Hemisphere Media Group, Inc.
Q2 2015 Earnings Call Transcript

Published: 11 Aug 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Hemisphere Media Group Second Quarter 2015 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to your host for today, Mr. Craig Fischer, Chief Financial Officer. Sir, you may begin.

[Craig Fischer:]

Thank you, 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. We are very pleased with the results of our second quarter, achieving double-digit revenue and EBITDA growth, an exceptional outcome. Our strong results were driven by double-digit growth in both in our revenue streams, advertising as well as retransmission and subscriber fees across all of our networks. The result and commentary of the past week have caught the spotlight on the feature of the PayTV ecosystem. While the overall PayTV universe in the U.S. is undergoing modest or continuous contraction, our paradigm is significantly different and better. In just the first six months of 2015, the aggregate number of subscribers to our U.S. cable networks increased by 6%. Hispanic program packages - our networks were carried which only about third of Hispanic TV households providing us with a long runway for continued growth. Additionally, the U.S. expanding population is growing at five times the rate of non-Hispanic, which will continue to fuel growth in Hispanic PayTV universe. In the current environment, PayTV distributors are cognizant that Hispanics represent one of the few real opportunities for growth and we believe they will develop more resources to growing their Hispanic subscriber base. In addition, as we’ve previously noted, we still have a number of major distribution host to our networks particularly the three networks we acquired last year. We have successfully secured meaningful new distribution in the past few months and are confident that we will continue to drive new launches, which will result in stepped up growth in our subscribers. At the same time, we are very aware of the increased consumption of video content through platforms outside of the traditional PayTV ecosystem without control of unique compelling of popular content; we are well positioned to take advantage all future industry scenarios. Our content is currently available on the DISH link and DirecTV over-the-top platforms. We view SVOD and other over-the-top platforms as providing us with the major opportunity to reach the approximately $10 million U.S. Hispanic households that do not subscribe to the Hispanic PayTV program package. Well the general market PayTV networks are focused on capturing code cutters and code trimmers through these new platforms we will now have the opportunity to directly reach Hispanic do not subscribe its Hispanic program package whether due to cost, unavailability or any other reason. American channel market the Hispanic non-subscribers are largely code - who we now have a chance to reach for the first time. We are examining and considering the wide range of options to make our content available via SVOD and other over-the-top platforms. We have the opportunity and intent to make our content available wherever and whenever our audiences choose to watch. Turning to our individual networks, WAPA once again delivered terrific double-digit growth in both ad revenue and re-transition fees, WAPA maintained its record setting share of ad revenue in the second quarter driven by its continued ratings dominance in the market. Our performance in Puerto Rico would be admirable under any scenario but it’s especially impressive given the harsh economic conditions they’re facing. The economic situation in Puerto Rico is obviously very complicated and uncertain with many as yet unknown variables potentially having a major impact. Issues such as the nature and timing of any future bond payment defaults, the availability of Chapter 9 option and the scope and timing of additional packages could all have major repercussion. With all of these challenges and uncertainties, the ad market declined by mid to high single digits in the second quarter. However with its massive orient delivery WAPA is a must buy for advertisers even in situations where advertisers have reduced their overall ad spend, we have secured higher budget than in previous years as these advertisers consolidate their bias around WAPA. We’ve ramped up our online and mobile efforts both WAPA and WAPA America and have seen very strong growth; with that, unique must have content we believe that we have an excellent opportunity to drive content monetization throughout online and mobile offerings. During the first half of 2015, WAPA’s mobile size averaged over $1.4 million monthly unique visitors an 86% increase over the first half of 2014. Our U.S. cable networks also all experienced strong ad revenue and subscriber fee growth this quarter. We launched advertising at Cinelatino in early July, we are optimistic that we will be able to convert Cinelatino’s ratings, advertise friendly environment into a meaningful new revenue stream. As an example of Cinelatino’s reach and appeal, the premier of Mexican Box-office hit [indiscernible] was the highest rated non-sports program in all Hispanic cable in the second quarter. And over the upcoming months, we will have the strongest line of blockbuster premiers in the networks history. Similarly, WAPA America is delivering strong and salable news and ratings, WAPA America’s news and ratings increased 25% from first quarter to second quarter and in the second quarter WAPA America was the number one rated Hispanic cable network from 5

