Hemisphere Media Group, Inc.
Q3 2016 Earnings Call Transcript

Published: 5 Nov 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the Hemisphere Media Group, Inc. Third Quarter 2016 Financial Results Conference Call. My name is Jonathan, 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 this call will be available beginning at approximately 1

[Erica Bartsch:]

Thank you, operator, and good morning, 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 announcements 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-Q 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 today. 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, Erica. Good morning, and thank you all for joining us today. We delivered another strong quarter with net revenues up 5% and adjusted EBITDA up 10%. We achieved these results despite much weaker than anticipated political spending in Puerto Rico during the quarter, which is testament to the quality and continued strong performance of our core business. Although visibility in Puerto Rico has been and remains cloudy, assuming that Puerto Rico TV ad market performs within our range of expectations in Q4, we remain on track to deliver our adjusted EBITDA guidance of low-double digit growth for the year. Retransmission and subscriber fees were up across all of our networks, fueled by rate increases and continued organic subscriber growth. We have also been successful in securing new distribution launches, which had and will continue to bolster our subscriber revenues. For example, during the quarter, we launched WAPA America and Pasiones on Cox Cable in some of their largest markets, including our Las Vegas, Phoenix, San Diego and Orange County, as well as Pasiones Latin America [indiscernible] Peru. We are confident that we will continue to secure meaningful new launches for our networks, both in the U.S. and Latin America, including launches in several key markets of the former Time Warner systems, now owned by Charter. I am also very excited to announce our partnership with Lions Gate and Univision to create a leading Spanish-language premium movie subscription video-on-demand service. We are proud to offer U.S. Hispanic a unique an unmatchable content proposition with exclusive access to the best and most recent movies. As I’ve previously noted, nearly two-thirds of U.S. Hispanics do not subscribe to the Hispanic pay-TV program packages. This is a huge untapped audience we will be able to reach for the first time and represents a tremendous potential growth opportunity for Hemisphere and our partners. We believe that the collective brand equity of Hemisphere and our partners among Spanish-speaking audiences ensures that this venture will be the leading OTT movies, over-the-top movie service for Hispanic audiences in the U.S. This service is expected to launch next year. We also continue to explore a pipeline of exciting acquisition opportunities and are confident that we will have other transactions to announce in the near-term. As was recently announced, InterMedia Partners has completed its transaction to provide liquidity options to its limited partners with respect to InterMedia’s stake in Hemisphere. We are pleased that InterMedia was able to provide a seamless liquidity event for its investors. Let’s now turn to the performance of our individual networks, beginning with WAPA. WAPA once again delivered strong results in the third quarter, as it continues to dominate in both primetime in total day ratings. WAPA has also been a leader during Puerto Rico’s election coverage, delivering an astounding 29 household rating and 45% audience share for its coverage of the Island’s gubernatorial debate. In Puerto Rico, each of the three broadcast networks holds its own debate and WAPA’s was the highest-rated of all the televised gubernatorial debates. Excluding political, WAPA’s ad revenue was down 2% of the third quarter. This was due primarily to a decline in advertising spending and a shift of ad dollars to the Summer Olympic Games. The overall Puerto Rico TV ad market was down mid-single digits in Q3, excluding political, consistent with the results for the first half of the year. Political spending in Puerto Rico came in significantly lighter than we anticipated in the third quarter. While the government did provide matching dollars to the political parties this election year, total dollar spent in 2016 decreased massively from 2012. The [indiscernible] in political spending was the result of the weak Puerto Rico economy and general apathy regarding the gubernatorial election in light of the perceived diminished rule of the Governor, following the establishment of the PROMESA Oversight Board. Despite the reduction of political spend, WAPA’s continued ratings dominance allowed us to secure over 50% of political ad dollars, a significantly larger share than we secured in 2012. However, the increased market share did not meaningfully compensate for the drop in political ad dollars. In terms of the overall Puerto Rican economy, little has changed since our last call. The members of the PROMESA Oversight Board were at September and a Chairman has been elected. They’re now in the process of naming Executive Director to manage fiscal rebalancing and debt restructuring process. We continue to be encouraged by the enactment of PROMESA and the steps that have been taken to-date. I remain hopeful that legislation will result in a clear path of fiscal and economic stability and growth. Our Cable Networks continued to perform well in the third quarter. Our Hispanic pack subscriber base has grown by over 3% for the first nine months of 2016, a stark contrast to the overall decline in U.S. pay-TV homes. In Latin America, our subscriber base has grown 9% through the first three quarters through a combination of robust organic growth and new launches. Driven by its line up blockbuster movies, Cinelatino was once again the second highest-rated Spanish language cable network in primetime. The network delivered 11% primetime year-over-year growth in adults 18 to 49. The launch of advertising on Cinelatino continues to evolve nicely, though the upfront broke more slowly than anticipated. We have started to receive commitments for next year from a number of major advertisers and are beginning to build momentum. WAPA America continued to perform well in Q3, delivering growth in subscribers and revenues. WAPA America continues to be the Number 2 rated cable network in total day household coverage ratings. Also, the network’s 27% growth in the 5 PM to 7 PM day parts since Q1 reinforces WAPA America’s position as the top rated Spanish language cable network in that key time period. Turning to Pasiones, we are pleased that the network has achieved 4% U.S. subscriber growth through the first nine months of the year. Pasiones is also succeeding delivering record breaking audiences. In Q3, Pasiones delivered its highest rated quarter ever, a record it had previously set in second quarter of this year. Our ratings success was driven by a portfolio of high quality international programing, including the U.S. premiers of blockbuster Turkish novelas, Mercy and Unforgettable and Gabriela, a co-production from global powerhouses Warner Brothers and Rede Globo. Our investment in exciting and differentiated program will continue in the fourth quarter with the premiers of [indiscernible] from Turkey. Its international programing strategy provides Pasiones with fresh, unique content that cannot be seen anywhere else. Centroamerica TV also demonstrated solid organic subscriber growth fueled by the best programing from Central America. Looking ahead in the fourth quarter, the network will add both the El Salvador and Costa Rica Professional Soccer League finals. Last year’s El Salvador final was the highest-rated program in the channel’s history and is expected to draw a huge audience again this year. We will also be launching a new rebrand for Centroamerica TV in the first quarter of 2017. Finally, we continue to invest in the programming at Television Dominicana and our efforts are paying dividends with subscribers up a robust 6% through the first nine months of the year. We are also gearing up to launch a new on-air look this month and are excited to share this with our viewers. In conclusion, despite the unexpected light political advertising spend the Puerto Rico, we continue to efficiently execute on our growth plans, delivering strong results. We believe that our growth paradigm is both different and better than that of our general market peers, that while the overall pay-TV ecosystem continues to contract, we have tremendous runway to continue our robust growth. With that, I’ll turn the call over to Craig. Thank you.

