Hemisphere Media Group, Inc.
Q1 2021 Earnings Call Transcript

Published: 8 May 2021

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Hemisphere Media Group Inc.’s First Quarter 2021 Financial Results Conference Call. My name is Jason, and I will be your operator today. I will now turn the call over to Danielle O’Brien. Please go ahead.

[Danielle O’Brien:]

Thank you, operator, and good morning, everyone. I’d like to welcome everyone to today’s conference call. I’m Danielle O’Brien and I’m with Edelman Financial Communications, Hemisphere’s outside investor relations firm. Today’s announcement and our comments may contain certain statements about Hemisphere that are forward-looking statements within the meeting of the U.S. Private Securities Litigation Reform Act of 1995.

[Alan Sokol:]

Thank you, Danielle, and good morning, everyone. We delivered yet another exceptional quarter of results. Reflect what the differentiated nature of our business and our continued strong execution, further bolstered by the overall economic recovery. Following the industry-leading performance and the third and fourth quarters of 2020, our strong momentum continued into the first quarter of 2021. We grew net revenue by 16%, led by an outstanding quarter of advertising revenue growth at 35%. This top-line growth drove a 37% increase in adjusted EBITDA in the quarter. Beyond our exceptional results, last month, we announced the acquisition of , which we believe will accelerate the growth profile of our business. Since we Pantaya in partnership with Lionsgate, it has quickly become the go-to Spanish language subscription streaming service, amassing approximately 900,000 subscribers. And we have just begun to scratch the surface of the addressable market. In 3 short years through this launch, it’s become clear that Pantaya fits at the sweet spot of the large, fast growing and underserved U.S. Hispanic market. The metrics are incredibly compelling. There are 60 million Hispanics in the U.S. today, estimated to grow to 75 million by 2030. Of the 60 million, 39 million are a core target of bicultural and Spanish dominant adults, a huge subscriber acquisition opportunity. And it’ll be 90% of the 39 million that are already accessing at least one streaming service, demonstrating the strong appetite for streaming. Pantaya has an unparalleled deep library of critically claimed original titles, from Pantaya’s production of as well as from world-class, third-party content producers, such as Televisa, Sony, and Lionsgate.

[Craig Fischer:]

Thank you, Alan, and good morning, everyone. We are excited to have continued our strong momentum into 2021. Please note that our operating results for the first quarter did not include Pantaya as we closed the acquisition on March 31st. Net revenues for the first quarter, with 37.6 million, an increase of 16% as compared to 32.

[Operator:]

Your first question comes from the line of Steven Cahall from Wells Fargo.

[Steven Cahall:]

Maybe first, just on Pantaya, a few questions. So on the content strategy and content spend, maybe you could give us an update of what the content spend looks like today and maybe what plans are as to where you might like to take it. And I think that you mentioned Televisa is one of your partners. I know they’re also launching a service with Univision. So just wondering if you think there’s going to be a lot of competition for content or if there’s sort of plenty out there for everybody. And with that competitor service, do you see that as just growing the market overall, or do you see that as more of a competitive threat? And also on Pantaya, just wondering if you’re contemplating any distribution partnerships with telco companies or MVPDs? Then I have a couple of follow-ups.

[Alan Sokol:]

Thanks. Thanks, Steve. Let me try to get to all your questions. If I miss any of them, just let me know and I’ll follow up.

[Steven Cahall:]

I know there was a lot in there.

