Hemisphere Media Group, Inc.
Q1 2019 Earnings Call Transcript

Published: 11 May 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to Hemisphere Media Group, Inc.'s First Quarter 2019 Financial Results Conference Call. My name is Sydney, and I will be your operator today. A replay of the call will be available beginning at approximately 1 PM. Eastern Time today, Tuesday, May 7, 2019, by dialing [phone] or from outside of the United States by dialing [phone]. The conference ID for the replay is 3099586. I will now turn the call over to Ms. Danielle O'Brien.

[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. Joining me on the call today is Alan Sokol, Hemisphere's Chief Executive Officer; and Craig Fischer, Hemisphere's Chief Financial Officer. Today's announcement and our comments may contain certain statements about Hemisphere that are forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. These statements are based on the current expectations of the management of Hemisphere and are subject to uncertainty and changes in circumstance, which may cause actual results to differ materially from those expressed or implied in such forward-looking statements. In addition, these statements are based on a number of assumptions that are subject to change. Please refer to our company's most recent annual report on Form 10-K and our other public filings for a more complete discussion of forward-looking statements and the risk factors applicable to our company. Forward-looking statements included herein are made as of the date hereof, and Hemisphere undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances. During today's call, in addition to discussing results that are calculated in accordance with generally accepted accounting principles, we will refer to adjusted EBITDA, which is a non-GAAP financial measure. A reconciliation of GAAP to non-GAAP information is included in our earnings press release, which was issued earlier this morning. Management believes that this non-GAAP information is important to investors' understanding of our business. I will now turn the call over to Alan.

[Alan Sokol:]

Thank you, Danielle, and good morning, everyone. We have had a strong start to the year. We delivered robust growth across all of our key revenue streams, and we continued to make important progress and drive value in our strategic initiatives. Our target audience continues to grow, and we offer a highly differentiated content to them. With these results and our strong market position, we are well positioned to achieve our full year guidance. Turning to Puerto Rico. The economy continues to see steady and encouraging growth with improvements across all key metrics. During March, private sector employment reached its highest level since 2015, growing 4% year-over-year. The auto industry continued its strong rebound with 12% year-over-year growth in car sales. We expect the pace of economic recovery to continue as federal aid and insurance proceeds flow into the island and the economy continues to solidify. Today, only $11 billion of $41 billion in allocated federal aid have been dispersed according to the Office of Management and Budget with the budget of estimating $91 billion of total aid over the next two decades. WAPA's results reflect the strengthening economy with significant ad sales growth. WAPA also delivered robust retransmission fee growth, benefiting from both contractual fee increases and continued recovery of pay TV subscribers. Turning to our U.S. cable channels. Our results in the quarter, as in previous quarters, underscore our unique and differentiated business. While U.S. distributors continue to lose video subs, our growing target audience and content proposition will allow us to continue to outperform the overall market. At Pasiones, we delivered the highest ratings in the history of the channel, marking the ninth consecutive quarter of record ratings, with total day audience grown by an impressive 41% over the first quarter of 2018. For the third straight quarter, Pasiones beat Univision's telenovelas channel in primetime with a 34% advantage, and this was prior to Pasiones' national launch on Spectrum. Pasiones is unique in that none of its top 10 programs is a traditional novela from Latin America. Rather the ratings are being driven by novelas and anthology series from nontraditional markets such as Turkey and India. On April 1, Pasiones was fully launched across Spectrum's national footprint, and as a result, is now distributed across all major cable, satellite and telco distributors. At the time when channels are regularly being dropped and very few channels are being launched, we are proud to have our channel added to one of the largest distributors in the U.S. whose footprint includes Los Angeles and New York, the two largest Hispanic markets. This launch will not only boost subscriber fee revenue but we expect will have a positive impact on advertising as a result of the additional reach and viewership. We are also pleased that Spectrum is the first distributor to launch Pasiones in HD, which we believe will encourage other distributors to follow suit. Cinelatino once again posted solid ratings performance and remains second-highest rated Spanish-language cable network. During the quarter, we launched our most ambitious original series ever, the second season of El Desconocido, with strong audience response. Subsequent to quarter end, Cinelatino reached a multiyear renewal agreement with DISH and Sling, again affirming the quality and value of our network. WAPA America concluded another strong quarter, increasing its total day audience by 7% over Q1 2018. WAPA America remains the highest-rated Spanish-language cable channel in weekday early fringe period and a top five channel in weekday primetime. Centroamerica TV also posted a strong quarter ratings growth, increasing total day ratings by 44% over the first quarter of 2018. One quick note on our sub count. As in Q4 of 2018, our subscriber numbers were negatively impacted in Q1 by the DISH-Univision dispute. However, with the resolution of the dispute in March, we view this as an anomaly. We are optimistic that DISH subscriber losses will abate, and in addition, we expect to realize continued growth from distributors who have benefited from the migration of DISH subscribers. Turning now to our strategic investments. Canal Uno in Colombia had an outstanding first quarter and already is a strong competitor to the two leading broadcasters in the market. Canal Uno increased its total day share by 69% over the first quarter of 2018 and increased its primetime share Monday to Friday by 121%. In fact, Canal Uno's Monday to Friday primetime ratings were higher than the top eight general entertainment cable channels in Colombia combined. We are proud that Canal Uno was able to achieve these results in only 1.5 years, and they have proof that Canal Uno has given the Colombian audience a fresh and compelling program alternative. As Canal Uno continues to grow its ratings and demonstrate its value to the market, we expect to see its share of advertising revenues increase commensurately. Our digital platform, Pantaya, experienced an excellent quarter of subscriber growth, and we are extremely encouraged about its prospects. Significantly, Pantaya is the only Spanish-language subscription service in the initial lineup on Apple TV+ as well as in Roku's premium subscriptions channel. Finally, in closing, we have a healthy and active M&A pipeline and continue to pursue opportunities that will accelerate our growth. Thank you, everyone. I will now turn the call over to Craig.

