Grupo Televisa S.A.B.

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Esquina, esquina, y ahí nos vamos. El mundo es grande, pero lo tengo en mis manos. Estoy muy duro, sí, ok, ahí vamos. Y con el tiempo nos seguimos elevando. Y seguimos rompiendo aquí. Esta fiesta no tiene fin. I feel like you're with me. No!

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Thank you. Yeah, love came around and it knocked me down. © BF-WATCH TV 2021

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I got it, I got it, I got it, I got it, it runs in my blood, oh. I love it, I love it, I love it, I love it, you already know. I said I'm good and I'm lucky, I'm lucky, I'm lucky, I know. It's another thing, yeah. Hey! Hot girls, red and brown, we don't look at all. If my face cries and the energy goes, if we're falling in love with a girl from Rio. So if they're standing in front of you, but you can't stop coming, uh-huh. Thank you.

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I feel like you're with me. Yeah.

I don't know.

Your program will begin shortly. If you need assistance during your conference today, please press star zero. © transcript Emily Beynon

Welcome to the Televisa Univision third quarter 2022 earnings call. At this time, all participants have been placed in a listen-only mode. Following management's prepared remarks, we will open the call for questions. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If you wish to remove yourself from the queue, press star 2. When you poise your question, you pick up your handset to allow optimal sound quality. Today's call is being recorded. I would now like to turn the call over to Betsy Frank, Head of Investor Relations. Please go ahead.

Thank you and welcome everyone to Televisa Univision's third quarter 2022 earnings call. I'm joined today by our CEO, Wade Davis, and our CFO, Carlos Ferreira. This morning, we issued an earnings press release, which can be found at investors.televisaunivision.com. A few notes about the content of our remarks today. We will refer to adjusted OIDDA as EBITDA. Unless stated otherwise, all financial comparisons will be on a pro forma year-over-year basis. Pro forma comparisons are adjusted to include the Televisa content business for all prior periods. Unless stated otherwise, our U.S. ratings figures refer to audiences ages 18 to 49, and Mexico ratings figures refer to audiences P4+. Some of the information discussed today will contain forward-looking statements. These statements involve risks and uncertainties, including those highlighted in our press release, and may cause actual results to differ materially from these statements. We are not obligated to update forward-looking information discussed on this call, except as may be required by law. Our press release and reporting package contain definitions and reconciliations of our non-GAAP measures to the most directly comparable GAAP measurements. I will now turn the call over to Wade.

