Hemisphere Media Group, Inc.
Q4 2014 Earnings Call Transcript

Published: 11 Mar 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Hemisphere Media Group Q4 and FY 2014 Earnings Conference Call. My name is Alison, and I'll be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to now turn the call over to Mr. Craig Fischer, CFO. Please proceed, sir. Craig Fischer Thank you, Alison, and good morning to everyone. I would like to welcome everybody to today's conference call. Joining me is Alan Sokol, Chief Executive Officer. A replay of the call will be available beginning at approximately 2

[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 December 31, 2014, were $33.2 million, an increase of 28% compared to net revenues of $25.9 million for the comparable period. Net revenues for the full year ended December 31, 2014, were $112 million, an increase of 30% compared to net revenues of $86 million in the comparable period. The increases in both the quarter and full year are primarily a result of the inclusion of the acquired Cable Networks and growth in subscriber and retransmission fees across all of our networks. The fourth quarter also benefited from growth in advertising revenue, and the full year also reflects the inclusion of a complete year in Cinelatino. Consistent with our expectations, subscriber and retransmission fees represented approximately 50% of our net revenues in 2014, up from 39% in 2013. Operating expenses were $23 million for the three months ended December 31, 2014, an increase of 10% from operating expenses of $20.9 million in the comparable period. Operating expenses were $86 million for the full year ended December 31, 2014, an increase of 10% from operating expenses of $78.3 million in the comparable period. These increases in operating expenses were due primarily to the inclusion of the operating results of the acquired Cable Networks. The increase for the full year period was also due to the inclusion of Cinelatino's operating expenses and corporate overhead for a complete year. These increases were offset in part by reduction in production costs as a result of the decision not to produce Idol Puerto Rico in 2014, the decline in stock compensation expense, as well as one-time charges incurred in 2013 from -- primarily as fees and expenses related to the growing public transaction and the Cable Network's acquisition. Net income was $4.3 million for the three months ended December 31, 2014, an increase of $1.7 million over the comparable period. For the full year ended December 31, 2014, net income was $10.6 million, an increase of $14.9 million over the comparable period. Adjusted EBITDA increased $5.7 million or 56% to $16 million for the three months ended December 31, 2014. For the full year ended December 31, 2014, adjusted EBITDA increased $16.2 million or 48% to 50 million, which is in line with our guidance. The increases in both the fourth quarter and full year were due to the inclusion of the operating results of the acquired Cable Networks and revenue growth at our combined networks. The increase for the full year also benefited from the inclusion of a complete year result of Cinelatino. These increases were offset in part by full year corporate overhead, which has increased as we expanded our infrastructure to support the growth in our business. Turning to the balance sheet, as of December 31, 2014, the company had $223.9 million in debt and $142 million in cash. Our gross leverage ratio was approximately 4.5 times and our leverage ratio net of cash on hand was approximately 1.6 times. Looking to 2015, we're enthusiastic about our performance outlook. 2015 will be a growth and investment year. We're expecting solid growth in retransmission and subscriber fees as well as advertising revenue. We expect revenue growth to be driven by several factors, including new system launches announced late 2014, and additional launches anticipated later this year, growth in retransmission fees, the conversion of Cinelatino to ad supported, and WAPA America benefiting from a full year of Nielsen ratings. Consistent with the strategy, we communicated when we announced the Cable Network's acquisition and thus specifically discussed by Alan earlier on the call, we have and plan to continue to upgrade the content and increase [indiscernible] efforts at the acquired Cable Networks. We also plan to increase marketing and sales efforts for Cinelatino as we transition to channel to being ad supported. We believe this increased investment will build long-term shareholder value. As a result, we're forecasting EBITDA growth in 2015, assuming no acquisitions in the low to mid teen's range. That concludes our prepared remarks for this morning. Operator, will you please instruct our guests how to ask questions? Thank you.

[Operator:]

Thank you, sir. [Operator Instructions] Mr. John Tinker, is your line on mute? You are now live in the call. Thank you.

[John Tinker:]

Hi, thank you. Congratulations on hitting your guidance. And following up on that, the 2015 guidance, low-to -mid teens, if you excluded the -- you'll still have an extra quarter of acquisition sort of kicking in next year [ph], if you took that out, what's your actual -- or how should we think about your organic rate? And secondly, if you do a quick back of the envelope on the margins, your margins -- the EBITDA margin this year was sort of mid-40s up from about 40% last year. Can you discuss what's driving that increase, and where -- and what's your sort of margin goal or do you actually think about a margin goal?

[Alan Sokol:]

Well, thank you, John. First, as we look in to answer your first question, as we look into 2015, it's increasingly difficult to separate the organic from the acquisition growth. We manage the assets as a whole, and we'll leverage the strength of one asset to the betterment of another channel, which should be value enhancing for the company as a whole. This is part of the strategy of the acquisition of getting bigger and adding scale. So, well, I can't give specifics, I think you'll see some announcements in the coming weeks that will show evidence of leveraging one channel relative to another. Your second question about the margin; the margin expansion was driven a lot by the growth in subscriber and retransmission fees, which were a 100% margin dollars for us. We don't have reverse comp. So we keep all of our fees. And I noted that the mix of advertising revenue to subscriber fees increased from 39% to 50%. Those dollars come with higher margin dollars, and that's helped to expand the EBITDA margin.

[John Tinker:]

Fine. If I could follow-up on that, so what's the -- what are the current retrans revenue deals that are up in this year and next year?