[Craig Fischer:]

Thank you, Alan. The operating results presented reflecting fusion of the operating results of the Acquired Cable Networks from April 1, 2014, which affects the comparability of the company’s results for the six months ended June 30, 2015. However, the three months ended June 30, 2015 is a clean comparable quarter-over-quarter. Net revenues for the three months ended June 30, 2015 was $32.6 million, an increase of 12% compared to net revenues of $29.1 million for the comparable period. Net revenues for the six months ended June 30, 2015 was $62.1 million an increase of 24% compared to net revenues of $50 million for the comparable period. These increases in both the three and six months periods were driven by 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 the company’s networks due to the combined effect of subscriber growth and rate increases. The increase for the six months ended June 30, 2015 was also due to the inclusion of the Acquired Cable Networks which are not included in the prior year’s first quarter. Subscriber and retransmission fees represented approximately 53% of our net revenues in the six months ended June 30, 2015 and advertising revenues made up the balance. Operating expenses were $23.8 million for the three months ended June 30, 2015 an increase of 6% from operating expenses of $22.4 million for the comparable period. Operating expenses were $46.3 million for the six months ended June 30, 2015 an increase of 16% from operating expenses of $39.7 million in the comparable period. These increases in both three and six months periods were due to the company’s investment in programming Acquired Cable Networks consistent with our previously stated plans as well as higher sales and marketing cost leading up to the launch of advertising on Cinelatino and continued growth and infrastructure to support the company’s expansion. The increase for the six months ended June 30, 2015 was also due to the inclusion of the Acquired Cable Networks which were not included in the prior year’s first quarter. Net income was $3.4 million for the three months ended June 30, 2015 a decrease of $1.9 million compared to net income of $5.3 million for the comparable period. Net income was $5.9 million for the six months ended June 30, 2015 an increase of $0.3 million compared to $5.6 million for the comparable period. The 2014 net income was higher as a result of a one-time reversal of a $2.5 million valuation allowance related to foreign tax credits which resulted in an income tax benefit in those periods. Adjusted EBITDA was $14.7 million for the three months ended June 30, 2015 an increase of $1.5 million or 12% compared to $13.2 million for the comparable period. Adjusted EBITDA was $27.5 million for the six months ended June 30, 2015 an increase of $6.3 million or 30% compared to $21.2 million for the comparable period. These increases in both three and six months periods were due to growth in advertising revenue and subscriber retransmission fees. The increase for the six months period was also due to the inclusion of the Acquired Cable Networks which were not included in the prior year’s first quarter. Turning to the balance sheet, as of June 30, 2015 the company had $222.8 million of debt and $159.7 million of cash. Our gross leverage ratio was approximately four times and our leverage ratio net of cash on hand was approximately 1.1 times. Consistent with our growth strategy, we expect to use our cash to invest in our core business and to fund potential acquisitions. In May, the company completed a secondary offering on behalf of certain selling shareholders of 3.2 million shares of Class A common stock at a price of $12 per share. In connection with the offering, the underwriters exercised a greenshoe and an additional 479,000 shares were offered by the company. Net of underwriting discounts the company received net proceeds of $5.4 million. We are affirming our previously announced full-year guidance, our performance to date has been very strong, however with the fourth quarter seasonally the highest revenue quarter it’s premature to reevaluate guidance for the year particularly given the lack of visibility in Puerto Rico as well as the effect of the slightly delayed launch of advertising on Cinelatino, That concludes our prepared remarks for this morning, operator would you please instruct to ask questions. Thank you.

[Operator:]

[Operator Instructions] And our first question comes from the line of David Bank of RBC Capital Markets. Your line is open. Please go ahead.

[David Bank:]

Okay, thanks. Well done for not participating in the Media slaughter of last week, I think work on that one. So your share gains particularly in the news side have given you, I think a great deal of cushion given the volatility of the local Puerto Rican economy around sort of WAPA TV advertising especially pretty more recently with the default. So can you remind us when you start lapping the changes in the competitive landscape around news that partially facilitates their share gains right now? And do you think, when you lap it, we’re likely to fuel more of the local headwinds or will political start to kind of kick-in and compensate, how do you think about how that could change? My second question is net leverage at one-time, you talked about being a consolidator but what exactly are you looking for, it doesn’t seem like there are a lot of logical domestic candidates, are we wrong there, what is the international list look like and how bigger priority is it. You mentioned content, how bigger priority is content, do you want to vertically integrate more deeply into content, would you rather own distribution assets. With more earnings visibility unless kind of hit risk or would rather own more content assets with better operating leverage in upside but more kind of hit risk, how do you guys think about that? Thanks very much.