Good morning. On behalf of myself and my partners, Alfonso and Bernardo, thanks for joining us. I'm thrilled to be sharing the results of another strong quarter and our continued progress in the transformation of Televisa Univision. This quarter, we delivered 5% overall revenue growth, which demonstrates the strong momentum we've built. We continue to grow across all major revenue streams in all geographies, despite very strong comps from a year ago and some macroeconomic headwinds that have started to materialize in the U.S. ad market in Q3. In late July, we launched VIX+, the much-anticipated premium subscription tier of our market-leading VIX service. Related to this launch, we saw a 4% decline in EBITDA for the quarter. With VIX Plus in the market, we now have both the free and paid tiers of our service live. I feel great about how the service is working overall, and I'm very proud of the fact that the growth and profitability of our core business has funded our massive investment to launch VIX and VIX Plus with minimal impact to our overall profitability. Despite the slight decline this quarter, on a year-to-date basis, our EBITDA is only down $22 million, despite investing hundreds of millions of dollars to deliver the largest Spanish-language streaming service the world has ever seen. Last quarter, we introduced the pillars of our long-term success. Our audience performance across all of our platforms and our ability to produce superior content to inform, empower, and entertain our audiences. Second, our ability to monetize those audiences through advertising and subscription revenues. And third, our digital transformation, where our massive streaming opportunity will allow us to reach new audiences and continue to be a driver of our above-market financial performance. I'll cover the strategic and operational progress across these pillars, and Carlos will discuss how our achievements are delivering superior financial results. So let's start with our audiences and content. The global Spanish-speaking audience is enormous, and there is no other company in the world that reaches more Spanish speakers across the breadth of platforms. linear, streaming, digital, audio, and live events. In our core U.S. and Mexican markets, we continue to deliver around 60% of the audience, nearly double the share of our closest competitors. And now with the full launch of VIX and VIX+, we're reaching audiences in all of Spanish-speaking Latin America. Our strategy to program all of these platforms that a unique and complementary element of a coherent ecosystem is highly differentiated and only enabled by the massive content advantages we have. We're able to do this because we can efficiently leverage our massive library, our huge vault of IP, the largest portfolio of soccer rights in the world, the largest Spanish-language news production infrastructure, and a scripted content engine unlike anything else in the world. where in Q3 alone we produced more than 4,500 hours of scripted content that aired across linear and streaming. This ecosystem-focused strategy allows us to maintain and leverage our healthy and stable core business while at the same time delivering a complementary streaming service that super serves our heavy viewers, and allows us to reach new audiences that are not being well served by the core linear platforms. In the U.S., we wrapped a fantastic broadcast season, where we were the only major broadcast network to deliver audience growth in prime time overall. During the July sweeps, Univision finished as the number two broadcast network, regardless of language. Our tentpole performance is bucking industry trends, with their Premios Juventud award show as the only tentpole in the industry to grow ratings for two years in a row and made Univision the number one network, regardless of language, on primetime that evening. We also leveraged our market-leading news platform to create an entirely unique news tentpole, Univision REOs. which came out of the gates as the number one program on all of television among U.S. Hispanics that evening. Although our overall year-to-date ratings performance was fantastic, and there were a number of highlights across our portfolio over the quarter, we did carry some rating softness out of Q2 that intensified in July and August. This office was exacerbated from a rate of change standpoint by comparisons to last year's third quarter, where we had a huge volume of major soccer tournaments. And although this was a weak quarter for us by our standards, it was largely in line with the market and we only lost about 20 basis points of share of overall television viewership. But importantly, we acted quickly and aggressively to address these issues. We completely remixed our primetime lineup on Univision, and we relaunched Galavision as a pure play comedy channel, filling a white space in the Spanish language market. And we did all of this at nearly zero incremental cost, as we were able to pull forward premium scripted entertainment from our massive pipeline. And for Galavision, we leveraged original content from our market-leading Distrito Comedia channel in Mexico. By September, the actions we took delivered 13% ratings increase relative to the prior three months. And this momentum has carried into October, and we're optimistic for the remainder of Q4. In Mexico, we continue to be in a category of one, with nearly double the audience share of our closest competitor. We delivered 19 of the top 20 weekday programs, the top ten highest-rated Liga MX matches, and four of the top five novellas. Our primetime and morning newscasts outperform the competition by a factor of three or more. And in Pay TV, where we have five of the top 15 channels, we have a portfolio that delivers the largest share of audience in all of pay television. And although our broadcast ratings declined modestly, the declines were in line with putts, which were in the process of resetting from COVID-related highs. Like in the U.S., we lapped a difficult comp from last year when we had major soccer tournaments, as well as two huge novellas, which generated the highest audience levels in seven years. Heading into Q4, we have great momentum, and all eyes will be on the World Cup. where from mid-November into December, we'll air 40 of the most important games between broadcast and VIX, with daily highlights and analysis of the full tournament. And on the entertainment side, we have a strong lineup for Q4, including the launch of the fourth season of Quienes La Máscara, which is one of the most watched reality shows in Mexico. On top of that, we have two highly anticipated telenovelas forthcoming from two of the most successful producers of the past decade. Now, moving on to monetization and starting with ad sales. Consolidated ad revenue grew 6% overall, which was an outstanding result given the historic high scatter volume in pricing we saw a year ago associated with the huge volume of major tournament soccer in both the U.S. and Mexico. In the U.S., our national ad sales grew 8%. Our local business grew 1%, bringing the overall growth rate down to 5%. The strong national growth reflects the continued benefit of an excellent 21-22 upfront, fantastic execution and scatter, and significant growth from advanced marketing solutions. Scatter volume was in line with last year's record levels. And although premiums have come down slightly from the historic highs we've seen in recent quarters, they remain at or above the English language market. Current pacing of new client activations put us on track for a record year. Currently, only a third of US TV advertisers are advertising in Spanish, which is astounding. given that the largest Spanish-speaking economy in the world is in the US. And activating these advertisers is an enormous opportunity. We've redesigned segments of our ad sales force, of our go-to-market strategies, and added new capabilities to focus on penetration and new client activations. And tracking these activations is a key metric in measuring our progress against this huge opportunity. We've been bringing online and scaling our advanced marketing solutions since Q2 of last year. And this quarter, our AMS revenue was up more than 50% fueled by VIX where revenue doubled. The VIX value proposition is resonating with advertisers as much as consumers. Attach rates with our existing advertisers are now meaningfully over 50%. And furthermore, vix is activating new advertisers to the platform who in turn add linear to their mix as they see the power of our multi-platform offering vix is commanding significant price premiums to linear even as other ad supported streamers are reducing price to drive volume in this expanding market in this quarter we started introducing innovation units which we expect will continue to drive even higher premiums particularly in more targeted consumer segments, which will