[Craig Fischer:]

Thank you, Alan, and good morning, everyone. Net revenues were $33.1 million for the quarter, an increase of $1.7 million, or 5% as compared to $31.5 million for the same period in 2015. For the first nine months of the year, net revenues were $99.1 million, an increase of $5.6 million, or 6% as compared to $93.6 million for the same period in 2015. The increases for both the three and nine month periods were due to growth in subscriber and retransmission fees. The increase in the three-month period was offset in part by the decline in advertising revenues as the Puerto Rico advertising market contracted and advertising dollars were shifted into the Summer Olympics. Excluding political advertising revenue, net revenues in each of the three and nine month periods increased by 5%. Political advertising revenue for the quarter came in well below political advertising in the same period of 2012, the last election year in Puerto Rico. The decline in political advertising revenue was partially offset by WAPA’s increased share of such revenue. Year-to-date 2016, WAPA secured over 50% of the total political television advertising pie. Nonetheless, we expect political revenue for the full year 2016 will be significantly lower than the 2012 election year and well below our budget. While the vast majority of our revenue is sourced from the U.S., we do have some distribution deals priced in foreign currency, which were affected by the appreciation of the U.S. dollar. Excluding foreign currency effects, our revenue growth was 6% in each of the three and nine month periods. Subscriber and retransmission fees represented approximately 55% of our revenue in the quarter, up from 52% in the same period in 2015. Operating expenses were $23.5 million for the quarter, flat as compared to the year-ago period. We incurred higher expenses as a result of increased investment in programing and higher employee compensation expense. These increases were offset by the timing of certain sports programing rights being incurred in the second quarter in 2016 versus the third quarter in 2015. Operating expenses were $71.7 million for the first nine months of 2016, an increase of 3% as compared to operating expenses of $69.8 million in the prior year period. The increase in the nine-month period was driven primarily by increased investment in programing and higher costs related to advertising sales, consistent with our efforts to upgrade the content on and drive advertising sales across our networks, including the launch of advertising on Cinelatino. Adjusted EBITDA was $15.1 million in the current quarter, an increase of 10% as compared to adjusted EBITDA of $13.7 million for the same period in 2015. Adjusted EBITDA was $43.9 million for the nine-month period of 2016, an increase of 6% as compared to adjusted EBITDA of $41.3 million in the prior-year period. Excluding foreign currency effects, our adjusted EBITDA growth was 11% in the three-month period and 7% in the nine-month period. Turning to the balance sheet, we had $211.9 million in debt and $150.6 million of cash. Our leverage ratio is 3.5 times and net leverage ratio was 1 term. This was a solid quarter and we have strong momentum as we near the end of the year. With that, let’s open the call to your questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Steven Cahall from Royal Bank of Canada. Your question please.

