new countries, Mexico, Argentina and Colombia, we can provide marketers with more authentic ways of reaching their desired audiences. We have plans to soon expand our influencer network to better support our core U.S. business targeting Latino consumers.

Out-of-home solutions resulted -- results are driving growth on a quarter-by-quarter basis as this initiative is currently helping us improve our product mix to reach consumers through various outdoor screens such as outdoor -- such as airports and business hubs. Claro, Toyota, Bimbo, Coca-Cola launched successful advertising campaigns on our out-of-home platform in Latin America.

Performance. Our mobile app promotion business, when combined with our content offering, provides the perfect mix for marketers to reach their desired goals. Personalization content marketing. As consumers are bombarded with more content, it is crucial that we better understand consumption and are able to personalize experiences to drive engagement. Attribution model. In order to provide a successful omnichannel solution, it is key to have a clear attribution methodology that provides insights for our campaigns. Entravision is leveraging technology and data to identify and assign value to key events across multiple touch points.

Complement our terrestrial touch points. We keep driving growth with our digital properties. This allows us to both support and enhance our core business. With the previous mentioned data-driven methodology, we are creating content that is appealing to our audience. We developed 4,800 original stories during the first quarter, which were viewed 14.6 million times across our owned and operated sites and produced 75 million video views on our social media footprint.

Regarding our digital audio business, we reached 816,000 unique users through our O&O digital audio footprint and saw a 17% increase in delivered hours when compared to the previous quarter, hitting the 7.4 million mark. We also saw significant increase in our programmatic audio demand, which tripled the revenue of the -- in the same quarter -- as the same quarter of 2018. This is due to the growth of our audio business unit, AudioEngage, and the strategic partnerships established during the quarter.

Entravision is committed to strengthening ties with our local communities. Social media platforms are a perfect complement for our current local media offering. Our footprint keeps growing steadily, reaching the 12.3 million fans across Facebook, Instagram and Twitter. Entravision will continue to complement its core business by further expanding its digital platform through new acquisitions, improved technology and the development of data-driven quality content to engage with our communities.

Turning now to our pacings for second quarter. Our television business is currently pacing plus 5 in the second quarter. Our audio business is currently pacing minus 11% in the second quarter. Digital revenues are pacing down 6%. All in all, total revenue for the company is pacing minus 2% for Q2 versus last year.

In summary, our first quarter results were largely in line with our plan, and we remain on track in executing our strategy to further build on our unique audience reach and targeting capabilities while proactively managing our costs. As we execute our multi-platform strategy and strategically invest in our digital platforms and our content and distribution assets, we remain committed to maximizing our performance and enhancing our cash flows for the benefit of our shareholders.

I will now turn the call over to Chris Young to take you through the numbers.

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Christopher T. Young, Entravision Communications Corporation - CFO & Treasurer [3]

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Thank you, Walter, and good afternoon, everyone. As Walter has discussed, net revenue for the quarter was down 3% to $64.7 million compared to $66.9 million in the same quarter last year. Operating expenses decreased 4% to $42.7 million, and consolidated adjusted EBITDA increased 16% to $8.1 million.

For the quarter, revenues in our television segment were up 11% to $38.3 million compared to $34.5 million in the same quarter of last year. The increase was primarily attributable to revenue generated from spectrum usage rights, which totaled $5.1 million during the first quarter arising primarily from nonadvertising revenue related to a service agreement with a local telecom operator in addition to spectrum leasing initiatives and an increase in national advertising revenue, partially offset by decreases in local advertising revenue and political revenue and a 1% decrease in retransmission consent revenue. We generated retransmission consent revenue of $8.8 million for the 3-month period ended March 31 compared to $8.9 million in the same quarter of last year.

Radio net revenue for the quarter was down 15% to $12 million compared to $14.1 million in the same quarter of last year. The decrease was primarily due to decreases in local and national advertising revenue.

Digital net revenue for the quarter was down 21% to $14.5 million compared to $18.2 million in the same quarter of last year. The decrease was primarily attributable to a growing trend of digital advertising moving over to programmatic platforms both domestically and more recently, in our international markets.

Operating expenses decreased 4% to $42.7 million for the 3-month period ended March 31 from $44.3 million in the prior 3-month period. The decrease was primarily due to certain expense control measures the company undertook in April of last year.

Corporate expenses for the quarter were up 15% to $6.9 million compared to $6 million in the same quarter of last year. The increase was primarily due to an increase in audit fees related to our late filing of our 10-K for the 2018 period.

