Hemisphere Media Group, Inc.
Q4 2019 Earnings Call Transcript

Published: 3 Mar 2020

[Operator:]

Good day ladies and gentlemen and welcome to Hemisphere Media Group, fourth quarter and full year 2019 financial results conference call. My name is Kristal and I'll be your operator today.A replay of the call will be available beginning at approximately 1

[Ashley Scott:]

Thank you, operator and good morning, everyone. I'd like to welcome everyone to today's conference call. I'm Ashley Scott 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 meaning of the US Private Securities Litigation Reform Act of 1995. These statements are based on the current expectations of the management at 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, Ashley and good morning everyone. Before I discuss our performance, I want to let you know that Craig Fischer is unable to be on our call today due to a personal matter, so I will be delivering our remarks and handling Q&A. As we close out 2019 we continue to execute on our mission to drive value across our entire platform and deliver fresh and compelling content to our unique and valuable audience. The fourth quarter had some challenges, but our fundamentals remained strong and we are well positioned to succeed in an evolving media landscape. In Puerto Rico WAPA was once again the dominant number one station across all key sales demographics and in fact expanded its lead against Telemundo, among adults 18 to 49 of WAPA's ratings increased, increased by 18% versus Q4, 2018. WAPA's performance was highlighted by our new hit reality series Guerreros which nearly doubled the time period viewing in adults 18 to 49. In December, we produced that first WAPA Canal Uno crossover event with our Puerto Rican Guerreros and once again Canal Uno Colombian Guerreros.The event was a huge hit in both markets, setting ratings records for the franchise. As previously announced, we are pleased to have reached a multiyear agreement with DISH Network to distribute WAPA and WAPA America ending this relatively short dispute and blackout. WAPA was restored on December 16th and WAPA America on January 28. We are very pleased with the economic terms of our agreement which reflect the tremendous value of our channels. In conjunction with these agreements we also entered into multiyear renewals with DISH for Central America TV and Television Dominicana. Following a very tumultuous summer of political unrest in Puerto Rico the fourth quarter was relatively calm. Nonetheless, there still has been a great deal of uncertainty as to the upcoming 2020 gubernatorial elections and whether the government is ready to move forward productively and transparently. This has had a dampening effect on the advertising market in Q4.While WAPA's results were impacted by these issues, we continue as the clear revenue leader in the market with a very strong share. As we look ahead, economic metrics in Puerto Rico are stable and generally positive. According to the US Census Bureau, Puerto Rico population 2019 actually had a modest increase. The first such increase in 15 years. Similarly, according to Nielsen, the number of TV households in Puerto Rico increased by 1.4% in 2019 the unemployment rate remains stable at 8.4% in December at or near 50 year lows. That said, Puerto Rico did experience a 6.4 magnitude earthquake, which struck established part of the Island on January 7th and was followed by numerous aftershocks. Fortunately, none of our employees was injured and our facilities were unaffected as the damage was geographically limited to the Southern part of the islands. While there was an immediate widespread power outage, electricity was fully restored within a few days. The lives that many people in the effected part of the Island, however, remained disrupted and numerous schools remain closed.The earthquake and aftershocks have adversely affected the advertising market in the first quarter, as advertisers have elected to pause spending preferring to show sensitivity to the population's concerns and priorities. Beyond Puerto Rico during Q4 we entered into a multiyear renewal with Comcast for carriage of all five of our US cable networks a further testament to the value of our content and our important audiences. Well, most linear cable networks are suffering significant ratings erosion our channels continue to perform strongly. Pasiones saw its 12 consecutive quarter of year over year ratings growth and continues to outpace Univision's telanovela channel in total day ratings by 22% and a primetime ratings like over 100%. While the Americas' audience increased by an impressive 21% versus fourth quarter 2018 led by over 65 hours per week of the best live news and entertainment programming for Puerto Rico. Central American TV had its six consecutive quarter of year over year ratings growth with a robust 53% increase in total day ratings versus fourth quarter of 2018.Cinelatino continues in its position as the second highest rated Spanish language cable channel in total day according to Nielsen. Our joint venture Colombia Canal Uno continues to experience impressive growth