[Alan Sokol:]

Hi, David. It’s Alan. Those are a bunch questions. If I miss any of them, tell me and I’ll go through it.

[David Bank:]

I will.

[Alan Sokol:]

First, starting on Puerto Rico and on the lapping. Univision suspended their news operation in the middle of fourth quarter last year. So we saw some benefit from that in fourth quarter last year, so you’ll start seeing lapping of that in fourth quarter this year. And first quarter of 2016 will be first full-quarter in which we lap it. However, as you noted we should start realizing some political upside in first quarter of next year. So that will help mitigate any effect in terms of our increase in our advertising share year-over-year. In terms of the [indiscernible]

[David Bank:]

On the acquisition side, what does the target list look like, what is your view of content versus distribution?

[Craig Fischer:]

I think it hasn’t changed. We think there is still a number of very interesting opportunities both in U.S. and Latin America on the distribution side. We have looked at and continue to look at a number of channels, networks, and network groups that we feel served, under served, valuable, growing audiences that we think we can take to the next level both through our know-how and through our distribution leverage and relationships. And if you owning that content and having and owning those audiences as being a very valuable asset, we still find Latin America to be very interesting, we have not as you know quite done any acquisitions down there yet. But we are continuing to look at opportunities down there both on the pay-TV network side, as well as the broadcast side which we still find compelling in certain markets down there. Just like Puerto Rico remains a very notwithstanding the economy effectively a very strong broadcast market, a market that is far better than the U.S. or certain other regions. Latin America is much like Puerto Rico in that regard and that most markets are very sectorly strong from a broadcast standpoint. We are also though really focused on content, we think that with our distribution asset with our knowledge of the industry with our relationships with distribution partners and distributors out there, we think there is a tremendous unsatisfied demand for quality, Spanish language content, the production of Spanish language content has been and is concentrated in the hands of very few players. The usual suspects, the Televisa, Telemundo few others in Latin America who also tend to produce very traditional forms of Spanish language content. And we think there are huge opportunities given the need and the hunger of existing and new distribution platforms that we feel we’re ideally positioned to kind of be that provider, as well as use that content to fuel our own network operations.

[David Bank:]

Okay. Thank you very much.

[Operator:]

[Operator Instructions] Our next question comes from the line of Ben Mogil of Stifel. Your line is open. Please go ahead.

[Benjamin Mogil:]

Hi, good morning and thank you for taking my question. So, first question when you look at the sort of traditionalize asphalt services, Amazon, Netflix, Hulu etcetera, do you see an opportunity from a content perspective that you guys could possibly fill out of into those services or on your own kind of system and do you have any sense of within your marketplace whether or not your consumer, whether or not your customers kind of over weighted or underweight some of the traditional asphalt services in terms of penetration.

[Alan Sokol:]

Hi, Ben this is Alan.

[Benjamin Mogil:]

Hi, Alan

[Alan Sokol:]

We know the metrics from any of the big FDO to got to know what the numbers or in terms of subscribers, our sense is that, again you can’t really look at Hispanic as a model our sense is that especially as far as ROD is concerning which are these Spanish dominant and bilingual. Hispanic that is they under index to those services because those service frank do not have much in the way of Spanish language product, Hulu had some Univision product but essentially Univision library product. Netflix just made a Univision deal again for library product and Amazon is very little. So as of today we don’t view them as being at big competitor in terms of taking a slice out of consumption of Hispanic video content that’s not to say that won’t change going forward, I think everybody is aware that Netflix announce its first Spanish language regional production which is going to be launching any day now so they are seeing obvious opportunity there and they probably will continue to invest in it. Many of these platforms have approached us about licensing our product. We believe that in our spaces, we are a gatekeeper and that if any of the services want to capture the audience is that we have reach they need to go though us. We have not done any significant deals in the U.S. any of these distributors primarily because unless the money is really irresistible frankly I don’t have any interest and we don’t have any interest to enabling these guys to become competitors with us we would rather own that product and do it ourselves or do with partners that we feel are more compatible that our goals. So, it’s a long winded answer to say that we keep in all options open and right now we don’t view these guys as being significant competitors, but we are being probably [indiscernible] we understand that’s the real possibility going forward that’s say that we control enough of the important must have content that we can capture those viewers throughout platforms either ourselves or conjunctionally partners.