Income tax expense was $1.1 million for the quarter, while cash taxes paid was $0.6 million. Given the elimination of our full valuation allowance in the fourth quarter of 2013, future income tax expense will run at approximately 41% of pretax income, although most of this expense will continue to be noncash given our NOL offsets.

Earnings for the quarter were a positive $0.02 per share compared to negative $0.02 per share in the same quarter of last year. Free cash flow, as defined in our earnings release, decreased to $1.3 million for the quarter compared to $1.6 million for the same quarter of last year. Net cash interest expense for the quarter was $2.3 million compared to $2.4 million in the same quarter of last year.

Cash capital expenditures for the quarter were $6.1 million compared to $3 million in the prior year period. This increase was primarily attributable to actions related to the FCC auction repack. Excluding CapEx to be reimbursed by the FCC, we anticipate that our capital expenditures will be approximately $14.5 million during the full year of 2019.

Turning to our balance sheet. As of March 31, 2019, our total debt was $245.5 million, and our trailing 12-month consolidated adjusted EBITDA was $55.2 million. Cash and marketable securities on the books was $174.6 million as of March 31. Net of $75 million of unrestricted cash in the books, our total leverage as defined in our 2017 credit agreement was 3.09x as of March 31. Net of cash and marketable securities, our total net leverage was 1.28x.

This concludes our formal remarks. Walter, Jeff, and I will now be happy to take your questions. William, I'll turn it back over to you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And today's first questioner will be Michael Kupinski with NOBLE Capital Markets.

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Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [2]

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Couple of questions here. In terms of the corporate expenses, I know that the audit fees were probably in there. Did you -- could you remind me what was the total of those audit fees that were in that number?

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Christopher T. Young, Entravision Communications Corporation - CFO & Treasurer [3]

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The incremental audit expense for first quarter was approximately $1.2 million, Michael.

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Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [4]

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Got you. And I've gotten this question from some investors. Why wouldn't you have viewed that as a onetime item so that we -- so that obviously, from continuing operations, the numbers would have been even stronger?

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Christopher T. Young, Entravision Communications Corporation - CFO & Treasurer [5]

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Well, there is a case to be made for that, I guess to just err on the side of being conservative, we booked the expense and didn't -- decided not to treat it as a onetime item. Going forward, the audit expense will be less than half of that on an annualized basis. We had encountered certain issues during the end of the year last year during the close. That's what caused our K to go past the filing deadline. But that's a good point, Michael, that you could look at that as a onetime expense. I mean -- but the accounting, how we spend it and how it gets booked, I guess thought that through a bit differently, but it still goes on the books as an expense.

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Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [6]

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And in the latest quarter, the company had, as you mentioned, significant cost controls. And costs were lower than I would have expected. You mentioned that the company will cycle through those cost cuts in April. Were there further cost cuts in the balance of the year or into the first quarter? Or you cycle against all of the cost cuts in April?

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Christopher T. Young, Entravision Communications Corporation - CFO & Treasurer [7]

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No, we have been making cuts throughout the year. We made cuts throughout the year that didn't necessarily get publicized. I mean if you're modeling this thing out, I would look for total company operating expenses in the second quarter to be down in the low single digits and then will start to flatten out around Q3. And then maybe Q4, you're in kind of the positive low single-digit expense increase range.

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Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [8]

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Got you. And then in retransmission revenues, they were down in the first quarter. That should start to show an increase in coming quarters, right?

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Christopher T. Young, Entravision Communications Corporation - CFO & Treasurer [9]

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That's exactly right. So the DISH -- DISH was not yet on in first quarter, came on in April. So you will see approximately $700,000 in incremental. If you're just looking at this sequentially between Q1 and Q2, you should see an additional around $700,000 in incremental retransmission revenue in Q2 as well as Q3 and Q4.

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Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [10]

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Got you. And then in terms of digital, you -- can you give a little more color on Smadex? It seems like -- did it not participate in the shift in programmatic? Or are you saying that it -- in future quarters, it should? Or I'm just trying to understand what that -- you were trying to say.

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Walter F. Ulloa, Entravision Communications Corporation - Chairman & CEO [11]

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Michael, it's Walter. No, we did participate in the shift in programmatic. We -- the acquisition of Smadex was certainly to be ready for the changing environment and -- but I will say that the shift from traditional to programmatic has moved in a faster pace than we anticipated. You also have the -- it takes a while to integrate this product or these products into our overall sales strategy. We didn't close on the acquisition until June of 2018, so we certainly worked through the rest of 2018 to integrate Smadex and we're starting to really gain traction with this programmatic offering. But again, it takes time. But we're well positioned. We will see an improvement in the coming quarters.

