Hemisphere Media Group, Inc.
Q1 2015 Earnings Call Transcript

Published: 4 May 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q1 2015 Hemisphere Media Group Earnings Conference Call. My name is Tiya, 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] I would now like to turn the conference over to your host for today, Craig Fischer, Chief Financial Officer of Hemisphere Media Group. Please proceed.

[Craig Fischer:]

Thank you, Tiya, 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

[Alan Sokol:]

Thank you, Craig. Good morning and thank you all for joining us today. We are off to a very strong start in 2015. For the first quarter, we delivered 41% revenue growth and 60% adjusted EBITDA growth, both exceptional results. These increases also translated into meaningful growth in our adjusted EBITDA margin to 43%. These results position us well to deliver on our reaffirmed full year earnings guidance. Our first quarter results were driven by strong performance across the Board and growth in all revenue categories. WAPA delivered terrific growth in both retransmission fees and ad revenue. Our U.S. cable networks also increased distribution, ad subscription revenue and strong ad performance including promising results from WAPA America since becoming Nielson rated. These results reflected continued growth in uncapped potential of the U.S. Hispanic market, particularly in pay television as well as our teams strong execution. WAPA is now in its seventh consecutive year as Puerto Rico’s ratings leader and in the first quarter, WAPA continued to build on its dominant ratings position. In fact, during the quarter, WAPA was the only network in Puerto Rico to grow its full day ratings among households as well as adults 18 to 49. WAPA’s market power to recent renewals of retransmission agreements on very favorable terms and during the first quarter, we started realizing the significant retransmission fee growth resulting from these renewals. Unfortunately, Puerto Rico’s economy remains troubled. The legal and financial uncertainties affecting Puerto Rico continue to have a chilling effect on spending and investment, and it’s unclear when the situation will improve. The TV advertising market remained very soft in Q1 with spending down mid-single digits. Nonetheless as in fourth quarter, WAPA dramatically outperformed the market and delivered robust ad revenue growth. WAPA continue to grow its share of the TV ad market delivering it all time high in the first quarter, exceeding its previous record set in the immediately preceding quarter. As we’ve said previously, with our massive audience delivery, we feel very confident in our ability to continue to drive market share mitigating any softness in the market. All of our cable networks performed extremely well during Q1 growing subscribers and delivering solid advertising results. New launches continued in the first quarter of our recently acquired networks with new distribution agreements with Television Dominicana on Choice Cable and DISH network in Puerto Rico. These launches come on the heels of the launches we announced last quarter on Cablevision and Cox, and our strong validation for acquisition of these networks, evidencing both a unique appeal and our ability to drive their growth. In addition, all of our networks experienced year-over-year organic subscriber growth. This organic growth stands in contrast to the consistent contraction in subscriber bases among the U.S. general market cable networks, and reflects both continued growth in the Hispanic population and the under penetration of Pay TV among Hispanics. We remain on track to launch advertising on Cinelatino this quarter and we believe we have an exceptional line-up of block buster movies for the second half of this year to drive ratings following the introduction of advertising. We have recently begun upfront sales presentation with ad agencies with particular focus on WAPA America and Cinelatino. Although it’s very early in the process, we are encouraged by the reception new have received and believe that we got the opportunity to secure upfront budget this year. We continue to invest in programming across our newly acquired networks. As only a couple of examples, we just announced a program in volume deal with TCS, which is the owner of the numbers, one, two, and three TV stations in Salvador. With Salvador comprising the largest segment of the U.S. Central American population, this agreement will have a significant positive impact on the Central America TD programming lineup. We also recently completed an agreement with renowned producer [indiscernible] who license the package of their most popular novellas for novellas for Pasiones Latin America. As I mentioned in our last call, we continue to engage in productive discusses with some of the largest players in the SVOD space, and believe that our content is extremely valuable in the SVOD universe. The quality and appeal of our content to digital distributors is evidenced by dishes announced in this past Friday that Cinelatino and proxy owners will both be included in their first Spanish language packages for sling TV. In fact, there was only one other own non-Univision channel which will be included in the sling movies and novellas package. This is a testament to the value of our content and networks, and we believe that we will be a key content provider and such over the top offerings. On the acquisition front, there are number of exciting strategic opportunities in the networks and content space, and we believe that we are uniquely positioned as a natural aggregator in this space. We are exploring a variety of possibility and we’re optimistic that we will identify some unique and attractive opportunities for channels’ slowed context. With that, I’ll turn the call back to Craig. Thank you.

