Hemisphere Media Group, Inc.
Q4 2015 Earnings Call Transcript

Published: 4 Mar 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the Hemisphere Media Group, Inc. fourth quarter and yearend 2015 financial results conference call. My name is Abigail, and I will be your operator today. [Operator Instructions] I would now like to turn the call over to Mr. Josh Hochberg. Please go ahead.

[Joshua Hochberg:]

Thanks, Abigail. Good morning, everyone. I would like to welcome everyone to today's conference call. I'm Josh Hochberg, and I'm 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 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 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 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 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'll now turn the call over to Alan.

[Alan Sokol:]

Thank you, Josh. Good morning, and thank you all for joining us today. The fourth quarter capped off, what was a very strong and consistent year for our business. For the fourth quarter, net revenues were up by 9% and adjusted EBITDA was up by 6%. For the year, both net revenues and adjusted EBITDA increased by 16%. During 2015 we continued to successfully execute on our key strategic initiatives. We drove significant growth in retransmission fees and subscriber fees. We converted Cinelatino to an ad-supported model, which we believe sets us up nicely to drive advertising sales going forward, and we have ramped up the investment in content for our network to build viewership and revenue. All of these initiatives drove our growth during 2015, and we believe have keyed us up for continued growth in 2016 and beyond. Our overall U.S. subscriber rates grew by 8% in 2015. Our growth was a result of organic subscriber growth as well as new distributor launches. These results are significantly better than those of the overall U.S. PayTV universe, which continued to see mild contraction. We see organic growth continuing in 2016, fueled by Hispanic population growth and increased take-up of Hispanic program packages, as only approximately one-third of Hispanic TV households currently subscribe to these packages. Let's now turn to our individual networks, beginning with WAPA, which once again delivered strong revenue growth in Q4, with robust increases in both advertising and retransmission revenue. In the face of ongoing economic challenges, WAPA achieved an all-time high in its share of ad revenue in Q4, exceeding its previous all-time high set in Q3. WAPA's ad revenue growth was driven by its continued dominant ratings performance. WAPA has now been the uninterrupted ratings champion in Puerto Rico for seven consecutive years. We anticipate continued robust retransmission revenue growth in 2016 and beyond. There is no station comparable to WAPA anywhere in United States. WAPA's massive and unparalleled audience delivery gives us tremendous leverage with all distributors, all of whom acknowledge WAPA's multi-status and unique value proposition. Despite Puerto Rico's difficult environment, the Puerto Rico television ad market experienced solid fourth quarter, with 2% growth over 2014, the first quarterly growth since Q1 of 2014. For the full year, the ad market was down by 4%, consistent with our forecast. The economic situation in Puerto Rico remains both challenging and uncertain. While the Obama administration has been supportive of providing Puerto Rico with various forms of elite, Congress has not yet acted. We are optimist that Congress will shortly provide Puerto Rico with a framework for debt restructuring. But at this point, we still cannot be sure of the terms or timing of such legislation. Given these circumstances, we believe that the market will continue to be challenged in 2016. This has been evident in the decision of many advertisers to forego with upfront commitment this year in favor of scatter buying. We are currently forecasting a decline in the Puerto Rico ad markets of low-to-mid single-digits in 2016, although our visibility is limited and our forecast could change as the year progresses. Nonetheless, we are confident as ever in our ability to once again outperform the market. With respect to political, we are in a very strong position to secure substantial share of the ad spent. But given the uncertainty in the market regarding the availability of matching funds from the government, as of now, we believe that overall political spending will actually be down from 2012. WAPA is off to a great programming start