Hemisphere Media Group, Inc.
Q2 2017 Earnings Call Transcript

Published: 4 Aug 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Hemisphere Media Group, Inc. Second Quarter 2017 Financial Results Conference Call. My name is Michelle and I will be your operator today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. A replay of the call will be available beginning at approximately 01

[Erica Bartsch:]

Thank you, operator, and good afternoon, everyone. I'd like to welcome everyone to today's conference call. I am Erica Bartsch, and I am with Sloane & Company, 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 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 today. Management believes that this non-GAAP information is important to investors' understanding of our business. I'd now like to turn the call over to Alan.

[Alan Sokol:]

Thank you, Erica. Good morning everyone. Our business delivered another solid performance in the second quarter, driven by continued strong retransmission and subscriber fee growth, which mitigated a weak Puerto Rico advertising market. Excluding political revenue from the year ago quarter, during Q2, net revenues increased by 2% and adjusted EBITDA increased by 9%, and for the first six months, net revenue increased by 5% and adjusted EBITDA increased by 9%. We remain on track to achieve our adjusted EBITDA guidance for the year. Before reviewing our operating results, I'd like to update you on our new strategic investments. First, regarding Canal Uno in Colombia, our joint venture assumed operating controls and network on May 1. We have drawn on our expertise and success in creating market leading TV networks and have developed a strong foundation for the launch of a formidable and exciting new broadcast TV network in a very compelling market. We will be formally launching the new Canal Uno on August 14th. We have implemented a full rebrand of the network, with a fresh and exciting look and feel. We have entered into content licensing agreement with some of the preeminent programming suppliers in the world, including NBC Universal, FOX, Paramount, Telemundo and Globo. We have also licensed several very popular Turkish dramas, which have ratings hits worldwide. From inception, we will be offering a strong slate of fresh and differentiated locally produced programming, including a world class news product and two original primetime entertainment series, which we are very excited about. The first is Guerreros or Warriors, a daily reality competition series. This format has been a huge rating success in Peru and Panama. We are also producing our first scripted series in Colombia, Infieles or Affairs, based on a successful Chilean format. As an example of the synergies created by Canal Uno, we will also be airing Infieles on our networks in Puerto Rico and the U.S., and syndicating it throughout the rest of the world. Infieles is a template for the strategic production leverage that Canal Uno affords us. We believe that Canal Uno will be competitive in Colombia within a short period of time, and are confident that we have a unique opportunity to create an important and valuable media business. As you may have seen, on August 1, we and Lionsgate announced the launch of PANTAYA, our premium OGT movie platform. We believe that the PANTAYA offering is extremely attractive, with an unrivaled selection of blockbusters and award winning movies and attractively priced at $5.99 per month. We are confident that there is a large and undisturbed audience for this product, especially among the estimated 35 million U.S. Hispanics, who do not subscribe to the Spanish pay-TV package. Finally, we are very enthusiastic about our recent investment in REMEZCLA. We believe that REMEZCLA has an original and authentic voice, that resonates with young acculturated Hispanics. Our investment and strategic resources will accelerate REMEZCLA's growth and visibility. REMEZCLA's value proposition is evidenced by the fact that since Q2, it had successfully secured advise from a number of blue chip clients, including General Motors, Toyota, Universal Pictures and Delta Airlines. All of them recognize and appreciate REMEZCLA's unique connection to its influential and hard to reach millennial audience. Turning to our networks, after a strong first quarter, WAPA is affected by a weak Puerto Rico ad market in Q2. While WAPA once again outperformed the overall TV market, ad revenues did decline. The softness in Q2 was in part timing related, with ad dollars shifting into Q1, as a result of the success of the World Baseball Classic which aired on WAPA. Notwithstanding the challenging economic environment for the first half of the year, excluding political, WAPA's ad revenues actually increased over 2016, underscoring our continued strength. We continue to focus on improving our programming to grow ratings and share of ad revenue. During Q2, we launched the new locally produced comedy series on WAPA, Such is Life. This is the first series to feature a mix of Puerto Rican and Dominican talent, and has been embraced by the audience. The premiere of Such is Life was the number one rated program in Puerto Rico in June. Such is Life is simulcast on WAPA America and will also be broadcast on Television Dominicana. We are also investing in upgrading our news and weather technology at WAPA and modernizing our sets during the second half of this year, as we continue our commitment to maintaining and expanding our leadership position. The overall economy in Puerto Rico remains challenged but relatively stable. During Q2, the Promesa oversight approved the governor's operating budget for fiscal 2018, and what is expected to be a protracted debt restructuring process has commenced. In the short run, the reduction in government spending under the approved budget, may negatively impact the economy. However, we believe that the measures being implemented will results in improved fiscal discipline and imaginable debt load, which will lead to a stronger and more stable economic climate and renewed growth. Our cable networks continue to defy overall U.S. subscriber trends, once again achieving organic subscriber growth, in once traditionally most challenging quarter of the year. Over the past 12 months, while the decline in total U.S. subscribers has accelerated, our U.S. subscribers have grown by 4%, which reflects both the value of our networks and the continued growth runway in U.S. Hispanic Pay-TV. Cine Latino continues to perform well, and we were proud to recently premiere our most ambitious production ever as Desconocido, a five part miniseries, which tells the compelling story of the right hand man to Mexico's most notorious drug lord. The premiere of Desconocido on July 30, was the highest rated program on Spanish Pay-TV, based on Nielsen coverage ratings. We also plan to license Desconocido to PANTAYA and to third party platforms outside the U.S. As Desconocido is just one example of a high quality productions in the Cine Latino pipeline. Cine Latino has successfully closed a number of both upfront and scatter national advertiser buys, including Sprint, Unilever, Honda, Chrysler, Tecate and Dos Equis. While still early days and most of these buys are modest, it represent important strides [indiscernible] Latino and breaking new accounts and growing it's ad revenue. We continue to have strong results with our other networks, including an agreement to launch Pasiones on Cablevision, Argentina's largest cable distributor. Pasiones has seen terrific ratings growth in both the U.S. and Latin America, with its differentiated programming strategy resonating with viewers. The strength of our networks is evidenced by the fact that, excluding sports networks, in Q2, we had three of the eight highest rated Spanish language cable networks, and all five of our networks were among the top 15, based on comScore's coverage ratings. While we are heavily involved in our new ventures and driving improved performance across all of our channels, including monetizing on our content and production, across our growing number of platforms, we also continue to pursue new acquisitions, which represent natural expansion to our business and strong strategic opportunities. I will now turn the call over to Craig. Thank you.