be defined and delivered using our proprietary USH data graph, the first and only data product to map nearly 100% of U.S. Hispanic households. On the local side of our business, our growth of 1% reflected softness in the auto sector that was offset by record political spend. We're well positioned for the midterms, with our audience increasingly viewed as the critical swing vote in many states. And political ad spend is widely projected to surpass the 2020 presidential election. And pacing to date for us has certainly shown this to be the case, where we delivered Q3 spend that was higher than our record Q3 spend from the 2020 presidential cycle. And although we'll beat our budget of more than doubling our political and advocacy revenue this year, we're disappointed that key races in Florida and Texas have not materialized, which would have contributed to an even more extraordinary result. Turning to Mexico, we posted another amazing quarter with 9% ad sales growth. Our team in Mexico did a fantastic job continuing to activate new clients across all of our platforms. national private sector, digital, national public sector, and local. At the same time we're activating new clients and capturing more volume from existing clients, we continue to steadily increase price. I want to underscore that the 9% growth we posted was all that much more impressive given we saw many clients hold their investment to push into the fourth quarter for the World Cup. which should drive an extraordinary finish to our 2022 ad sales in Mexico. Moving on to the second component of our monetization, subscription and licensing, where consolidated revenue grew 8%. The late July launch of VIX+, steady growth in Mexican pay TV, meaningful growth of the virtual MVPD segment of our U.S. channels business, somewhat offset by traditional U.S. MVP subscriber trends were the drivers of our subscription revenue growth. Also, the increased volume of premium original content that we're releasing on Zixx Plus is beginning to be a contributor to licensing growth outside of our core Spanish language markets. In the U.S., subscription and licensing revenue grew a solid 7%, where we saw linear subscribers decline low single digits as the traditional segment declined in line with the broader industry and was almost entirely offset by the strength in our virtual MVPD subscribers. In Mexico, we had a fantastic quarter with 14% revenue growth. Subscription revenue there benefited from contractual price increases, while subscribers grew in low single digits. And further contributing to our growth in Mexico is the rest of world content licensing that I referenced, which we booked to our Mexico segment. Here, the increased volume of premium original content we're producing for our streaming platform will drive licensing growth going forward, given the significant opportunity to sell this content outside of our core Spanish language markets. And although it's early days, given we've just launched VIX Plus and just begun releasing this content, we've already announced a partnership with Globo for them to license VIX Plus originals in Brazil. And coming out of MIPCOM last week, we're seeing massive demand from other regions. And on top of that, in Q4, we'll have a large one-time increase associated with the sub-licensing of our Latin American World Cup rights outside of Mexico. Now moving on to digital. The third quarter marks an historic point in our transformation as we launched VIX Plus in late July to complete the overall service offering. With the full free ad-supported base of VIX and the premium subscription tier of VIX+, within the same product, we're seeing the strategic and operational benefits of this unique approach already paying significant dividends. Obviously, the last couple of quarters have seen a lot of activity in press as other streamers scramble to retrofit their offerings in order to introduce the benefits of ad-supported functionality. We started with a strategy to have a free ad supported service alongside a premium subscription tier before we wrote our first line of code. In our markets, the audiences are lower ARPU and higher churn. So in order to drive higher levels of profitability against this reality, a strategy to reduce SAC, manage churn and reactivations is critical. The configuration of our service was designed to accomplish this, and I'm really happy to report that since we launched the full service, we've seen the productivity of our ad-supported funnel deliver more than two and a half times our original assumptions. Although it's too soon to tell if we'll see the churn management and reactivation benefits that we've designed, we're optimistic that we'll see similar results. From a competitive standpoint, It's important to point out that the flurry of activity around ads supported from other streamers is really only about introducing ad-supported subscription tier, which doesn't really benefit the SAC or churn dynamics I've just discussed. It just yields a lower-priced subscription tier that'll pick up a slightly larger segment of the market on the bottom end. From a content perspective, VIX continues to deliver extremely high levels of engagement, driven by the quality and uniqueness of its strategy and content proposition. VIX is the only free streaming service in the world with more than 50% of its content volume exclusive and original. We're now producing over 12 hours a day of original news and sports to drive daily viewing and habituation. In addition, our massive library of some of the world's most powerful and relevant Spanish language content of all time can't be found anywhere other than VIX. We're seeing over three-quarters of our viewership come from this O&O content, which obviously yields very favorable margin dynamics beyond the pull of its exclusivity. Turning to VIX+. While it's very early days, our amazing original content slate is resonating. Our originals are the largest driver of engagement in new subscribers on the platform. We launched with a huge volume of new original entertainment, more than any other streamer at the time of launch, and we followed this up with the promised cadence of one new blockbuster series or first-run original movie per week. And beyond this incredible entertainment proposition is our massive premium sports offering. In less than three months, we've aired about 3,000 hours of live soccer, which has been a huge driver of new subscribers and consumption overall. No one in any language has this volume of original entertainment and premium sports in one app. And another critical element of our success out of the gates with VIX Plus is the breadth of amazing distribution partners, which were part of the launch. Of course, we launched with the service available on all major platforms and embedded as a native app in the largest CTV OEMs. But it's important to note that the largest distributors in our launch region chose VIX Plus as the centerpiece of their streaming entertainment offering. T-Mobile. the largest Spanish-language carrier in the U.S., exclusively offers it to their customers free of charge. In Mexico, Izzy, the largest cable operator in the country, is our exclusive MVPD distributor. And OXO, one of the largest retailers in the country, provides cash and prepaid infrastructure at their 20,000 locations and is making VIX Plus a core part of their loyalty and rewards programs. Intego, one of the largest wireless carriers in Central America, is bundling VIX Plus for their subscribers. Beyond this, we have a robust pipeline of additional distribution partners, with the only limiter at this point being the rate at which we can deliver the technical integrations. And of course, I'd be remiss not to close my remarks about streaming without reminding that our economic model is intrinsically more efficient and profitable. As I said earlier, we have launched all of this through the growth and profitability of our core business, and we continue to expect that our streaming offering overall will be profitable by the end of next year, its first full year of operation. Our third quarter performance continues to highlight the elements that make Televisa Univision such a unique story. It's a stable and growing core business, consistently delivering above market growth rates. It's a company with the best profit margins in the business, yielding sufficient profit growth and free cash flow from our core business to fund a massive investment in our new streaming business. We've been able to demonstrate high quality execution and focus required to launch in record time a truly unique product and content offering positioned to capture the massive and underserved global Spanish language streaming market. It's a pleasure to continue to share this story with you as it's unfolding. And with that, I'll turn it over to Carlos to take you through the financial performance in more detail.