[Craig Fischer:]

Thank you, Alan. Net revenues for the three months ended March 31, 2015 were $29.5 million, an increase of 41% compared to net revenues of $21 million for the same period in 2014. This increase was a result of the inclusion of the acquired cable networks, growth in advertising revenue primarily resulting from an increase in WAPA’s market share as well as growth in subscriber and retransmission fees across all of our networks. Subscriber and retransmission fees represented 55% of our net revenues in the first quarter and advertising revenue has made up the balance. This was in line with expectations given that advertising is seasonally lowest in the first quarter and highest during the fourth quarter. We expect to finish the year at approximately 50-50 revenue mix consistent with full year 2014. Operating expenses were $22.4 million for the three months ended March 31, 2015, an increase of 30% from operating expenses of $17.3 million for the comparable period in 2014. This increase was primarily due to the inclusion of the operating results of the Acquired Cable Networks, higher amortization expense due to the intangible assets identified in connection with the Cable Networks Acquisition, and increased corporate overhead charges as we grew our infrastructure to support the expansion of our business. Net income was $2.5 million for the three months ended March 31, 2015, an increase of $2.2 million compared to net income of $0.2 million for the same period in 2014. Adjusted EBITDA was $12.8 million for the three months ended March 31, 2015, an increase of $4.8 million or 60% compared to $8.0 million for the same period in 2014. This increase in the quarter was due to the inclusion of the operating results of the Acquired Cable Networks, growth in advertising revenues, and increases in subscriber and retransmission fees, which are high margin revenue streams. Accordingly, our adjusted EBITDA margin expanded to 43% in the current quarter, up from 38% in the same period in 2014. Given the solid first quarter performance we are affirming our previously announced full year’s earnings guidance. Turning to the balance sheet, as of March 31, 2015 the company had $223.3 million in gross debt, and $147.3 million of cash. Our gross leverage ratio was approximately 4.1 times and our leverage ratio net of cash on hand was approximately 1.4 times. Before we turn the call over for questions, we have recently filed a registration statement to offer shares on behalf of certain selling shareholders. Per security rules, we cannot respond to any questions relating to the registration statement or the timing of the offering on this call. That concludes our prepared remarks for this morning. Operator will you please instruct our guest how to ask questions. Thank you.

[Operator:]

[Operator Instructions] The first question comes from the line of Ben Mogil from Stifel. Please proceed.

[Ben Mogil:]

Hi good morning and thanks for taking my question. Maybe you could talk a little bit about the overall movement that you are seeing towards skinny bundles, what are your MVPD partners doing and how do you see yourself advantaged or disadvantaged in that?

[Alan Sokol:]

Hi Ben it’s Alan. The reality is, we already are on skinny bundles. As you know our channels are distributed on Hispanic program packages, which are effectively a skinny bundle of Hispanic pay-TV networks. These bundles are profitable for the distributors, so we don’t really see the skinny bundles impacting our networks because effectively we are already there.

[Ben Mogil:]

Okay. And then maybe sort of talking general, are you seeing even on some of the – are seeing the network sort of start to try to put stuff that’s not your bigger networks, but it is only the Move’s raise question. As you look to do M&A, you look for more distribution as one of the synergies you’ve got on M&A, are you seeing the MVPD’s sort of begin to put smaller tiered packages at the higher level channels together to make it sort of easier to sort of argue, I can do more M&A because there is more package like put myself into?

[Alan Sokol:]

We’re not seeing fragmentation of the packages or seeing a creation of sub packages or [indiscernible] packages and you really [indiscernible], the only place we’ve seen that is in the [indiscernible] from addition of sling, with a created more targeted packages that first two they’ve announced are sports package and a movie telenovelas package. So, DISH’s has started doing that and over the top basis, but we are not seeing that in any way with the traditional distribution.

[Ben Mogil:]

Okay, thanks. And just a one last one and then I’ll let someone else get on the queue. In terms of the Puerto Rico, Puerto Rican ad environment you know mid-way through the second quarter any different than the first quarter?

[Alan Sokol:]

I think it’s fairly consistent with what we say in the first quarter.

[Ben Mogil:]

Okay. That’s great Alan. Thanks a lot.

[Operator:]

The next question comes from the line of David Bank with RBC Capital Markets, please proceed.

[David Bank:]

Okay thanks. Good morning guys.

[Alan Sokol:]

Good morning.

[David Bank:]

Can you quantify the continued share gains kind of the magnitude of share gains year-over-year and sequentially at Puerto Rico and talk a little bit about – little bit more meaning what’s driving those share gains and how sustainable they are thanks very much.

[Alan Sokol:]

Sure, the – we remained dominant ratings leader in the market and in fact have grown our share ratings and share gains have followed our continued rating gains. It’s a function of our strong programming and audience royalty, as well as frankly Univision’s particular weakness in the market after they dispended their local news operation. So, we have not specifically enumerated our share in the market, but we have the dominant advertising share in Puerto Rico and it has grown sequentially since fourth quarter, which was a prior all-time high.

[David Bank:]

Okay, thank you.

[Operator:]

[Operator Instructions] There are no further questions in queue at this time. I would not like to turn the call back over to management for any closing remarks.

[Alan Sokol:]

That will be all, operator. Thank you very much. Thank you everybody for joining us today.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. That concludes the presentation. You may now disconnect. Have a great day.