Hemisphere Media Group's (HMTV) CEO Alan Sokol on Q2 2016 Results - Earnings Call Transcript

| About: Hemisphere Media (HMTV)

Hemisphere Media Group, Inc. (NASDAQ:HMTV)

Q2 2016 Earnings Conference Call

August 5, 2016 10:00 a.m. ET

Executives

Alan Sokol - CEO

Craig Fischer - CFO

Erica Bartsch – IR, Sloane & Company

Analysts

Ben Mogil – Stifel Nicolaus

Steven Cahall – Royal Bank of Canada

Michael Morris - Guggenheim Securities

Operator

Good day, ladies and gentlemen, and welcome to the Hemisphere Media Group, Inc. Second Quarter 2016 Financial Results Conference Call. My name is Brian, and I will be your operator today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. A replay of this call will be available beginning approximately 1:00 PM Eastern Time, August 05, 2016, by dialing 855-859-2056 or from outside the United States, by dialing 404-537-3406. The Conference ID for the replay is 56385056. [Operator Instructions].

I would now like to turn the call over to Miss Erica Bartsch. Proceed ma’am

Erica Bartsch

Thank you, Operator and good morning, everyone. I’d like to welcome everyone to today's conference call.

I'm Erica Bartsch, 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 announcements 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 company’s most recent Annual Report on Form 10-Q 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 will now turn the call over to Alan.

Alan Sokol

Thank you, Erica. Good morning and thank you all for joining us today. We are very pleased with our results in the second quarter, with net revenues up 7% and Adjusted EBITDA up 5%. We remain on track to achieve our Adjusted EBITDA guidance of about double digit growth for the year. Our performance in the quarter was highlighted by strong subscriber growth across all of our networks. Our overall US Hispanic tier subscriber base has seen organic growth in excess of 4% year-over-year, a stark contrast to the overall US pay TV universe, which continues to undergo modest subscriber contraction. We see organic growth continuing in the back half of 2016 and beyond, fueled by the continued Hispanic population growth and increased take up of Hispanic program packages.

In addition, we are confident that we will continue to successfully secure new launches which will drive stepped up growth in our subscriber base. As our most recent example, we will soon be launching Pasiones on Cox Cable in their largest market and we have secured a significant expansion of WAPA America’s carriage with Pasiones in the key markets of Las Vegas, Phoenix, San Diego and Orange County. We were having similar discussions with other major distributors and are confident that we will continue to secure new launches for our network.

Let’s now turn to our individual networks, beginning with WAPA and market conditions in Puerto Rico. WAPA continued to dominate performance in Puerto Rico in the second quarter. WAPA’s ad revenue increased in Q2, even before taking political revenue into account, an impressive achievement in difficult market conditions. Now WAPA continues to meaningfully outperform the market. WAPA again grew its share of the TV ad market in Q2, once more setting a new all-time high. Demonstrating our unrivalled position, WAPA’s sign-on, sign-off ratings were higher than those of Univision and Telemundo combined.

Building on WAPA’s unprecedented success is Fatmagul, the first Turkish novela to air in Puerto Rico. WAPA launched a new Turkish novela, Tormenta de Pasiones which is currently Puerto Rico’s highest rated daily series. WAPA also recently launched Sila, one of the most successful Turkish dramas ever produced and a huge ratings hit across Latin America.

Despite all the negative headlines regarding Puerto Rico's economy, the Puerto Rican television ad market, excluding political revenue, was down only 1% in the second quarter. And as noted, WAPA outperformed the market once again. As a result of a competitive primary election in June, WAPA realized political revenue in Q2. With WAPA’s dominant ratings position at world-class news organizations, WAPA was able to secure over 50% of the political dollars in the second quarter, a positive sign for WAPA’s political revenue going forward. The status of government matching funds is still uncertain, although we’re optimistic that a certain amount of matching funds will be made available.

We are also encouraged by the enactment of the Puerto Rico Oversight Management and Economic Stability Act or PROMESA, which should begin to restore confidence and provide a clear path to long term fiscal and economic stability. While we don't want to understate the severity of Puerto Rico’s economic situation, as we saw during the second quarter, the advertising market has been resilient and should improve as the initiatives under PROMESA begin to be implemented. In fact, we are already beginning to see some positive signs that the market is strengthening.

According to the United Automobile Importers Group, after a prolonged series of more than 20 months of negative sales, the local auto industry in Puerto Rico experienced the third consecutive months of positive sales in June. It's also important to realize that WAPA has seen unparalleled growth in retransmission revenues, which are largely insulated from the island's economic situation. Given WAPA’s unique and massive ratings dominance, we're confident that this growth will not abate.

Our cable networks continued to perform well in the second quarter. Driven by its lineup of blockbuster movies, Cinelatino was once again the second highest rated non-sports Spanish language cable network. The launch of advertising on Cinelatino continues to progress nicely. We’re pleased with the feedback and momentum we generated following our upfront presentation in early June. We have been meeting with and presenting proposals to numerous agencies in order to enhance our visibility and secure portions of Hispanic budget. We expect that the results of our efforts will begin to be reflected in the fourth quarter and beyond.