Thanks, Wade. It's great to be here today to share our third quarter results, where we had another solid financial performance. We continue to focus on the transformation of our businesses, During the quarter, we launched VIX Plus, our premium subscription streaming service, and we now have both tiers of our app live in the market. We are facing some challenges on the macro front, but our team's execution has positioned us with a great setup heading into year end. Looking more closely at our results for the quarter, consolidated revenue grew by 5%, bringing our year-to-date growth to 9%. Moving to advertising, consolidated revenue grew 6%. In the U.S., ad revenue grew 5%. Our teams executed superbly and grew revenue in the quarter despite a tough comparison to 2021 when we had three major soccer tournaments, the Gold Cup, Copa America, and Euro Cup, all of which generated significant advertiser interest. We completed the final quarter of the 21-22 broadcast upfront, a stellar one for us, which contributed to both volume and pricing growth. VIX is generating great demand among our advertiser base. We successfully expanded relationships with existing advertisers by landing attachment rates well in excess of 50%. Our solid U.S. advertising revenue was generated despite being negatively impacted by the macroeconomic headwinds, which we're starting to see spread beyond categories impacted by supply chain disruption. Mexico advertising revenue grew 9% in the quarter. This is especially impressive given our existing position as the market share leader in linear audience and advertising dollars. We generated this growth despite clients pushing investments into Q4 to coincide with the soccer World Cup. Now going into subscription and licensing. Revenue grew 8% on a consolidated basis. In the US, this growth was 7%. We benefited from the launch of VIX+, as well as from YouTube TV distribution that was implemented a year ago. On the linear side, we lost a modest amount of subscribers primarily due to market-driven losses in traditional MVPDs, mostly offset by increases in virtual MVPDs. In Mexico, subscription and licensing revenue grew 14%. This exceptional growth was mainly driven by a slight increase in subscribers, across-the-board rate increases, and also content licensing fueled our growth this quarter as we continue to find new ways to monetize our content. Growth in these two main revenue streams was slightly offset by a decline in other revenue. The majority of this revenue is a legacy stream that is in runoff mode through year ends. Turning to expenses and profitability. Expenses grew 10% in the quarter and adjusted EBITDA declined by 4%. On a year-to-date basis, our profitability is down 2%. All of this reflects our aggressive investments in our streaming service which allowed us to bring the full product to market in the third quarter. We're confident that these investments are the right thing for our business over the long term. Now let's cover the balance sheet. We ended the quarter with $531 million of cash on our balance sheet, with incremental liquidity available through credit lines. Cash declined from $684 million versus the prior quarter. primarily related to the acquisition of Pantaya in September. Our leverage ratio increased modestly to 5.7 times from 5.5 times, reflecting the decline in last 12 months EBITDA. We believe the increasing leverage is more temporary in nature as we're in a period of intense investments. Looking more at our debt. We completed a $400 million refinancing in August that extended our maturity profile, marking our second refinancing of the summer and bringing the total to $1.9 billion. As a result of these proactive measures, we now have an average maturity of 4.7 years. I would also remind you that as it relates to a rising interest rate environment, we have reduced our exposure to hedges. This means that nearly 80% of our debt is now effectively at a fixed rate. I will remind you about what I said last quarter as it relates to economic pressures, which we are now seeing. We're prepared to manage our business through economic challenges and will take necessary steps to protect margins and cash flow. As individual companies, Televisa and Univision have been through this scenario before, but we're a stronger combined company and are confident in our ability to navigate an economic downturn. In summary, we're executing well. We are ahead of schedule on our integration plans and are making significant progress on our anticipated synergies. We have a lot of opportunities ahead of us. Finally, we're optimistic about the remainder of the year considering the following five factors. Number one, our 22-23 U.S. upfront results. Two, political advertising spent from the U.S. midterm elections. Three, advertising around the World Cup in Mexico. Four, the significant revenue from sub-licensing our World Cup rides to Latin America. And number five, a full quarter of our streaming service. We look forward to a very strong closing of the year. And with that, let's take your questions. Operator, please open the line.