[Alan Sokol:]

John, we don't specifically give that information, bound by confidentiality under our retransmission and subscription agreements, but we did enter into -- through material renewals at the end of last year, the results of which were very positive for us. We had very, very significant growth in our retrans revenues and we expect that going forward we'll also be able to generate significant growth from upcoming renewals.

[John Tinker:]

Okay. Is there any -- you're obviously -- I don't think I can say, "packaging," but the channels are coming together; is there any one channel that's been a -- that's doing a little better than you expected relative to any others that has been…

[Alan Sokol:]

I think they're all doing well. I think the response of our distributors has been very positive to our ownership into the changes that we've made in that we've committed to make going forward. They recognize that, I think that we're -- that under our ownership, there is going to be investment in programming marketing and they welcome that and they're starting to recognize that and reward us for that by filling in the holes where we're not currently distributed and in the negotiations we have with them on our renewals.

[John Tinker:]

Okay. And can you -- it may not be possible, but M&A pipeline; how active is that at the moment -- domestically or internationally?

[Alan Sokol:]

We're very active. Obviously we haven't announced any deals since our deals last year, but we are looking at a number of different opportunities; some of which look very interesting and intriguing to us. We think we're in a good space, and we're the natural aggregator in our space. So we feel good about our ability to execute and to get additional really interesting and unique deals done, and be able to execute on them.

[John Tinker:]

Okay. Good luck. Thanks.

[Operator:]

Thank you. The next question comes from the line of Jon Hickman from Ladenburg. Please proceed, sir.

[Jon Hickman:]

Hi, good morning. Could you -- Craig, could you comment on what you expect your operating expense growth to be in the coming year? Do you have -- I mean is your infrastructure pretty set for the growth that you envision?

[Craig Fischer:]

Well, I think we've noted that we are going to make increased investment in programming and marketing of our channels, so that will be reflected in 2015. It's not built into our infrastructure at the moment. The guidance we've given on EBITDA is what I can provide for 2015's outlook.

[Jon Hickman:]

Okay. And then I'd like to follow-up on the M&A question; what's the -- has there been any change in the competition out there for -- I mean the people that you would be competing against to buy attractive properties?

[Alan Sokol:]

Not really, Jon. I think the good news from our side is the kind of assets that we're looking at, I don't feel like we're going to be competing with the big boys in our space for those assets, because they tend to be smaller than the types of acquisitions that those guys tend to do, and I think less familiar for them, but very familiar for us, and assets that we're very comfortable with. And I really think that we're in a sort of ideal negotiating position to do those deals. And we also know where all the bodies are buried in our space. We know all the players. We know who's interested in potentially selling, who's interested in a potential strategic partnership. And we can take advantage of those relationships.

[Jon Hickman:]

Okay. Thank you, that's it for me.

[Alan Sokol:]

Thank you

[Operator:]

Thank you. The next question comes from the line of Ben Mogil from Stifel. Please proceed, sir.

[Ben Mogil:]

Hi, thank you for taking my question. On the affiliate, the [indiscernible] and retrans number, which I think you said, was north of 50% of revenue; what do think it grows at in fiscal '15 to get to your guidance?

[Alan Sokol:]

Well, it's -- just to be clear, it's a retransmission fees and subscriber fees that are approximately 50% of our revenue.

[Ben Mogil:]

Sure.

[Alan Sokol:]

We expect the ratio revenue -- of subscriber fees to ad revenue to remain fairly consistent into 2015, given the expectations for growth in advertising revenue as a result of the launch of Cinelatino being ad supported, as well as the full year benefit of WAPA America being Nielson rated. We've noted that we've had obviously some new launches of the acquired channels, and the renewals of our retransmission agreements, which the rates will be effective -- in the case of the renewals on January 1, 2015. So we think we'll have healthy growth rates of both subscriber and advertising revenue.

[Ben Mogil:]

Okay, that's great. Thank you very much.

[Operator:]

Thank you. The next question comes from the line of Barry Kaplan from Maple Tree Capital. Please proceed, sir.

[Barry Kaplan:]

Hi, good morning guys.

[Alan Sokol:]

Good morning, Barry.

[Barry Kaplan:]

I have two questions. One is just really a follow-up on Jon's question about organic growth. Are you able to give us any kind of organic numbers for the already reported fourth quarter and full year '14? And then, Alan, I wonder if you could just -- if there's any more detail you could give us on the agreements you signed with Cablevision and Cox in terms of [indiscernible] it's going to be on, how many subs it involves, and anything else that you think is salient?

[Craig Fischer:]

So I'll take the first part on the organic growth. There's really nothing more than what we could say that we've already said; the businesses are more and more intertwined, we manage them as a whole. Our sales and marketing teams and finance teams are all integrated with the channels. And as I noted, we're increasingly bundling those channels together, whether it would be in advertising, or distribution deals. So it's difficult at this point trying to provide a breakout of the comparison between organic and strategic.

[Barry Kaplan:]

Okay.

[Alan Sokol:]

And on the Cablevision and Cox question, I think, again, we don't -- because of confidentiality reasons with our distribution contracts we can't give out specific subscriber numbers, but I think Cablevision is in the low single-digits. I'm sorry, the low six figures in terms of subscribers, and as well as -- and Cox is in the same range.

[Barry Kaplan:]

Okay, great. Thank you.

[Operator:]

Thank you. [Operator Instructions] Thank you. No further questions, I'd now like to turn the call back over to Alan Sokol. Thank you.

[Alan Sokol:]

Thank you everybody for joining us today, and we look forward to a positive and strong year, and look forward to speaking to you all of you soon. Thank you.

[Operator:]

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Thank you for joining.