in 2016. We have seen record prime time ratings thus far, driven by the enormous success of Fatmagül, a Turkish drama series that has mesmerized Puerto Rican audiences, delivering a 30 rating and nearly 50% viewing share. These kinds of successes give us tremendous confidence, as we enter into negotiations with advertisers as well as retransmission renewal negotiations. Our cable networks continued to perform well with strong revenue growth in Q4. As we previously discussed, we launched advertising at Cinelatino in July, a few months later than expected, and as a result did not participate in the 2015/2016 upfront selling season, causing us to miss out on upfront revenues for the first three quarters of 2016. We are essentially one cycle behind our original plan. At the same time, we have invested and we'll continue to invest in our infrastructure to support our ad sales efforts. We expect to successfully participate in this upfront selling season, with the results to be reflected beginning Q4 2016. Our confidence is bolstered by the unique and attractive programming offered by Cinelatino. Our premier in November of the box office hit, Instructions Not Included, was the highest rated non-sports program in all Hispanic cable in Q4, with the ratings nearly twice that of the next highest rated show. We are already seeing interest from major national advertisers and we have secured buys from advertisers such as the U.S. Army, Honda and Lexus. WAPA America is continuing to see growth in subscribers, revenues and ad sales, and is delivering strong Nielsen ratings, while Americas total day household ratings in the fourth quarter increased by 48% over Q4 2014. Our new networks are performing very well too, with solid advertising and subscriber fee growth. Audiences have embraced the improvements we have made. According to Rentrak, both Pasiones and Centroamerica TV delivered record ratings in Q4, surpassing their previous highs in Q3. Last year, we launched a new on-air local Pasiones and continued to invest in programming. Looking ahead, we have some innovative new programming launching this year, including a new Turkish telenovela, which we are very excited about. We've also just launched our first co-production on Centroamerica TV with our local television partner in El Salvador. A daily reality series called Calle 7 that is a hybrid of Big Brother and Ninja Warrior. This format has been extremely successful throughout Latin America and there is nothing like it on Hispanic TV in the U.S. This year we will also be investing in new on-air looks and graphics for both Centroamerica TV and Televisión Dominicana, which will provide these networks with a fresh and current look and feel, significantly enhancing their brand value. We are leveraging our tremendous marketing promotions infrastructure at WAPA to perform this work on a world-class level yet on a very cost-effective basis. Latin America also continues to experience strong subscriber growth. In 2015, Pasiones grew subscribers by 17% and Cinelatino subscriber base increased by 13%. Both of these networks still have major upside with subscriber penetration less than 25%. As I previously mentioned, we are very focused on digital and over-the-top opportunities. This is a high priority for us, as we believe we have valuable and unique content, which the vast majority of U.S. Hispanics do not currently receive. Digital platforms provide us with a new avenue to reach Hispanics, who do not subscribe to PayTV or the Hispanic program package, and we will aggressively, but thoughtfully pursue these opportunities. On the acquisition front, we are very active in the market in both the U.S. and Latin America, and we're optimistic that we will consummate one or more transactions. Market trends seem to be moving in our favor and the deal flow is positive, but we are not going to do a deal just to do one. We want to ensure that any investment we make has the right economics and strategic fit that will meet sustainable shareholder value creation. In conclusion, our business continues to perform very well in 2015 and our guidance of low double-digit EBITDA growth, which Craig will walk you through, indicates that we expect to perform well once again in 2016. We have a differentiated business model, we cater to unique hard-to-reach audiences with compelling growth attributes, and we are confident that we will capitalize and execute on the many opportunities we have in front of us. With that, I'll turn the call over to Craig. Thank you.