At this time, if you would like to ask a question, please press the star and 1 on your touchstone phone. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star and 1 if you would like to ask a question. In the interest of time, we ask that you please limit yourself to one question and one follow up. We will take our first question from Robbie Steiner with JP Morgan.

Thank you for taking the questions. Appreciate it. Wade, maybe I'll start with you. I think I heard you touch on subscriber acquisition costs and churn, but are there any early submetrics you can share now that Fixed Plus has launched? I know it's early and maybe how the uptake is relative to expectations and relatedly what you're seeing competitively, and then I have one follow-up. Thank you.

Yeah. I mean, first of all, good morning, Avi. Thanks for your question. As we've said before, it is too early to really give detailed metrics around VIX. I know that continues to be disappointing to the analyst community. But I'll just reiterate that, you know, because we have such a unique service in which we're combining, you know, a fully free ad-supported app with a subscription here inside the same product, There's just a lot that nobody's ever really seen in terms of how that works from an audience flow standpoint. And we don't want to get ahead of ourselves by reporting metrics that might not be helpful to the analyst community. And so we need a little bit of time for it to settle in. And, of course, we're going to provide a high level of disclosure and transparency. you know, going forward as soon as we believe the KPIs settle into a place where that's going to be meaningful for everybody. You know, in terms of the benefits of having those two tiers in the same product, as you referenced, the reason we've decided to do that is because in these markets we do have lower ARPU and higher churn. And so having a fully free a fully free tier allows us to access the maximum market share because there's a lot of there's a lot of the population in our market the population in our markets that will never be SBUD subscribers It allows us to easily get people to sample the service and start discovering the content and us to begin building a relationship with them and understanding their viewership preferences. And, of course, have the ability to promote. And so that really – That is the free ad-supported funnel that can then point people to the paywall where appropriate. And as I said in my prepared remarks, we had made some initial assumptions about the productivity of that part of our user acquisition funnel, and we're seeing that. two and a half times the volume of referrals out of our ad-supported funnel into the paywall. So we're incredibly happy to see that. And then, you know, obviously the other piece of the benefit of having the two tiers together is that, you know, as people naturally churn

out of the subscription environment, we have a free environment to churn them into.

So a season of soccer ends, and they can churn out into our free tier. We maintain a relationship. with them, we continue to generate viewership, make money, but keeping them in our ecosystem, it becomes much, much more efficient to reactivate them when either the next season of the premium series that they might be interested in or the next season of soccer comes back around. And obviously we're way too early to see any of those churn benefits or reactivation benefits that we've planned for. But given the success that we've seen, you know, on the front of the funnel relative to our assumptions, we're very optimistic. You know, in terms of other metrics, you know, really we're, you know, I think probably the most important thing to point you to is just the success of our content. You know, as I said, on the free service, we're seeing, I guess, 76% of U.S. consumption overall is coming from our first-party content.

In Mexico, it's even higher. I think we're seeing 80% higher. I think we're seeing 86% of our free consumption coming off of our first party content.

That's critical because it drives important margin benefits. Obviously, that's also exclusive content that you can't find anywhere else, so that's a big part of what's attracting people to the service. And on the SVOD side, I'd say that content proposition is working well as well. Our new original series and movies that we've launched, all of them are in the top ten in terms terms of consumption of our entertainment proposition. We launched the service with close to 10,000 hours of entertainment content, so obviously a lot of that is licensed. But the releases that we've dropped on a weekly basis are performing incredibly And as I said, every one of the top 10 programs was one of our premium original series or our premium original movies. And of course, the sports proposition is critical. Nobody's combining the volume of sports, live, exclusive sports, with the volume of entertainment and content that we have. As I said in my prepared remarks, just since the launch of VIX+, we've aired about 3,000 hours of live soccer. And that's also been an incredible source of not just engagement, engagement, but new subscriber acquisition. In fact, on the game days, we see spikes of as much as 3x increase in daily gross ads. So we're really gratified to see how well the sports proposition is working to complement our original entertainment proposition.

I appreciate the comments very much.

For my follow-up, even though I have a ton, I just wanted to ask about operating expenses. They improve sequentially in the third quarter at plus 10%.