[Craig Fischer:]

Thank you, Alan, and good morning everyone. Net revenues in the quarter was $35.2 million, up modestly as compared to $35 million in the same period in 2016. For the first six months, net revenues were $68.3 million, an increase of 4% as compared to $66 million for the same period of 2016. The increases in both the three and six month periods, were due to growth in subscriber and retransmission fees and other revenue, partially offset by declining advertising revenue. Excluding political advertising revenue in prior year periods, net revenue in the three and six months increased $0.9 million and $3.1 million or 2% and 5% respectively. Subscriber and retransmission fees across all of our channels grew 9% in both the three and six month periods, driven by subscriber growth, new launches and annual rate increases. Advertising revenue decreased $2.1 million and $1.4 million or 12% and 5% in the three and six month periods respectively. The decline in both periods, is due to political advertising in 2016, and softness in the direct-to-response advertising market in the U.S., which impact our cable networks. In addition, as Alan noted, the market was impacted by the shift in ad dollars from Q2 to Q1 due to the World Baseball Classic. Other revenue, which is primarily related to the licensing of content, grew $0.6 million and $0.5 million in the three and six month periods respectively. The increases were due to the timing of revenue recognition of certain licensing agreements with third parties, including PANTAYA. Going forward, we expect licensing revenue to vary, depending on the timing of delivery of content. Subscriber and retransmission fees represented approximately 56% of our revenue in the quarter, up from approximately 51% in the same period in 2016. Operating expenses were $24.7 million for the quarter, an increase of 1% as compared to operating expenses of $24.4 million for the comparable period in 2016. Operating expenses for the first six months were $50.8 million, an increase of 5% as compared to $48.2 million for the comparable period of 2016. The increases for the three and six months, were driven by transaction costs related to our strategic investment activity, as well as higher stock based compensation. The increase in the six month period, was also due to costs incurred, in connection with the amendment of our term loan. These increases were partially offset by lower news and programming costs. Adjusted EBITDA was $16.1 million for the three month period ended June 30, an increase of 4% as compared to adjusted EBITDA of $15.5 million for the comparable period of 2016. Adjusted EBITDA for the six month period ended June 30, was $30.6 million, an increase of 6% as compared to adjusted EBITDA of $28.8 million for the comparable period of 2016. Excluding political revenue, adjusted EBITDA for both the three and six month periods increased 9%. As Alan mentioned, we remain on target for mid to high single digit increases in adjusted EBITDA for full year 2017, excluding political advertising revenues and our attributable interest in minority investments. Turning to the balance sheet, we had $212.3 million in debt and $155.5 million of cash. Our leverage ratio was approximately 3.2 times and net leverage revenue was approximately 0.9 times. In terms of our strategic investments, we guided at the beginning of the year, that we expected to fund $30 million to $35 million in 2017 for Canal Uno and PANTAYA. Following our investment in REMEZCLA, our total investment spend in these three initiatives, is now expected to be $35 million to $40 million in 2017. Through June 30, we have funded $14 million in strategic investments. Finally, in late June, we announced a $25 million share repurchase plan. As we were in a cooling off period, following the announcement, no shares were repurchased during the second quarter. We were however active in the markets starting in July. Going forward, we will update you on the amounts repurchased each quarter. With that, let's open the call to your questions.