[Craig Fischer:]

Thank you, Alan, and good morning, everyone. Our results reflect the inclusion of the operating results of the acquired cable networks, which we purchased in April of 2014. This affects the comparability of our yearend results, but not our quarterly results. Net revenues increased 9.1% for the quarter and 15.9% for the full year. The increases for both periods were primarily driven by growth in advertising revenues and higher subscriber retransmission fees, as a result of increases in subscribers and rates. The increase for the full year was also due to the inclusion of the acquired cable networks. I should note here that the inclusion of the acquired cable networks also impacted our operating expenses and adjusted EBITDA for the full year. 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 effected by the appreciation of the U.S. dollar. Excluding foreign currency effects, our revenue growth would have been 9.5% in the quarter and 16.2% for the full year. Subscriber and retransmission fees represented approximately 51% of our net revenues for the full year, up from 49% in the prior year. Operating expenses increased 9.4% for the quarter and 10.4% for the full year. Increases for both periods were driven primarily by increased investment programming and marketing across all of our networks. Costs were also impacted by the build-up of staff and research costs in connection with the launch of advertising on Cinelatino. Adjusted EBITDA was $16.9 million for the quarter, an increase of 5.5% and $58.1 million for the full year, an increase of 16.2%. The increases in both periods were due to growth in advertising revenues and subscriber and retransmission fees. Excluding foreign currency effects, our adjusted EBITDA growth would have been 6.2% in the quarter and 17% for the full year. Our adjusted EBITDA margin for the year was approximately 45%, consistent with last year and reflects the impact of increased investment in programming and higher sales and marketing cost. Turning to the balance sheet. As of December 31, 2015, we had $219.9 million in debt and $179.5 million of cash. In accordance with the terms of our term loan, we will be making an excess cash flow payment this month in the amount of approximately $8 million. This payment will be allocated in direct order of maturity, and as a result, we will not be required to make scheduled quarterly loan amortization payments for several quarters. During the fourth quarter, we made progress in cleaning up our capital structure. In December, we repurchased 1.3 million warrants at a total cost of $1.8 million. We will continue to evaluate our capital structure from time to time. Our capital allocation priorities remain investing in organic growth and to grow through acquisitions both in the U.S. and Latin America. Let's turn to 2016. Driven by continued strong advertising and subscriber and retransmissions fee growth, we are guiding to low-double digit adjusted EBITDA growth in 2016. We expected that our growth will be stronger in the second half of the year, coinciding with the timing of political advertising, as well as upfront advertising sales for Cinelatino and WAPA America, which will have a greater impact in the fourth quarter. At the same time, cost related to the new programming that we are launching in the early part of this year, advertising infrastructure ramp up, and additional Nielsen's rating cost will impact adjusted EBITDA in the first half of the year. In closing, we had a strong year in 2015 and expect another year of growth in 2016. Let's now open the call up to your questions.

[Operator:]

Thank you. Our first question is from the line of Ben Mogil with Stifel.

[Ben Mogil:]

I just have a couple. On the broader picture, when you look at some of the MBPD deals that are going on, a number of distributors, a number of cable channels have noted either rate harmonization issues or rate harmonization headwinds and have also in some cases noted some headwinds around volume or just the number of subs, because of marketing plans kind of getting disrupted because of the two big mergers out there in the marketplace right now. Can you talk to both of those issues?

[Alan Sokol:]

On the second part of your question, the marketing is nonissue for us. We've had some modest impact on the harmonization rate equalization issue, that will have an impact this year and going forward.

[Ben Mogil:]

And that's obviously sort of in your guidance, I presume as well.

[Alan Sokol:]

Correct, that's baked in.

[Ben Mogil:]

So maybe we can talk a little bit about, in the fourth quarter, what was the revenue mix between affiliate and sub?

[Alan Sokol:]

It was higher in advertisement sales, which is typical for the fourth quarter, given the seasonally high advertising sales.

[Ben Mogil:]

Can you break down the mix of revenue by quarter in the quarter between ad and sub?

[Alan Sokol:]

It was roughly about 54% advertising revenue.

[Ben Mogil:]

And then when you look at the year in '16, obviously political helps you. Do you anticipate that the growth rate for advertising is going to be higher than the growth rate for affiliate in the domestic market partly because of both political helping you, but also because of the rate card harmonization issue?

[Alan Sokol:]

In domestic, meaning x Puerto Rico, we think that political will not have a significant impact on us in the U.S. Unfortunately, given that our networks are cable networks, they're generally not going to benefit significantly from political. So we shouldn't see significant changes in trends on either sub fee growth or advertising growth. We think they will both grow consistent with the past year.

[Ben Mogil:]

And then I think just to refresh everyone, can you remind us what the 2012 political number was, so we can get a sense of what we're comping against?

[Alan Sokol:]

Yes, 2012 gross political number in Puerto Rico was around 16.

[Craig Fischer:]

Total pie.

[Alan Sokol:]

Total pie. And WAPA share that year, gross was 6. I mean, net approximately 5. There is also some cost associated with that in every political year relating to increased news production and on-air talent costs, so it's not purely an incremental number.

[Ben Mogil:]

And is your thought around political in the market that it will be down and you will as well be down, or is the former easier to sort of gauge than the latter?