I guess how should we think about those in general and maybe streaming investments going forward? And in particular, Carlos, I'm interested in your comments around protecting margins. Thanks a lot.

Yes. Hi, Abby.

Thanks for the question. Yes, we did see a sequential improvement in the quarter. As we have said, we are funding our streaming investment, mostly funding our investments in streaming. We have a $22 million loss for the year, which in essence means that we're funding everything, everything from our core operations to our two new streaming platforms, interest, CapEx, everything. We're funding everything with our own resources. Going forward, as we have said, we believe that we can continue to fund this as we are doing it. In terms of cash flow, it's pretty much the same. We are generating healthy levels of cash flows, and we feel confident that as we gain scale in streaming, this will help us to continue to grow free cash flow generation.

I'll just add, since I think there was a question about streaming investment going forward.

So I'll reiterate, as I said in my prepared remarks, we believe that we can deliver a profitable streaming business by the end of next year. When you look at the rest of the industry, they're seeing peak losses occur somewhere between two and a half to three years. after the launch of their service. And then they're projecting profitability on average around two years after peak losses. It's also important to note that consensus expectations for analysts covering those companies generally lag by about a year. So that means that most analysts expect the streaming services that have been launched into the market to be profitable six years after launch. This is year 0.5 for us. We're in year zero. We just launched the streaming service. It'll be live for less than a half half a year, and our peak losses will occur in this year. And we'll continue to reduce the losses as the service scales over the course of 23 and achieve profitability by the end of the year, one year after the service has been fully live in the marketplace. So this is something that we think is incredibly unique to us, is very differentiated from the standpoint of our investor proposition, and should give you some color about how we think about the level of streaming investment relative to its profitability going forward.

We will take our next question from Jessica Reeferwick with BOA Securities. Your line is open.

Thank you. Good morning. I have two different questions. One, continuing on streaming, how do you think about longer-term, like long-term success, whether it's margins or size of success? whether it's margins, the size of the business, and then more near term, do you expect to see any impact from the coming offering of advertising on both Netflix and Disney Plus on their coming avalanche years? And then second subject, You have an incredibly strong audience in the face of declining pay TV penetration. How do you think about, well, first of all, how much is re-transforming for you, and how do you think about that longer term? Is that at risk?

Sure. Why don't I go backwards? So, you know, on the core business, you know, our core business, unlike many of the other diversified media companies in the U.S., continues to be stable and growing. And that's across both ad sales and subscription. We do believe that those above-market growth rates will be able to sustain themselves for multiple years to come. The biggest dynamic associated with why it's different for us than other people boils down to, frankly, market penetration in both ad sales and distribution. Excuse me. Since your question was on distribution, it represents a little less than 40% of our U.S. revenue. And the biggest place that we're underpenetrated is in the universal NDPB segment. And that's a place where, as you know, we've had success recently launching with YouTube. YouTube has been incredibly happy with the performance of our service to date. In fact, you can see the impact on other distributors that are not carrying our services. that compete with YouTube TV have been immediately impacted by the launch of our services on YouTube TV. So it's hard to imagine that in this day and age in which the U.S. Hispanic audience represents 20% of the overall population, And we represent 60% of the viewership with that population, and even more so for things like news. It's really hard to imagine that any major distributor is going to make a choice to essentially alienate this massive audience by not carrying the largest program. focused on the audience. And so there's tailwinds that come from incremental penetration with distributors that don't carry us. The other thing that I'll say is that we're in the process of launching new channel products. And so these are channels-based experiences that will be purely distributed through our MVPDs, both traditional MVPDs and virtual MVPDs, that are unique to the market and we think can actually help expand the universe and recruit new subscribers into the pay television universe. which is obviously something all of the distributors are looking for, you know, sources of new subscriber growth. And the nature of these products we're working with them on will be massively margin accretive to them at the gross margin level relative to other products that we have. So that's the answer to your retrans question. In terms of streaming and the impact of Disney and Netflix on the ad market, I think it's going to be different in the U.S. and Mexico for us. First of all, we don't think it's really going to have a significant impact on us in particular. They didn't go through the upfront, so it's purely going to impact the scatter market. And we think it's largely going to be a share shift within English language. And frankly, Netflix and Disney coming to the market will continue to drive a focus on the importance of premium ad-supported streaming. And for us, as the market leader in Spanish language, you know, more focus on that segment of the market is good for us. In Mexico, it's going to be, I think, have less of a near-term impact on us, right? We're by far the market leader in video advertising when you think about, you know, linear and premium digital. It's early days in Mexico for that marketplace.

There's very limited programmatic business for connected TV and OTT.

And as you know from prior remarks we've made about the market dynamics, the scatter market in Mexico is a much smaller piece of the market relative to the upfront. And so, as we said, they didn't go through the upfront cycle. It's purely going to be a scatter play. They have to scale up. that they don't have in Mexico, and they can't rely on the programmatic business because the programmatic business is quite immature. So in the near term, that's the answer. In the longer term, it's an answer that's more similar to what I said about the U.S., which is, you know, more, or more participants in the market we think is good for us.

