Hemisphere Media Group, Inc.
Q3 2014 Earnings Call Transcript

Published: 12 Nov 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to the Third Quarter 2014 Hemisphere Media Group Earnings Conference Call. My name is Lacy and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of the presentation. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today, Craig Fischer, Chief Financial Officer. Please proceed.

[Craig Fischer:]

Good morning, and welcome to today's call. Joining me is Alan Sokol, our Chief Executive Officer. A replay of the call will be available later today beginning at approximately 2 PM, Eastern Time, by dialing 888-286-8010 or from outside the United States by dialing 617-801-6888. The conference ID for the replay is 65653421. A recording of this call may also be accessed through our website. 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 the company 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 the company 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 Sokol.

[Alan Sokol:]

Thank you, Craig. Good morning, everyone, and thank you for joining us. I'm pleased to report the results for the third quarter. Revenue was up 21% and adjusted EBITDA was up 46% compared to the third quarter of 2013. We remain on pace to deliver our full year adjusted EBITDA guidance of $49 million to $51 million. Our results reflect continued strong execution by our team. All of our networks are performing at high levels. WAPA delivered record ratings performance in Q3, growing its ratings fleet over its competitors Univision and Telemundo to its largest margin ever. WAPA's ratings increased in all key demographic categories in all major day parts. In the key ad sales demographic of adults 18 to 49, WAPA's full day ratings increased by 10% and its primetime ratings increased by 12% over the third quarter of 2013. At the same time, both Univision's and Telemundo's ratings declined year-over-year. WAPA's results are particularly impressive in light of our decision not to produce Idol Puerto Rico this year as that series was the number one rated program in Puerto Rico. The Puerto Rico TV ad market declined in Q3 reflecting the ongoing challenging economic climate. Although ad rate revenue in Puerto Rico also declined, WAPA materially outperformed the market, once again growing its share of TV ad spending despite the loss of revenue tide to Idol Puerto Rico and a significant ad dollars going to Univision that was specifically attached to World Cup. The decision not to produce Idol Puerto Rico this year was a difficult one given the rating success of that show. However, it is a very expensive production and we were justifiably concerned that in the soft market we would not be able to generate the necessary premium sponsorship revenue. The decision to adapt would be the correct one. Although, our decision clearly had an impact on revenue, the loss of revenue was more than offset by the savings of production cost on the show, translating into meaningful net positive impact to adjusted EBITDA. Given WAPA's dominant rating performance, we expect our share of advertising to continue to grow. Univision Puerto Rico recently announced the cancellation of all local news production, firing over 100 people in the process. We expect to grow advertising share as a result of this move as that reinforces WAPA's position as the undisputed news leader in the market. WAPA now airs, the only early morning and 11 PM newscast in Puerto Rico and produces approximately twice the number of hours of news content at Telemundo, the only remaining producer of local news. Shifting to our cable networks, all of our networks experienced meaningful organic subscriber growth in Q3, reflecting the uniquely strong upside of the U.S. Hispanic and Latin American pay-TV markets. We also expect to enter into important new distribution agreements shortly which will accelerate our growth. As I mentioned on our Q2 call, WAPA America has become a Nielsen-Rated network. Although it's too soon to reach any conclusions, we are very encouraged by the early ratings results. In fact in October more Puerto Ricans in the U.S. watched WAPA America's evening newscast than watched Univision, especially impressive given that Univision, which is three times the number of U.S. Hispanic as WAPA America. We have recently launched a new 8 PM newscast targeted specifically to the U.S. market. We are very optimistic about this newscast, particularly given the dearth of news programming available in the U.S. in this time period. Cinelatino continues to perform very well and is on track to migrate to an ad supported model for 2015. We've recently completed the acquisition of a library of 100 movies for which we control all rights. We believe we acquired these titles on very advantages terms allowing us to lock popular movies at an attractive cost per title and providing us with the ability to use the titles on all of our networks, as well as an over the top offerings in other platforms. Our three newly acquired networks continued to perform well. We continue to implement our strategy of upgrading programming at the networks to drive performance. For example, we have recently entered into agreement with world-class producers such as Sony and Telemundo to license top quality in telenovelas and serialized drama the Pasiones. We've also begun to realize the strategic advantages of owning and operating five complementary cable networks, including utilizing our programming across our multiple networks. For example, we are running additional Dominican League Base Ball games on WAPA 2 and WAPA America. We have also tapped into our Cinelatino movie catalog to create a Dominican movie slot on TV Dominicana and a female-oriented movie slot on Pasiones. Going forward, we are looking ahead to continue the strong performance and we continue to evaluate new acquisition opportunities that complement our existing business. With that, I will turn the call over to Craig. Thank you.