in both ratings and revenue. Additionally, we are very encouraged by the robust double digit growth in the Colombian TV ad market in Q4. Canal Uno has entered into strategic programming alliances with Sony as well as Semana Colombia's leading digital and print news magazine, which we believe will accelerate the joint ventures growth. Our premium subscription streaming service Pantaya continued its terrific momentum ending the year with over 600,000 subscribers, a very strong growth trajectory. Pantaya subscribers have embraced its original series, which by virtue of their limited length, contemporary subject matter and high production values are unlike anything available on Spanish television. Leveraging our deep and valuable library we have begun to generate revenues from licensing our content to streaming services in the US and Latin America, including Amazon and Latin America, which has driven solid revenues after just a few months. I should note that we did experience a decline in our subscriber numbers in Q4. As noted last quarter, we believe this decline was in large part due to one major US distributor that is altering sign up process making it very burdensome to subscribe to the Spanish language package. We are in conversations with this distributor and are hopeful that they will address this issue in the near term. In the meantime we are still seeing consistent growth from some of the largest distributors. We are also optimistic that YouTube, YouTube TV and Hulu will soon introduce a Spanish language offering.We continue to pursue M&A opportunities that will accelerate our growth and remain hopeful that we will be able to successfully execute on such opportunities. Before turning to the financial review I would like to briefly share our viewpoint regarding the Corona virus. First, our thoughts go out to those affected and we hope the spread is contained and quick progress is made in terms of a global solution. Thankfully, none of our employees had been affected, but we recognize that the outbreak is causing meaningful disruption to the daily life for many around the world. We are closely monitoring the situation. We currently don't believe that the virus will have a negative impact on viewership or subscriptions, but the potential impact on advertising is unknown.Turning now to a quick review of our financials. Net revenue in the fourth quarter was 39.3 million as compared to net revenue of 46 million for the year ago period, which included 5.8 million in business interruption insurance proceeds we received in connection with Hurricane Maria. Excluding these proceeds, net revenues decreased by 1 million. Advertising revenue decreased 1.5 million due to decline in the Puerto Rico advertising market as well as the blackout on DISH Network beginning on October 24. It is challenging to precisely describe the dollar impact on advertising of the DISH network blackout. The decline in the advertising market was driven by Puerto Rico's uncertain political climate as well as continued delays in the disbursement of earmarked federal relief funds. Affiliate fees decreased 200,000 due to the DISH network blackout but would have increased 600,000 when excluding the blackout impact. The decrease in affiliate fees was offset in part by contractual fee increases and the launch of Pasiones on Spectrum.Other revenue in the fourth quarter excluding the 5.8 million business interruption proceeds received in the prior year period, increased 700,000 driven by the higher licensing revenue from our content library and revenue contributed by Snap Media, which was acquired in November 2018. Operating expenses were 25.9 million as compared to operating expense of 26.2 million for the same period in 2018. Adjusted EBITDA in the fourth quarter was 18.4 million as compared to 18.6 million for the comparable period last year. Adjusted EBITDA for the full year 2019 we're 66.5 million an increase of 11% as compared to 60.1 million for the comparable period in line with our guidance. Capital expenditures were 5.4 million for the full year 2019 against which we receive reimbursement of 1.7 million from our insurance policies as well as 1.7 million from the STC. We've expect 2020 CapEx net of FCC reimbursement to be about 3.5 million.Turning to our strategic investments during the fourth quarter we funded 4.4 million into Canal Uno down considerably from the prior year due to the completion of concession payments earlier in 2019 as well as lower working capital needs as Canal Uno continues to grow its revenues. This brings our full year 2019 strategic investments to total of 31.7 million. Looking to 2020 we expect the annual investment in Canal Uno to continue to decline. Additionally, the remaining 1.5 million of our initial 10 million capital commitments for Pantaya was met in the first quarter of 2020. We continue to view this as a strong investment and we'll keep you updated on the relationship moving forward. Regarding guidance, we are forecasting a low to mid single digit percentage increase in adjusted EBITDA for 2020 as compared to 2019. We'll now open the call to your questions.