[Craig Fischer:]

Thank you, Alan, and good morning, everyone. Net revenues in the first quarter were $35.1 million, an increase of 21% as compared to net revenues of $29 million for the year ago period. Advertising revenue in the first quarter increased $3.2 million or 33% over the comparable period driven by the strengthening economy in Puerto Rico. Affiliate revenue in the first quarter increased $2.9 million or 16% over the comparable period. The increase was driven by contractual fee increases as well as overall subscriber growth, including continued restoration of Pay TV subscribers in Puerto Rico. Operating expenses in the first quarter were $24 million, a decrease of 1% as compared to $24.2 million for the year ago period. The decrease was primarily due to an expense offset from a $1.5 million gain related to the timing of FCC reimbursements for equipment purchases required as a result of the spectrum repack. The decrease was also due to hurricane-related expenses incurred in the prior year period. This was offset by higher programming and production expenses over the prior year period when WAPA implemented cost savings measures following Hurricane Maria. The gain from the FCC spectrum repack is included in operating income but backed out of adjusted EBITDA. Adjusted EBITDA in the first quarter was $14.9 million, an increase of 41% as compared to $10.6 million for the comparable period. Turning to the balance sheet. We had $208.5 million in debt and $86.2 million of cash as of March 31. Our gross leverage ratio was approximately 3.2x, and net leverage ratio was approximately 1.9x. During the quarter, we repurchased approximately 41,000 shares of common stock at a weighted average price of $12.57 for an aggregate purchase price of approximately $500,000. Capital expenditures were $2.9 million in the quarter, including $700,000 for equipment purchases required by the FCC spectrum repack and to replace equipment damaged by Hurricane Maria. We continue to incur CapEx to purchase equipment required by the spectrum repack or damaged by Hurricane Maria. We anticipate that insurance proceeds and FCC reimbursements will cover most of these expenditures. Turning to strategic investments during the quarter. We funded $13.8 million into our joint ventures, including $12.5 million into Canal Uno and $1.3 million into Pantaya. The funding of the Canal Uno includes the final payment of the concession fee in the amount of $4.3 million. We are affirming our 2019 guidance of mid-teen percentage growth in adjusted EBITDA as compared to 2018. We believe our differentiated content and channel offerings, coupled with growth in Puerto Rico and our strategic investments, will continue to yield long-term shareholder value. We'll now open the call to your questions.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Curry Baker with Guggenheim. Your line is open.