[Craig Fischer:]

Thank you, Alan. The operating results reflect the inclusion of the acquired Cable Networks from April 1, 2014, and Cinelatino since April 4, 2013. Net revenues for the three months ended September 30, 2014, were $28.8 million, an increase of 21% compared to net revenues of $23.7 million for the same period in 2013. Net revenues for the nine months ended September 30, 2014, were $78.8 million, an increase of 31% compared to net revenues of $60.1 million for the same period in 2013. These increases were driven in part by the inclusion of the acquired Cable Networks in the current quarter and Cinelatino for the full nine months as well as growth in retransmission and subscriber fees. The growth in revenues was mitigated in part by a decrease in advertising revenue resulting from the decline in the Puerto Rico television advertising market and a difficult year-over-year comparison due to the cancellation of Idol Puerto Rico. Consistent with our expectations, revenue from retransmission and subscriber fees represented approximately 50% of our revenue year-to-date, up from approximately 40% historically. Operating expenses were $23.2 million for the three months ended September 30, 2014, an increase of 19% from operating expenses of $19.6 million for the same period in 2013. Operating expenses were $63 million for the nine months ended September 30, 2014, an increase of 10% from operating expenses of $57.4 million in the year ago period. The increase in the current quarter was primarily due to the inclusion of the operating results of the acquired Cable Networks offset in part by lower production costs due to decision not to produce Idol Puerto Rico. The increase for the nine months ended September 30, 2014, was also due to the inclusion of Cinelatino and corporate overhead and public company charges, which were not included in the prior year's first calendar quarter. This was offset in part by one-time $3.8 million charge incurred in connection with the government public transaction in 2013 and higher stock compensation expense of $1 million in the prior year nine-month period. Net income was $0.7 million for the three months ended September 30, 2014, an increase of $4.7 million compared to a net loss of $4 million for the same period in 2013. Net income was $6.2 million for the nine months ended September 30, 2014, an increase of $13.2 million compared to a net loss of $6.9 million for the same period in 2013. Adjusted EBITDA increased $4.1 million or 46% to $12.8 million for the three months ended September 30, 2014 and adjusted EBITDA increased $10.5 million or 45% to $34 million for the nine months ended September 30, 2014. These increases were due to the inclusion of the operating results of the acquired cable networks and growth in our business offset in part by a full nine months of corporate overhead which is going to support the expansion in our business. EBITDA margins have expanded to 43% in the nine-month period in 2014, up from 39% in 2013, as we continue to show operating leverage in our business. And as noted by Alan, we remain on track to achieve our full year 2014 adjusted EBITDA guidance of $49 million to $51 million. Turning to the balance sheet, as of September 30, 2014, we had $224.4 million in debt and $132.2 million in cash. As previously announced, in July we refinanced our term loan, increasing our principal balance by $51 million and reducing our interest rate to 5%, a 125 basis point reduction from the prior term loan. As a result, we did not have a significant increase in our annual interest charges. Consistent with the guidance we provided last quarter, we expect our leverage ratio net of cash for the year will be approximately two times. We believe that the cash on hand is sufficient to fund our strategic plans. That concludes our prepared remarks for this afternoon. Operator, will you please instruct our guests how to ask questions? Thank you.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from the line of John Tinker with Maxim. Please proceed.

[John Tinker:]

Good morning. Thanks for taking the question. Could you just talk a little bit more about the comment that you're all looking to finalize important distribution agreements and renewals on the retransmission and how many subs could we be talking about here?

[Alan Sokol:]

Hi, John. It's Alan. We're -- as you know, we're bound by confidentiality in our negotiations. And until the distributors that we're negotiating with give us the green light, we're not allowed to talk about this stuff. But I think you can take our words pretty literarily that I think we are very close to making some significant announcements, at least significant within our universe of Hispanic U.S. subscribers. And I think they'll be important announcements for us and important strategically for the growth of our business. On the re-trans side, we have some retransformation agreements that are up at the end of the year. And we are in the midst of negotiations on those agreements, and we're anticipating very positive results from those agreements.

[John Tinker:]

The timing of moving Cinelatino through an advertise -- partially appetizing driven model, how is that shaping up and what are the issues we should be looking out for?

[Alan Sokol:]

We continue to move forward and make progress on it. Honestly, we've been slowed down a bit by virtue of the consolidation and mergers in the business just because they've been a distraction to the parties involved in those mergers. And some of those parties are parties that we've been in discussions with relative to converting to advertising, but I think that shift a minor timing issue as opposed to an issue of whether this will happen. So we maybe off by a short amount of time in the launch, but I don't anticipate to having any material effect given that really we're looking primarily towards the upfront next year and we're still on-track for that.

[John Tinker:]

Thanks. Operator

[Alan Sokol:]

Well, thank you everybody for joining us. And we look forward to speaking to you shortly.

[Operator:]

Thank you for your participation in today's conference. This concludes your presentation. You may all disconnect. Good day, everyone.