[Operator:]

[Operator Instructions] And our first question comes from Steve Cahall with Wells Fargo. Your line is open.

[Steve Cahall:]

Good morning. Maybe first that distributor that you said has kind of been a problem child but dragged the sub council a little bit lower. I think you mentioned that last quarter as well. So just wondering what kind of progress you might've had quarter to quarter, getting them to fix it. And if you think this is something that can be sorted out within the next couple of months.

[Alan Sokol:]

It's absolutely something that can be sorted out. I think it's a relatively easy fix if they, you know, they focus on it, but you know, they're a large, big bureaucratic teleco which were in the queue, I know that and know that they understand this is an issue for them. And this is a distributor that has historically done very well with the Hispanic package. So it's a little mystifying to us as to why they haven't moved with a little more urgency on this, but we expect that the problem will be addressed. I just don't know exactly when.

[Steve Cahall:]

Okay. And then on the Comcast deal, just wondering, are those networks going to be an HD on Comcast.

[Alan Sokol:]

As of now there's no change. Uh, although it's absurd that in year 2020, these distributors do not carry all Spanish language networks in HD and honestly it's insulting to our audience that they don't. We're talking to Comcast as well as other distributors. Some distributors, particularly Spectrum have been more aggressive in converting networks to HD. Comcast has the intent to do it, but again, you know, there's a queue there and then, you know, it's a question of their level of priority. I will say our VOD with Comcast is in HD.

[Steve Cahall:]

Okay. And then with Pantaya, I think you're up around a 100,000 subs sequentially. Can you speak at all to what kind of momentum you've seen early this year and what the original programming pipeline looks like for Pantaya?

[Alan Sokol:]

I don't want to talk about current quarter, but we feel very good about the cadence of growth and the trajectory. We think we're barely scratching the surface on the opportunity here. We see broad acceptance among our subscribers of the service and continued robust growth. And you know, we're hopeful that that will continue. We have great programming scheduled for 2020. We've increased our investment in programming based on the results we've seen to date. We will have second seasons of our two biggest hit series that we introduced last year as well as the new series that we're super excited about.

[Steve Cahall:]

And then the last one for me, you know, there was a lot in the press about a bid for Univision and I think you got a fair amount of connectivity there between Vince Sandusky and Searchlight. Can you just talk about what that relationship is like and is there an opportunity to work together going forward or do you still see them primarily as a competitor or maybe just help put all that in context for us? Thanks a lot.

[Alan Sokol:]

Sure. Well clearly I can't comment on the rumors of our involvement in potential Univision bid, but they're based on Searchlight's involvement in both Hemisphere and Univision, I would, it was premature at this point to really talk about and we clearly haven't had any specific discussions. I would believe that given that there would be plenty of opportunity for us to pursue synergistic and strategic initiatives together with Univision and we'll see as the deal moves forward and closes, what happens. But I think there's some really interesting opportunity there.

[Steve Cahall:]

Great. Thanks a lot.

[Operator:]

[Operator Instructions] And our next question comes from Curry Baker from Guggenheim. Your line is open.

[Curry Baker:]

Thanks for the questions, Alan. Can you maybe talk a bit about what's embedded in your advertising outlook for 2020, just in terms of the low to mid single digit EBITDA guide? I understand you're seeing some softness in the first quarter due to the earthquake impact you see this carrying forward beyond 1Q. Just any incremental color on core advertising in Puerto Rico would be helpful.

[Alan Sokol:]

Sure. I mean, I would love, I wish I had a better crystal ball in Puerto Rico. It's such a volatile market that changes very quickly. So I don't have any long term real strong point of view on it. I will say the first quarter has been adversely affected by this earthquake, which obviously is a onetime event. We're hopeful that, that, that the effect on first quarter is more in the nature of a delay in advertising spend as opposed to a cancellation or reduction in advertising spend. We're not projecting a particularly robust market in Puerto Rico. We're looking at a kind of a stable situation in Puerto Rico relative to where it was. However, we think there's some potential upside there to the extent that federal funds do get dispersed and confidence is restored in both the government and in the economy. So I think we've taken a relatively cautious view, but in that cautious is warranted given the history of Puerto Rico. From a performance standpoint leverage WAPA is running on all cylinders. We have a dominant first position in ratings in the market. We've grown since last year and we expect our share of the advertising market to be very strong.

[Curry Baker:]

That's helpful. And then maybe on political for, in Puerto Rico. Can you give us any sense of kind of expectations for this year and maybe a sense of what you guys did in 2016 and how you see this election cycle shaping up versus 2016?

[Alan Sokol:]

Sure. There's a couple of components to that. The Puerto Rican gubernatorial primaries are on, are in early June, so it's a little early for spending to have taken place yet. For the first time in history, both parties have primaries. So that should normally be a positive sign. However, our belief is that neither party is particularly well funded and does not have a ton of money to be spending on TV advertising as that cuts against the opportunity. As a result we are projecting our political to be kind of in line with where it was in 2016 which was in the $3 million range. We don't think will be higher than that. We also expect some relatively small amount of money, sort of let's say six digits in for the Presidential Democratic primary in March.

[Curry Baker:]

Okay. Thanks. That's helpful. And then maybe just a bigger picture question, can you maybe talk about your ability and appetite to consolidate some of the your investments either Pantaya or Canal Uno.

[Alan Sokol:]

Sure. Look, we are very pleased with both of those investments. We think it both big opportunity. And you know, we would, Canal Uno is a difficult situation because the foreign ownership rules in Colombia restrict us to owning 40% of the business. So, as of today, you know, consolidating is not a possibility that could change down the road, but that's not possible legally today. Pantaya we love the business and we'd love to own more of it.

[Curry Baker:]

Okay, thanks. I think that's it for me.

[Operator:]

Thank you and I'm showing no further questions from our callers at this time. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.