[Alan Sokol:]

First of all, on Pantaya’s strategy and our progress. So, we don’t get specific dollar numbers, but as I’ve said, our core strategy is to increase materially the program expend on Pantaya. And we’re already in the process of doing that. We think that the content of Pantaya’s start has been great, but we also feel this opportunity to accelerate growth in subscribers and to improve retention by increasing program expanded national retention. I also think it’s important to note, as I stated before, that our programming cost model is significantly different than that of the big general market players who are in this giant programming arms race. We kind of swim in a different lane where our program costs are much more modest than those with a big general market head, so we got a lot more bang for our buck. We also have the advantage of being able to use our entire ecosystem for all of our programs so all the programs that’s not Pantaya will ultimately make its way through all of our other channels and platforms. And similarly, that we create for our platform, much of that will make its way through Pantaya as well. So, we’ve created the virtual cycle of using Pantaya and our existing channels and platforms. Relating to Televisa, we have a great relationship with Televisa. We have a multi-year agreement in place with Televisa, which actually is very mutually beneficial because not only do we have access to Televisa’s theatrical films, but Televisa also has access to Pantelion’s production for their own theatrical use in Mexico. So, it’s a mutually beneficial arrangement that I know Televisa values very much, and we have a multi-year contract. So, we don’t expect any interruption in that.

[Steven Cahall:]

Great. And then just on the Puerto Rico side, I mean, it’s an amazing level of ad growth that you’re seeing. I think your share on WAPA is already really high. So I’m just wondering with the economy there being as strong as it’s been, at least since I’ve followed the stock, how do you keep capturing more ad revenue? Can CPMs keep going higher? Or do you have other levers you can pull to capture incremental demand? Maybe just help us think about that opportunity.

[Alan Sokol:]

Well, the market, especially for the last 3 quarters, has been as good as any other market in the world, I think. And we have not only captured our share of that growth, but we have captured a disproportional share of that growth because of our positioning in the market, because the fact that we are a must-have for advertisers in the market. So, we feel the market’s strong as it’s been, honestly, since we acquired this business in 2007. We feel more positive about the outlook for Puerto Rico than we have felt in a very long time now that Puerto Rico has been in a constant state of economic headwinds since we acquired the business. And this is the first time we really feel some sense of tailwind at our backs between the government stimulus, between the of a previously allocated hurricane relief funding, and just the overall economic recovery. So we feel great about where Puerto Rico’s going. Again, hard to have a long-term crystal ball, but we feel very good about now. And the way we continue to take advantage of that is doing what we’re doing, which is continuing to grow our audience, continuing to deliver great product for our viewers and for our advertisers, be creative in the way we can provide advertising and services for our clients. We have a great digital platform that is growing at a very strong rate. We have a great sports channel that is growing well, and we still have the ability on our main channel to grow rates and to grow, increase the amount of commercial inventory available.

[Steven Cahall:]

Great. And then last one for Craig. Craig, you mentioned the net leverage is 2.7 X. Does that include maybe some EBITDA dilution from Pantaya? And as we think about leverage going forward, as you invest in Pantaya, that’s definitely a bit of a drag, but you’ve got some organic EBITDA growth in the rest of the business and a little bit of cash should be generating. So how do we just maybe first think about the EBITDA trajectory of the company as those 2 things mix? And also, will you use your excess cash flow for debt reduction? Or could we see a combination of debt reduction and some more share buybacks?

[Craig Fischer:]

Sure. We can start with the first one. Pantaya is not included in the EBITDA on an LTM basis for the calculation. The adjustment we made was to the cash balance since the cash was still sitting in our balance sheet of March 31st. So that’s the performance effect for Pantaya. As we indicated, Pantaya’s going to be a bit of an EBITDA drag here. So naturally the leverage will go up, but you are correct that we’ll still see growth in organic business and free cash flow generation. I think the primary allocation of our capital going forward will be to invest in our business. We’ve talked a lot about investment in content at Pantaya. And that content, by the way, will serve not just Pantaya, but across all of our platforms. As we noted, we put a share buyback plan in place in November that was active here in the first quarter, but as we regularly do, we will continue to evaluate our capital allocation plans with our board going forward.

[Operator:]

Your next question comes from the line of Kutgun Maral from RBC Capital Markets.

