Grupo Televisa Earnings Call INSIGHTS: Pay-TV Penetration, The Iusacell Investment

On Tuesday, Grupo Televisa, S.A. ADR (NYSE:TV) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Pay-TV Penetration

Gregorio Tomassi – Itau Bank: First of all, congratulations. I think they are strong results. I have two questions. First of all, pay-TV penetration, where do you see it standing in the next three years in Mexico? What’s your view about it? The second question relates to how do you see the risks about the third network to be auctioned soon in Mexico combined with the – also combined with the analog switch-off that is foreseen for the end of 2015?

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Alfonso de Angoitia Noriega – EVP: I think the penetration of pay-television will end this year around 43%. However, we believe that there are some between 6 million and 8 million additional households that can afford to pay for content for the pay-television. So, I think that there is a lot of space there to grow. And on the other side, our cable operations have a lot of space to grow on data and telephony where penetrations are really low. So, we believe that there is still a lot of space. We have accomplished a lot because, as I said, penetration will end the year around 43%, 44%, but there is still a lot of space to grow. As to your second question about third network that would compete in Mexico. As I have always said, we welcome competition. It will make us stronger, a better company. We have been producing content successfully for over 60 years and I believe that we have the scale and also the talent and expertise’s to continue producing content that has strong appeal around the world not only in Mexico. We really believe that competition is good for any business, that has proven to be the case for Televisa and I guess three examples come to mind. The first example would be on television precisely, when the government privatized Television Azteca 20 years ago, our share of broadcasting television was more than 90% I would say, but it was a less efficient company. So, our broadcasting business improved its production of high-quality content and managed cost and expenses much better and it has been incredibly profitable since. So, I guess it’s more – Televisa is more profitable on the broadcasting side now with competition from Television Azteca and with more or less 70% audience share then when it had a 90% audience share. So, we have become a more efficient company and we have faced competition and we will face competition on television as well. Another example is satellite television, where with the entry of DISH, Sky’s competition increased a lot, but in the process Sky improved its pay-television offerings and as you have seen we expanded into low cast pay-television market, we believe that DISH is highly subsidized by Telmex, effectively to compete against DISH is to compete against Telmex, which as you know is the dominant telecommunications company in our country. In spite of that, today Sky is twice as big as it was before DISH and its margins remain strong as ever. So in the DTH business we have been able to compete against Telmex effectively and efficiently, maintaining margins and doubling the size of the company. And the last example that comes to my mind is Cable. In Cable, we faced incredible competition every day in the offering of triple-play services. Our cable companies compete with an incumbent that has close to 75% market share in both voice and data. And in spite of that and as Telmex is aggressive pusher of triple-play with DISH, our cable operations have continued to grow double digits. We have voice and data customers growing the most. So, we’re used to competing. We welcome it. And I believe that competition of the third network will make Televisa a stronger company.

Gregorio Tomassi – Itau Bank: Alfonso, if I may follow on, and thanks for the answer, but if we consider that the TV broadcasting business is more mature business than the pay-TV business then probably my assumption is that competition would bring some pressures on margins and prices and some fragmentation of audience. Would you agree with that, would it be not necessarily completely similar to what happened with the pay-TV as it is a more mature market?

Alfonso de Angoitia Noriega – EVP: I mean the best example in that case would be DISH when in order to compete against – I mean, this is Sky – in order to compete against DISH, we launched the low-cost pay-television offerings and there, I mean, the concern of the market was that as a result of that ARPU would of course drop and our margins would suffer. However, we have been able to maintain a very strict control of cost and expenses in our DTH operations and of course, we have doubled the Company year-over-year, and, I mean, it’s a Company that has been to maintain its margins. So, I think that we have taken precautions in order to compete against a new entrant into the network business. We believe that in the short-term margins can suffer a little but we don’t think that because of the things that we have put in place we will have a material impact on our margins and on our operations.

The Iusacell Investment

Andrew Campbell – Credit Suisse: I was hoping to just clarify some points about the adjustments you made to the Iusacell investment. Can you just clarify that there has been no other change other than FX in terms of the operating assumptions and the way that you’re viewing the underlying potential of the business? The other question is how the asset will be accounted for going forward? On what regularity will you be reviewing the value of the asset and what is the potential risk of some kind of an additional adjustment to that valuation?

Alfonso de Angoitia Noriega – EVP: I’ll ask Salvi Folch to answer your question.

Salvi Folch Viadero – CFO: Well, as you know we have to value our investment at fair value. So, every quarter we have to look at the fair value of our investment and compare it to the carrying value that we have on our books. When updating our valuation model with the market exchange rate there was a reduction this quarter, valuation of about $70 million, basically explains because CapEx is dollar denominated while revenues are basically Peso denominated. Going forward starting July 1, since we’ll have 50% of equity it would be valued under the equity method and we will have 50% of the net income of Iusacell on our results. Well, we will continue to have to look at the value of our investments compared to its carrying value. The impact this quarter was not due to the operations but was due to this market factor.

Andrew Campbell – Credit Suisse: So just to be clear, so starting July 1 will it be carried on a cost basis and then reviewed periodically by an impairment test or will you be adjusting it every quarter for a fair value and therefore we should expect some volatility resulting from that?

Salvi Folch Viadero – CFO: Well, we will have to look at fair value of the investment in sales, right. So that will depend if the value that we have in our books is backed by our model. So, only if there is change on fair value, we will have an impact. But aside from that every quarter what you will see is that we will book a net income – 50% of the net income of Iusacell on our equity method under EBITDA.

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