[Curry Baker:]

Great, thanks for the question guys. Maybe just starting with Puerto Rico. Is it fair to say the advertising environment there has recovered to pre-hurricane levels? And would you characterize it as about similar or maybe even a little bit better than before the hurricane? And also, can you update us maybe on where subscribers stand in Puerto Rico? Are we at like 10% below pre-storm levels? Any color there would be helpful.

[Alan Sokol:]

It's Alan. Regarding the advertising market in Puerto Rico, I would say it is approaching pre-storm levels, not quite there yet and unclear where we'll ultimately settle out. But I think at or near pre-storm levels is probably a pretty good prediction at this point. In terms of subscriber levels, we haven't given out specific subscriber numbers, but they are – as of today, subscribers are still more than 10% below where they were pre-storm. Remember also we did have some outward migration from Puerto Rico. The last numbers we have are slightly over 100,000 people net outward migration from Puerto Rico. And there's been some consolidation of housing in Puerto Rico as a result of damage done to houses during the storm. So the combined results of both of those have been, I think, fewer actual television homes in Puerto Rico than pre-storm. So I think we're seeing some of that in the numbers. I think we still expect to see some modest continued growth in subscribers in Puerto Rico, but they will not get to pre-storm levels. Maybe somewhere in the 10% to 15% below pre-storm levels is where we're thinking we'll ultimately settle out.

[Curry Baker:]

Okay. That's helpful. And maybe also just sticking with Puerto Rico, could you touch upon your share there and how ratings have been trending in Puerto Rico?

[Alan Sokol:]

Yes. We were the number one network again in first quarter of 2019, and we feel good about where things are going with some really exciting programming initiatives coming up in Q2.

[Curry Baker:]

Okay. And then maybe one on Pantaya. Are there any subscriber metrics or anything that you can provide at this point? If not, maybe qualitatively, can you talk about maybe the success you've seen to date and what you have to accomplish there in 2019?

[Alan Sokol:]

Well, Lionsgate, which is the majority owner of Pantaya, has not given out specific numbers, so we have followed suit in not doing that. That said, we feel very good. I know it's hard for you to kind of create a valuation out of it without knowing numbers, so I apologize for that. But we are very encouraged by the growth. If you look at the publicly available information on apps, you can see that we are top 10 grossing app on both iTunes and Android, which should give you a sense of how well we're doing relative to some of the very well-known over-the-top services out there. So we feel very good about that. During Q1, we had more gross adds than we have had during any other quarter since inception of the service. And then we are adding for the first time series in 2019, which we hope will create even additional step function growth to the service.

[Curry Baker:]

Okay. That's helpful. And then maybe a final one for me. I know you touched a bit about the M&A pipeline in your comments. I know you're limited as to what you can say. I mean do you expect to do a transaction this year? Or is there any more color at all you can give us there?

[Alan Sokol:]

I'm reluctant to go too proud on a limb because I would have hoped and thought that we would have gotten more transactions closed by this point, as I've said in other calls. That said, we are – so I'm not going to prognosticate on this, but we're optimistic that we can get one or more deals done. There are a number of deals that we're looking at. There are a couple of deals that we're excited about and feel would be great fits for us if we can get them done. But until you get a deal done, it's not done. So that's about as much as color as I can give you on that we'd like to get a deal done, we'd like to get a deal done of significant – where we have control over the transaction. Those are our – the parameters that we're looking at, and we're hopeful that something can get done this year, if not sooner.

[Curry Baker:]

Okay. Great, thanks guys. Appreciate the questions.

[Operator:]

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back to Alan Sokol for any further remarks.

[Alan Sokol:]

No further remarks. Thank you, everybody, for joining us today.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.