[Kutgun Maral:]

Great. The Pantaya is fairly transformative so I was hoping to dig in a bit deeper. Maybe first on advertising. I know Pantaya has a great corner of the market as a commercial free stream that’s . But now that you have full operational control, is there an appetite to maybe widen your potential target audience by introducing a lower price ad-supported tier?

[Alan Sokol:]

Hey, Kutgun. This is Alan. It is absolutely something that we are looking at. Going forward right now, our focus is on growing the core premium business. But we have had a really surprising number of inbound inquiries from major advertisers about wanting to advertise on Pantaya. So that’s really opened their eyes up to the opportunity. Plus we know the size of our audience and the potentially larger size, which you could add in a lower price business. So it’s something we’re absolutely looking at going forward, although it’s not in our plans for the immediate future.

[Kutgun Maral:]

Understood. And maybe when we think about your path to growing the Pantaya subscriber base from the 900,000 today to 2.5 million to 3 million in 2025, would you expect that growth to be somewhat linear and benefit from the broader trends that we’re all seeing in the marketplace? Or would you expect some of the distribution agreements that you’re currently working on to maybe accelerate growth in the back half of this year?

[Alan Sokol:]

I think it’s a little all of the above and it’s hard to know sort of how the mix shaked out. I think it’s going to be of that. Plus, I think that the quality and quantity of content that we are developing in a production, I think as we expand our content offering and have more frequent content releases and our higher quality content releases, I think that will accelerate subscriber acquisition and also improve retention. So, we’re expecting that growth will be robust for the foreseeable future.

[Kutgun Maral:]

Understood. And just, sorry, 2 more on Pantaya. Maybe just on the content side. I know with Steve, you talked about ramping programming investments. I guess I’m curious on how you’re thinking about the evolution of your actual programming slate in terms of, do you expect to invest more in TV versus film? Or even across the 2, are there any specific genres of focus and maybe just over the long run as you build out Pantaya as Pantelion and benefit from merger synergies, like the shared production capabilities with the rest of Hemisphere, do you expect to deemphasize some of these great third-party programming relationships that you have and maybe focus more on the original production side?

[Alan Sokol:]

Good questions. I think our lessons to date have been, I think that the original theory that we have produced have driven the greatest subscriber acquisition and retention. And really they’re really not widely available elsewhere in the market. Certainly not anywhere on free or paid TV. Some of the general market players have some small number of premium Spanish language series as I’m sure you know, but it’s really very sparse and haphazard offering. So I think the intentional purposeful offering of a clear series strategy with continuous series drops and predictable series drops I think is core to our strategy of growing the business. We are going to continue to be in the big feature business because we also feel like that gives us a unique advantage in the marketplace and is the core of our relationships and our strategic ventures with our Mexican partners. And it’s high-profile and gives us a lot of sizzle and the ability to generate pops in subscribers. So we think that that’s a valuable piece of the business as well. And in terms of using the Hemisphere assets for third party, I think it’s both. We don’t look at it as either or. We think having access and leveraging the Hemisphere platforms, Hemisphere production infrastructure capabilities just gives us another very significant source of content and new production in addition to what we have. And well, frankly, we are expanding our third-party relationships as well. We will have some announcements coming forward in the near term about partnerships with other brand-named, third-party players in Latin America and the rest of the world.

[Kutgun Maral:]

That’s perfect. And maybe, sorry, just one last one. I’m not sure if you’d be willing to share this, but as you do grow the service from 2 and a half to 3 million subs, what do you expect the U.S. versus international mix might eventually look like?

[Alan Sokol:]

Well, today the service is just U.S. and Puerto Rico. So when we say 2.5 million to 3 million, that’s just U.S. and Puerto Rico. We obviously are considering expanding into Latin America, but that would be a completely incremental subscriber opportunity to what we have today.

[Operator:]

That concludes our Q&A. I now turn it back over to Mr. Sokol for closing remarks.

[Alan Sokol:]

No further remarks. Thank you, everybody, for joining and have a nice day.

[Operator:]

That concludes today’s conference call. You may now disconnect.