[Operator:]

Thank you. [Operator Instructions]. Our first question comes from the line of Steven Cahall with Royal Bank of Canada. Your line is open. Please go ahead.

[Steven Cahall:]

Thanks. Maybe to kick off with the advertising outlook, you called out some of the direct softness in the quarter. So I was wondering, if you can give us, maybe a little bit of the outlook, both on the domestic cable side, where you see that trending in the back half of the year? And then, you also spoke on length on Puerto Rico and how the new budget could cause some short term weakness. So do you see deceleration in advertising in the short term on the Puerto Rico side, or have we sort of bottomed to a more stable point there? Any more color would be great. Thanks.

[Alan Sokol:]

Hi Steve, it's Alan. Good morning. I think those are relevant questions, questions that we obviously ask ourselves every day, and try to get answers to. I think the visibility on both of those is somewhat limited. On the Puerto Rico side, there has not been much visibility historically and revenues on a quarter-to-quarter even month-to-month basis, a bit somewhat volatile. We are not seeing any significant downturn, beyond what we have seen in the past. We are anticipating that there could be some additional bumpiness, depending on how the advertise and how the economy reacts to the austerity measures in the new budget. But we haven't seen anything materially change, and I think a lot of the second quarter weakness was more timing related to shifting into first quarter, as opposed to -- seems that we are endemic to the second quarter. And if you look at the first half of the year, the advertising revenue is actually down only low single digits versus first half of 2016, excluding political, which is actually a little bit better than we had forecast. So I wouldn't read too much into one quarter, and I think the market is performing generally as we anticipated it would. And as of now, don't see things changing the second half of the year. On the domestic side, we have seen some weakness in the DR market. We have also seen that there has been a little bit shifting of DR dollars into the broadcast networks, who have traditionally not pursued that revenue, but because of their own ratings weakness, the Telemundo-Univision, they have chased some of those dollars that they previously wouldn't, so we are competing with those networks, which was not the case historically. So I think it's a combination of some weakness and some softness in the DR market, and the additional competitor pressures. Again, hard to have visibility we have. I think we think that the market will not get worse and may get better in the second half of the year, but the scatter buys that are on such short term basis that, it's hard to know how long -- to have a crystal ball into it. We are encouraged by the national advise that we have received. On Cine Latino, we think that the fact that we have gotten bought by some of these major blue chip Fortune 500 advertisers is a great sign for us and they are confident in our business in their recognition of the value that Cine Latino provides. And these things tend to have a snowball effect, once you get certain advertisers and certain industries to start buying into you, then you get on the radar screen of all of the other advertisers in those industries. So we are encouraged by that. Those numbers won't really be reflected until the earliest, the fourth quarter and in some cases, to 2018, because their upfront calendar abide [ph] in some situations. But we are, nonetheless, very encouraged by that.

[Steven Cahall:]

Okay. And then on the domestic distribution side, it gives you opportunity either to accelerate your affiliate fee or improved carriage on domestic networks?

[Alan Sokol:]

We don't comment on renewals and negotiations. But we don't see anything that will negatively impact our growth that we have experienced. We expect that growth to continue, both from a fee and from a subscriber standpoint. Our organic subscriber growth has been strong and has been a completely different paradigm to what you are seeing in the overall market, and we think given the fact that there are still only about $5 million subscribers of U.S. Hispanic package, in a market with 16 million Hispanic households in the U.S., we think there is still tremendous growth opportunity, especially the distributors would focus on this audience, and would market and price the product profitably. Remember that, our networks are still being offered in standard definition, in 2017; and the fact that we have grown 4% organically, while having standard definition networks, to me is just proof of the hunger the audience has for these networks in the variety, and content that these networks provide. And we anticipate that one or more of our networks will go HD in the near term. We have had very positive conversations with distributors that recognize, that they are essentially providing an inferior product to the one segment of the audience that is actually growing for them. So we remain optimistic on the continued growth, and we also believe that there will be new OTG bundles being offered by DIRECTV and others -- DIRECTV now for example, currently does not have Hispanic package, but we believe will have a Hispanic package in the near term. It will present further incremental growth opportunity.