More focus on the market is good for us because we continue to think that we'll be the leader and therefore be the beneficiary of increased focus.

Thank you.

We will take our next question from Jason Kim with Goldman Sachs. Your line is now open.

Great. Thank you. Thanks for all the details as always. You were opportunistic in pushing out some of your maturities earlier this year but still have some left. So how are you thinking about the timing of addressing those maturities that you still have in 24 and 25? And the cost of capital has gone up. a lot for everyone this year, just given what the rates are doing. Does the current environment have any impact on either the pace or the magnitude of the investments you think you need to make in your streaming initiatives?

Hi, Jason. Thanks for the question. In terms of, as you know, we pretty much pushed pushed all of our short-term materials.

We have a very small amount doing 24. We have a significant amount of cash on hand, and as I mentioned previously on one of the questions, we're generating cash flow, so we don't feel pressured. by what's maturing in 24 and in terms of our maturities in 25, we will be opportunistic and when we feel comfortable and we believe that market conditions are appropriate, we will take advantage of that, no?

As I also mentioned, around 80% of our debt is fixed, so that helps us a lot in terms of planning and in an environment where interest rates are rising, that's really the impact that we're having is minimal, no? So that's the answer for your first question, and I'll let Wade answer the second one.

From the standpoint of the pacing of our streaming investment and any sort of macroeconomic uncertainty, the further we get from the launch of the business, which obviously occurred at the end of Q1 for free and late July for streaming, the more variable our expense base gets. And so as I said, we have peak losses occurring this year. We obviously enjoy the benefit of revenue scaling going into next year. But to the extent that that revenue doesn't scale, a much higher proportion of our expense base in 2023 from a streaming standpoint is variable. The real costs that are not variable, now that we have most of our costs behind us, are content. And that's the place where we have an advantage from a cost standpoint and a volume standpoint. that's unlike anybody else in the world. You know, the amount of content that we can produce out of our factory in Mexico is static.

I mean, in the In this quarter alone, we produced 18,000 hours of content out of Mexico.

We're obviously producing that incredibly efficiently relative to our opportunity to essentially export and monetize that around the world. We are going to continue to invest in content. And given our cost advantages, frankly, we think we'll be able to push forward at a rate that others can't afford to on a relative basis.

So we have a huge cost advantage on content, which is the main fixed cost. We're going to reap the benefits of that going into any sort of macroeconomic uncertainty.

And as I said, we'll be through our peak loss period by the end of this year and moving into into a place where our variable costs represent more than 50% of our cost base.

And so to the extent that growth doesn't materialize, we'll be able to manage things very efficiently.

We'll take our next question from David Joyce with Barclays. Your line is now open.

Thank you. A couple questions on the streaming side. First, as it relates to the Pentai acquisition, how does that fit into the broader strategy now that you have launched on Nuvix Plus and Nuvix is already out there? And then secondly, I know you've talked about the vast volume of content that you're producing and able to produce with your infrastructure. But are you seeing any other sorts of content sourcing competition from other studios or streamers as they look to expand more globally? And finally, how much of your target, Tam, of I think you originally talked about trying to reach 600 million homes, population, how much of that target do you still have to launch in? Thank you. Sure. Try to keep all three questions straight there. So on Pantaya, pretty simple answer. You know, Pantaya subs will be migrated over to VIX over the next few months. And so they will enjoy an enhanced product will grandfather the price that they had from Pantaya. So they're going to get an enormous upgrade from a content proposition in terms of scope. Because obviously Pantaya didn't have sports, they didn't have the volume of new releases that VIX has. And they'll enjoy that at a at a favorable price point.

Obviously, we do, day one, we now have access to all of the PENTAI content.

They do have some great things in the pipeline. And we're slowly, from a programming standpoint, looking at how we're going to lay in the Pantaya content into the overall VIX release. But in the aggregate, the short answer is Pantaya is going to be absorbed into VIX+. From a content competition standpoint, really, we don't... a lot of competition for the things that we're doing. We have the vast majority of the capacity to produce content in the Spanish language world. Clearly others like Netflix can look to third-party studios for hire to produce their content. We think they, of course, get their share of interesting projects, but the capacity to produce real volume just doesn't exist in the Spanish-speaking world. outside of our infrastructure. And to the extent it does, because you're needing to tap third parties, it's happening at a significant price point premium relative to what we're able to produce. In terms of TAM and where we are on market rollout, You know, we've launched, let's say, a hard launch now in the U.S. and Mexico. For the rest of Spanish-speaking Latin America, it's a soft launch. So we're available on all of the major platforms. But with the exception of our recently announced partnership with Tigo, we really haven't started any sort of concerted direct-to-consumer push.