[Steven Cahall:]

Yes, thanks. So, maybe just to start off a couple of things on advertising. Maybe first, could you just give us a sense of when maybe you think that the market will bottom such that the comps get a little bit easier, even if we remain in a somewhat weak economic environment? And then on the U.S. advertising side, I was wondering if you could quantify what sort of upsight you might have coming to the upfront this year, because it feels like – the current season upfront, you were still sort of finding footing on the ad-supported networks, so wondering if you could quantify what sort of upside you might expect? You said you’re already getting some upfront – some interest in the upcoming upfront?

[Alan Sokol:]

Sure. Hi, Steve, how are you? In terms of Puerto Rico, I think we’re still kind of bumping along the bottom. I don’t think things are getting materially worse. There’s not been a not falling off a cliff. Things are pretty stable, but they’re soft. Visibility has been cloudy, at best in Puerto Rico in terms of ad sales. And as you know, even quarter-to-quarter, they have been some significant variations in terms of how the markets perform. So far this year, the market has been roughly down mid-single digits for the first nine months of the year. We had guided to low-to-mid single-digit declines. We’ll see how fourth quarter winds up because fourth quarter is the heaviest quarter. Hard to know when things are going to get better. I think the establishment of PROMESA, the appointment of the Board is really important and hugely significant move in terms of riding the ship, but it will take some time for the Board to start implementing measures and for those measures to have some impact. So I think next year – at this point, it’s too early to say, but I think in the – over the next 12 months, we’re not necessarily looking to see any significant uptick in the economy, but over the next 24 months and beyond, I think we’re hopeful that things will get significantly better. In terms of the U.S., really the upfront in national advertisers should benefit Cinelatino and WAPA America because those are our two new stimulated networks and that’s where we’ll see the opportunity. And as you noted, the upfront was slow to break this year. With that, we’re still in discussions with a lot of national advertisers but we feel very good about the opportunity to deliver some national advertising next year that we have not delivered this year that should have a helpful impact on our numbers next year.

[Steven Cahall:]

Great. And then maybe just a couple of questions on distribution. So maybe number one, did we see the full impact of Cox in Q3 or is there still some upside to sub numbers as that new agreement rolls through? And then on the new SVOD platform that you’ve got, I was wondering if you could just give us some inclination maybe as to what sort of pricing per sub might look like and how much of that you share, and if you and your partners have any expectations for what sort of subscriber numbers you might be able to achieve in the next 12, 18 months? Thanks.

[Alan Sokol:]

On Cox, the numbers are not in the third quarter, you’ll see those in the fourth quarter, and hopefully some new launches – other new launches as well. In terms of the SVOD, we are – we’ve not – we’ve had discussions around pricing. We have not established that pricing yet. So it’s a little premature, but we’re conscious of where the competition is priced and the price sensitivity of our audience. And we’re – clearly we have a business plan and we have some goals in mind, but it would be premature at this point to share those publicly.

[Steven Cahall:]

And just to clarify on Cox, does that mean we should see a step-up in subscription fees in Q4 as you get to recognize those subs?

[Alan Sokol:]

Yes, you will see the full effect of the quarter in fourth quarter.

[Steven Cahall:]

Great. Thank you very much.

[Operator:]

Thank you. Our next question comes from the line of Kevin Lee from Stifel. Your question please.

[Kevin Lee:]

Hi, thanks for taking my question. I guess just a follow-up on distribution. Just on the SVOD side, the landscape is getting pretty crowded these days now with Netflix, Amazon, Hulu, a lot of the smaller guys as well. When you think about this product with Lionsgate and Univision, how are you guys planning to position it in terms of best positioning it for subscriber acquisition? Thank you.

[Alan Sokol:]

We think really this could be the Spanish Netflix. We think we’re – with our partners and our own assets and portfolio, we think we have planted the flag and we are the gatekeeper in our space. Between our library and our production capabilities and that of Pantaleon, Lionsgate and Univision, we really think that we have the – we’re set up perfectly to own the space, the space being Spanish-language movies and ultimately series. And we don’t think anybody has really state the claim to this space yet. And given – again given our collective assets, given our collective leverage in the space and our ability to reach consumers, we think we’re perfectly positioned to really own the space.

[Kevin Lee:]

Thank you.

[Operator:]

Thank you. This does conclude the question-and-answer session of today’s program. I’d like to hand the program back to management for any further remarks.

[Alan Sokol:]

No further remarks. Thank you, everybody, and have a great weekend.

[Operator:]

Thank you ladies and gentlemen for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.