[Steven Cahall:]

Great. And then, on PENTAYA, you mentioned that 35 million sort of total addressable market. I was wondering if you have done any sort of testing or any other analytics that would give you any early indications of like what subnumbers could be achievable in the first year or two for that venture?

[Alan Sokol:]

Well, without going into detail, we have done extensive focus groups and research with Lionsgate on the market, and that research and those focus groups, really reinforced, that we think that we are on to something here. We had a very positive response, almost universally among Hispanics from all countries of origin and all age groups, and frankly, all levels of acculturation, that this is a product that they would really like to have. So we think, given the fact that there are really 60 million Hispanic in the U.S., nearly 40 million that don't subscribe to Hispanic Pay-TV package, this is a really big opportunity for us, and we are excited about the potential upside for this. We think this is a meaningful asset opportunity for both us and Lionsgate.

[Steven Cahall:]

And then finally, Alan, both you and Craig spoke sort of separately about both the M&A and the share repo side of things. So how do we think about close or not close, you might be on major acquisition opportunities? And then, what you see as an appropriate pace for the buyback, as we move through this year and next year?

[Alan Sokol:]

I will answer on M&A and I will let Craig respond to the buyback question. On the M&A, we continue to look at a number of deals. There are a number of deals in the pipeline that we are enthusiastic about. But until you close the deal, it's not closed. So we are enthusiastic about the number of things we have seen. We are optimistic that we will get one or more deals done. But again, hard for us to comment on timing, because every time I have thought that we were close, one or more things occur to delay or retract the process. So again, I am optimistic and I think we will get deals done, and I think we will get really interesting and deals done that are synergistically unique to us and synergistic to us. But I can't really -- don't really want to comment on timing yet.

[Craig Fischer:]

And on the share repurchase, as you know, we are constrained by volume limitations. So you can figure out where we are able to in the market space off of that. Where we find the stock attractive at these levels, you will probably get a better sense to the pace when we announce, what we bought back in the third quarter, because as I noted, we had a cooling off period after the announcement in June, so we didn't get into the market until July. But that said, the primary allocation of our capital is still to pursue M&A.

[Steven Cahall:]

Great. Thank you very much.

[Operator:]

Thank you. And our next question comes from the line of Curry Baker with Guggenheim Securities. Your line is open. Please go ahead.

[Curry Baker:]

Hey guys, thanks for the question. Maybe, I had one on Canal Uno and the brand refresh and the relaunch that you guys have, coming up here in about two weeks. Can you maybe speak more and give a little more color on the health of the advertising market in Colombia and advertiser interest that you are seeing in market, so far ahead of the launch? And maybe a little color as far as how quick you think you will be able to take share there?

[Alan Sokol:]

Hi Curry, good morning. The market distribution [ph] in Colombia has been soft. I think generally, Latin America, is experiencing a bit of a downturn in economies in overall markets. So the market distribution [ph] has been supple. We believe in the long run, one of the thing that doesn't bother us, we believe a lot on Colombia, is a really strong economy, very solid geopolitically and has really tremendous upside in terms of its economic growth and accordingly, advertising market growth. So we look at this as a great long term opportunity in Colombia, it's really a great market. We have had really positive response from advertisers. Advertisers, frankly, are really hungry for an alternative. Colombia has been a duopoly for over 20 years. Just two competitors in a market of 50 million population, which is really unheard of on a global basis. And those two competitors have to some extent, worked in lock-step. So the idea of having a disruptive force like us in the market and also a network that frankly is going to be producing and broadcasting in, what we believe is a more modern and viewer friendly way, has gotten really tremendous response from advertisers, who are anxious to work with us and anxious for an alternative to the existing duopoly.

[Curry Baker:]

Okay, thanks. Also more of a housekeeping question; is the other income line, I think you guys had positive 121,000 in this quarter, is that where you are counting for the equity method investments, and in aggregate, are these investments positive and should we continue to see that moving forward?

[Craig Fischer:]

Just to clarify, other revenue is up $600,000 in the quarter, and this does not pick up our other income or equity interest in the joint ventures, that is actually running through other income line, below operating income. And so this is what's driving other revenue, is the licensing of content to third parties, including PANTAYA.

[Curry Baker:]

Okay. Thanks guys.

[Operator:]

Thank you. And I am showing no further questions at this time. And I would like to turn the conference back over to Alan Sokol for any further remarks.

[Alan Sokol:]

No further remarks. Thanks everybody. Have a great weekend.

[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.