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Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [12]

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And given your shift in strategy in terms of going after more profitable business in digital and the shift that you're seeing towards programmatic and so forth, does this change your view of the digital media segment? Your thoughts in terms of growth, maybe your thoughts in terms of the expansion of Headway into the U.S. or your thoughts in terms of digital media as a percent of the total company revenue?

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Walter F. Ulloa, Entravision Communications Corporation - Chairman & CEO [13]

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Well, I'll just say that to all of the questions you asked, we were feeling very positive about the potential for digital growth and also how we're going to use all of our experiences, particularly in Latin America, and transfer these experiences and tools and products to the U.S. and address or deliver services to our core Latino consumer. So overall, I think we're pleased with the steps that we've taken to improve our digital performance. We did see again a decline in the first quarter, but we're working hard to turn this around and get back to growth here soon.

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Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [14]

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And I know that you have -- you indicated the pacing's down for the second quarter. But do you think that digital will, by the end of this year, reflect growth year-over-year by, let's say, the fourth quarter?

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Walter F. Ulloa, Entravision Communications Corporation - Chairman & CEO [15]

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Well, I'll say we've budgeted to reflect growth. Growth was certainly less than last year, which had plus 40% growth but we're -- we made an -- we all got together in November and made decisions around how do we continue to grow the business but be more selective about the transactions that we're on and therefore not only produce better results for our clients and their advertising needs but also better margins for our business.

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Christopher T. Young, Entravision Communications Corporation - CFO & Treasurer [16]

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Yes, I mean growth and revenue to be seen, but certainly, we do expect growth and cash flow year-over-year from the digital business.

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Operator [17]

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(Operator Instructions) And the next questioner will be Gordon Hodge with Tracker Research.

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Gordon Hodge, [18]

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Just had a couple of questions. One, I just wanted to clarify, Walter, on the second quarter pacings on TV. Was that strictly advertising? Or does that include the pickup in retrans as well from DISH and so forth?

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Christopher T. Young, Entravision Communications Corporation - CFO & Treasurer [19]

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That's all in, Gordon. So it...

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Gordon Hodge, [20]

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That's all in. Okay. So any sense for what the ad pacings are roughly under the hood or...

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Christopher T. Young, Entravision Communications Corporation - CFO & Treasurer [21]

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I believe advertising is down low single digits for TV, just purely on the advertising basis.

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Gordon Hodge, [22]

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Got you. Okay. Very good. And then on the spectrum usage, obviously, it sounds like you had kind of an opportunistic situation there, but you do have ongoing spectrum usage fees, too. Maybe you can highlight, sort of break out is it -- how much of that revenue might be recurring in future quarters.

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Christopher T. Young, Entravision Communications Corporation - CFO & Treasurer [23]

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You'll have, throughout the year, about $1.2 million to $1.3 million in recurring multicast revenue that will show up on that line. And anything on top of that quarter by quarter will be that opportunistic play that we still have to play out for the next couple of quarters, not necessarily at the same level we saw in the first quarter.

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Gordon Hodge, [24]

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But is it -- so there is opportunity for more like that [coming on] in terms of just...

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Christopher T. Young, Entravision Communications Corporation - CFO & Treasurer [25]

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There will be more -- they're already kind of in the works, and as we satisfy the obligations on our side, the revenue will be recognized.

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Gordon Hodge, [26]

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Got you. Okay. Very good. And then I guess the last question I had was just you had an operating gain in the quarter of about almost $2 million. Is that FCC repack reimbursement? Or is that (inaudible)?

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Christopher T. Young, Entravision Communications Corporation - CFO & Treasurer [27]

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Yes. So as we spend the CapEx, we file the paperwork with the FCC. And then there's usually a 3- to 6-month lag. But then they'll send us a check, and then that'll be that same line item going forward. You'll see it.

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Operator [28]

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And this will conclude our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

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Walter F. Ulloa, Entravision Communications Corporation - Chairman & CEO [29]

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Thank you, William and everyone, for joining us on our first quarter 2019 earnings call. We look forward to speaking to all of you in early August when we will announce our second quarter results.

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Operator [30]

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The conference has now concluded. Thank you all for attending today's presentation, and you may now disconnect your lines.