[Alan Sokol:]

I think the latter is sort of easier to gauge. And we feel very good about our ability to secure a huge share of that pie, especially if Univision is really not in the game, not having any local news product. Having news is key in order to secure political revenue. So given our audience share and given the fact that only two networks actually have news infrastructures, I think we're looking at getting a really big share of the pie, higher than we got in 2012. That said, we don't have a lot of visibility into what the number is going to be. Literally no money has been spent to date on political. And one of the parties does have a primary in less than three months, but again, zero money has been spent to date on that. So it's really hard for us, Ben, at this moment to give you any clarity. And when you overlay that with the fact that there is sort of just complete lack of knowledge as to whether matching funds will be in effect this year, it's very hard for us to get a real sense of what the market is going to be. And trust me it's more frustrating for us than for you. But our best guess right now is that it will be materially less than it was in 2012 for just the overall pie.

[Craig Fischer:]

Just to be clear, though, in 2012, we didn't experience a lot of political revenue at this point in time of the year either [multiple speakers].

[Operator:]

Our next question comes from the line of Steven Cahall with RBC.

[Steven Cahall:]

Maybe first just a question a bit more on the M&A pipeline. So maybe, first, I was just wondering if you could talk about the types of assets that you have a preference for and maybe split the world between more content-heavy assets versus distribution style assets? And then also I was wondering if you could update us, you mentioned that the markets were bit in your favor, but in terms of what you're seeing, is it a lot of sort of smaller bolt-on style acquisitions or is there just as many potential transformative deals out there as well.

[Alan Sokol:]

I think that, I think that in terms of the first part of your question, we continue to look at all interesting content -- all content-driven business that we think are interesting and good fits for us, and where we really think we can make a difference in terms of adding value and taking assets that need some help and work in making them world-class assets. That's what we think we're good at. That's what we've done well before, but that's where we believe we can really add value for our shareholders. So that said, we will continue to look at some channels businesses both in the U.S. and Latin America. In Latin American, I think we look at both. We're interested in both, cable and broadcast. We're still big believers in Latin American broadcast. There are a lot of broadcast assets down there that we believe we can add a lot of value to. And we're also looking at assets on the content side, both production and libraries. We believe that in this day and age, with the hunger for content among existing and emerging platforms, that there is a dearth of quality Spanish-language content out there, sort of the flipside of what you're seeing on the English side, where there's been all this talk about how there is this plethora or the saturation of amazing content, 400 plus scripted series, et cetera. Spanish is the opposite. It's the same stuff that's been produced over the last 50 years, so we think there is an opportunity for us to come in and fill that void maybe through rolling up some great production companies that can produce for our networks as well as third-party networks, or maybe existing content libraries that we can deploy in our networks, as well as syndicate out through existing and emerging platforms.

[Steven Cahall:]

And then, on the political side, maybe to just follow up on the last question, if we were to see a deal that provided the Puerto Rican government with sufficient funds to provide the matching, would that provide a material lift to your EBITDA outlook for '16?

[Alan Sokol:]

If it was matching, we believe that it would be, depending on the terms of matching, it could be a list of low-single digit million dollars for us.

[Steven Cahall:]

And then maybe just a last one. I read in the press this morning that AT&T U-verse have gone into a blackout with Univision, with some of the programming that you have on Pasiones. Did that give you any sort of unexpected near-term upside as well to at least your sort of shorter-term outlook?

[Alan Sokol:]

Well, that's a good headline that we actually were not aware. We knew that they were in discussions, and we knew that those discussions were contentious. And the reality is, yes. I think that certainly we are happy to there for AT&T and DirecTV to provide whatever their needs are, in the absence of having Univision. We've done that in the past with other distributors, and we have really strong relations with both of those, with actually one distributor AT&T and DirecTV now. And so we think that that's something we certainly will try to take advantage of.

[Steven Cahall:]

Just the last quick housekeeping one for Craig. The warrants that you did in December, anything we should expect for 2016 to stick into our model on that side of things?

[Alan Sokol:]

There is nothing specific I could speak to. As we do with our capital structure generally we will continue to evaluate our capital structure regularly and be opportunistic to improve our capital structure. End of Q&A

[Operator:]

That does conclude the Q&A session. Ladies and gentlemen, this does conclude today's presentation. Thank you for your participation. You may all disconnect. Everyone have a great day.