[Benjamin Mogil:]

Okay, that’s great, thanks Alan. And then maybe Alan just a broader issue, David always touched on earlier, I mean you have got the circular trend that obviously hitting the number of people are getting MVPD service you yourself or your customer base I am sorry has traditional been somewhere underway - any outsource somewhere as you got protection around that when you conversions with the MVPDs and you’re trying to get your channels on to more basic kind of tears. I understand the rational why that would make sense or keep people with ecosystem, but giving just for the overall kind of pressures on the system, how that you will sort of talk about give and takes when you have conversations what’s in the pushback you are almost getting from MVPDs on why they are not pushing some of your channels into more basic packages when, at first places since very obvious thing to do in order try to grow sub base or keep sub base from declining if you will.

[Alan Sokol:]

Well, I think, I didn’t for better or worse, so right or wrong the MVPD largely look at Hispanic was being a separate business and they traditionally put Hispanic cable services up on a tear. And when you approach them about moving into a more basic package very [indiscernible] just that is not the way we have done it or do business. I think as the Pay TV, you know ecosystem continues to evolve and we continue to have those - w can revisit those conversation and anything of those conversation potentially come more relevant as ways to drive new customer take up and retention and so although we haven’t count it on that, we haven’t included that any of our models or projections, we do think that there is an opportunity going forward with certain MVPDs and in certain markets. You look at WAPA America and there is no reason that shouldn’t be on digital basis in New York given the 1.5 million Puerto Ricans that live in New York. So those are conversations that we plan to have and will continue to have and we’ll see where it go, but these MVPDs are not the most actual guys in terms of changing the way they do business and changing their business model. So they don’t take some, lot of work and a lot of massage and a lot of convincing to get to them.

[Benjamin Mogil:]

That sounds great, Alan. Thanks for the color, and sort of like David, I applaud the fact there was no carnage today for you guys. Thanks.

[Alan Sokol:]

Yes.

[Operator:]

Thank you. Our next question comes from the line of Aaron Watts of Deutsche Bank. Your line is open. Please go ahead.

[Aaron Watts:]

Hey, guys, good morning.

[Alan Sokol:]

Good morning.

[Aaron Watts:]

Alan, as you think about the target audience you hope to attract of both young and olds, and the type of programming you see them preferring to consume. I’m curious your thoughts on the attractiveness of potential programming targets that are Spanish language versus English language programming targeted at that demographic or the Hispanic audience you hope to attract and whether you see kind of the younger audiences preferring one of the other and how that makes you think about acquisition targets.

[Alan Sokol:]

Thanks, Aaron. Aaron, I think it’s a complicated question so I think you have to look at Hispanics is being this somewhat, complicated metrics of based on age and use in comfort with language. So they have never been more Spanish dominate, Hispanics in the US than today. They continue to grow, even though a lot of focus has been on the English speaking Hispanics. So we like our space, our space is still great growth space and it’s not a lot of options for our audience is that we want to be, we will represent the destination for Spanish people audience that are really looking for alternative to this additional broadcasters. That said, English language or English speaking Hispanics represent a really attractive high growth audience, it’s just they are difficult to capture given that once you are in an English language world, you essentially have unlimited options. So whereas there have been a number of outlets that target African Americans that have been very successful in reaching those African Americans and aggregating audiences, the same has not happened on the Hispanic side for whatever reason. So I do think there is any opportunity there, I think it’s been evasive, I think we may very well play in that space down the road because we do think it’s interesting, we do think we understand the market very well. But we also we do like our Spanish language space as well.

[Aaron Watts:]

Got it. All right. Helpful context. Thanks.

[Operator:]

Thank you. And I’m showing no additional questions, I’ll hand the conference back over to management for any closing remarks.

[Alan Sokol:]

No. I think we are good. Thank you very much everybody for joining us today.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of your day.