Because in most of these markets, and well, frankly, in all the markets in Latin America other than Mexico, we don't enjoy

The same benefit of having, you know, the market-leading platform as a megaphone to help enhance our direct-to-consumer marketing efforts. Most of our rollout in the rest of Latin America will be distributor-led. So you'll see us do what we've done with Tigo in San and the other major markets. In Latin America, it will work with the major distributors, whether those are mobile carriers, MVPD, broadband, retailers, online retailers, to leverage their ability to bundle in VIX Plus as an important part of their overall service offering. And so that will be the principal thrust of scaling in the rest of Latin America. And we'll go through and you'll see us incrementally be announcing these marketing partnerships, which will be the centerpiece of the scaling out there. The only other Spanish-speaking market in the world that the service is not available on is Spain. Spain's very different set of dynamics as it relates to AVOD, SVOD, their ability to the size of the post-paid premium market.

And importantly, the content proposition there does not leverage as much the core Mexican and Latin American sensibilities.

So in order to be successful in Spain, we need a higher percentage of European Spanish content. And for all those reasons, Spain is kind of slated for later in our release slate. That's something currently we're thinking about as a 2024 event. I think we have time for one more question, operator.

Of course, we'll take our final question from Marcelo Santos. With JP Morgan, your line is now open.

Hi, good afternoon. Thank you very much. Wade, my question is regarding the current macro backdrop and investments you're doing in streaming. What could you say about the outlook for revenues in 2023. Is there any call that you could provide there? Thanks so much.

For 2023?

Look, we're... We got a couple months left in 2023, and we're feeling great about it. I mean, look, everybody... that has an ad-supported business in the U.S. is feeling some impact from a macroeconomic standpoint. And we're not immune to that. However, we have been able to continue to grow our business at a very, very healthy level. And although there was some, I would say, modest deceleration sequentially from Q2 into Q3, from a growth rate standpoint, that was mostly driven by the comparison in

last year's third quarter that came from soccer. Now, Univision used to report their core ad sales net of major soccer and political. I kind of stopped that because I believe we can deliver strong growth rates without any qualifications.

But the soccer that we comped had a 10% impact on our U.S. national ad results, which included with 8% growth. So if you adjusted that out for the 10% impact of comping soccer, our U.S. national ad sales would have grown 18%, which is actually an acceleration. over the 13% Q2 U.S.

national assets that we saw.

And I would say without really breaking our tradition of not giving guidance, we expect that we're going to see continued acceleration on a sequential basis going into Q4. You know, for that reason, obviously Carlos highlighted a number of other factors that make us very confident in a strong Q4, both in the U.S. and Mexico. We have two months to go, and we're incredibly bullish on delivering an extraordinary result from a growth standpoint in 2022. From a 2023 standpoint, as we go into the year. I would say that there are probably three things that make us confident about growth, three or four things that make us confident about growth going forward.

First of all, we had an amazing opportunity. upfront.

We delivered a mid-teens growth rate in the 2022-23 upfront, and that includes any sort of options, breakage, cancellations that occurred over the course of the year. And that's probably three times what the next best performer in the U.S. delivered. You know, second, we continue to have capacity, right? So our ratings are strong and linear. We're delivering a streaming business that's growing at an explosive rate. And third... increasingly our advertisers are looking at doing multi-platform deals across both linear and streaming, which gives us both pricing and yield optimization benefits. The last thing I'll say, which really from an ad sales standpoint just builds on the penetration answer I gave Jessica for returns,

and subscription is in the ad sales business, we continue to have an enormous opportunity around zero and low share advertisers.

So in the U.S., only about a third of television advertisers are currently advertising in Spanish. And so our ability to capture low and zero share advertisers, even as a market, the broad markets might be down, is something that should continue to be a tailwind for us. And particularly when you think of advertisers in challenged macroeconomic environments thinking in a more disciplined way about the ROI from their ad spend. As we've reoriented our go-to-market approach and the capabilities that we have to bring to bear on behalf of our advertisers, we are super confident that

The ROI from a marginal dollar spent in an underpenetrated Spanish language market in the U.S.

is massively greater than the marginal impact of a dollar spent in an oversaturated English language market. And so the zero share opportunity that we have and the value proposition that that represents, you know, in general, but in particular a down market, it represents hundreds of millions of dollars to us in the U.S.

So there's a number of things that make us really confident about accelerating growth goals. about accelerating growth going into Q4.

All of those things are going to continue into 2023. And then in the medium term, we have these penetration benefits, both on our ad sales business and our distribution business, that are going to be able to continue to deliver tailwinds to us, even if the broader markets are a little choppy.

Andy, would you now like to turn the program?

Yep. Sorry, Operator. I think that was all the time that we had for Q&A. I want to thank everybody for joining, and we look forward to talking to you next quarter.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.