WAPA America continues to perform well, delivering growth in subscribers and revenues as well as strong Nielsen ratings. WAPA America continues to have the highest Nielsen coverage ratings among all Spanish language cable networks in the key day part of 5:00 to 7:00 p.m. weekdays, a true testament to the unique appeal of our content offering.

Turning to Pasiones and Centroamerica TV, I am pleased to report that both networks delivered record breaking performances in the first half of 2016. In Q2, according to Rentrak, Pasiones delivered the highest rated quarter ever, a record it had previously set in the first quarter of this year. Our ratings success was driven by the exclusive US premier of the blockbuster Turkish series, Mercy. As the first Turkish novela to air on Pasiones, it has been a resounding success, delivering a 41% ratings increase in its time slot over the same period a year ago. Looking ahead, we have 2 novela that will be premiering in the US exclusively on Pasiones in the third quarter. Unforgettable, another highly successful Turkish novella and Gabriela, a major co-production between Rede Globo of Brazil and Warner Brothers. Our investment in series such as Mercy, Unforgettable and Gabriela, evidences our commitment to make Pasiones a compelling and differentiated viewer destination.

Centroamerica TV is continuing to grow its audience and according to Rentrak, had its best 6 month performance in its history, driven in part by the continued success in our first co-production, [indiscernible] as daily reality series.

Finally, we continue to invest in programs in Television Dominicana, including the long term renewal of our agreement with the Dominican Professional Baseball League, the most popular sports league in the Dominican Republic. We will also been launching our new on-air look later in the third quarter.

Latin America continues to experience strong subscriber growth. In only the first 6 months of 2016, Cinelatino subscribers grew by more than 9% and Pasiones subscriber base increased by over 6%. During the second quarter, we picked up new key launches for Pasiones on Claro in several major countries and on Cable Onda, the largest cable operator in Panama.

We also continued to develop digital and mobile extensions of all of our properties. During the second quarter, we relaunched the WAPA mobile app, with an updated design and enhanced features and we launched the Noticentro mobile app, fully dedicated to breaking news. These apps have been immediate hits with over 1.4 million visits in just the first 45 days following the launch. We're also focused on creating compelling and innovative social media extensions across all of our networks.

On the acquisition front, we continue to actively explore a pipeline of opportunities. While we would like to have completed the transaction by now, certain factors outside of our control have impeded this process. We’re dealing in certain cases with fellows who do not typically partake in these transactions, and are not being advised by investment banks. So some of the opportunities we're looking at are just taking more time to come to fruition. That said, based on our current pipeline, we’re confident that we will enter into one or more transactions by year end.

In conclusion, we continue to efficiently execute on our strategies as evidenced by our strong results this quarter, affirmative strength and growth opportunities in our business.

With that, I'll turn the call over to Craig. Thank you.

Craig Fischer

Thank you, Alan and good morning everyone. Net revenues were $35 million for the quarter, an increase of $2.4 million or 7% as compared to $32.6 million for the same period in 2015. For the first 6 months of the year, net revenues were $66 million, an increase of $3.9 million or 6% as compared to $62.1 million for the same period in 2015.

These revenue increases in both the 3 and 6 month periods were due to higher subscriber retransmission fees driven by growth in subscribers and rate increases. These revenue increases were also driven by growth in advertising revenues, primarily as a result of political advertising revenue. Excluding political advertising revenue, net revenues in each of the 3 and 6 month periods increased by 5%.

The political advertising for the 6 month period in 2016 exceeded the political advertising in the same period of 2012, the last election year in Puerto Rico. We attribute this increase to one of the major political parties in Puerto Rico having a primary this year, where neither of the 2 major political parties staged a primary in 2012. Additionally, year-to-date 2016, as Alan noted, WAPA secured over 50% of the total pie, an increase over our share in 2012. While we are pleased with the early returns on political advertising, historically the overwhelming majority of the political dollars are placed in the second half of the year, and it is too early to estimate the political revenue for the balance of the year.

Subscriber and retransmission fees represented approximately 51% of our revenue in the quarter, consistent with the same period in 2015, and represented approximately 54% of our revenue in the first 6 months of 2016 compared to approximately 53% in the prior year period.

Operating expenses were $24.4 million for the quarter, an increase of 2% as compared to operating expenses of $23.8 million for the year ago period. Operating expenses were $48.2 million for the first 6 months of 2016, an increase of 4% as compared to operating expenses of $46.3 million in the prior year period.

These increases for both the 3 and 6 month period were driven by increased investment in programming and higher sales and marketing costs, consistent with our efforts to upgrade our content and to drive viewership and advertising sales across the networks.

Adjusted EBITDA was $15.5 million in the current quarter, an increase of 5% as compared to adjusted EBITDA of $14.7 million for the same period in 2015. Adjusted EBITDA was $28.8 million for the 6 month period of 2016, an increase of 5% as compared to adjusted EBITDA of $27.5 million in the prior year period. While the vast majority of our revenue is sourced from the US, we do have some distribution deals priced in foreign currency, which were affected by the appreciation of the US dollar. Excluding foreign currency effects, our adjusted EBITDA growth was 6% in each of the 3 and 6 month period.

Turning to the balance sheet, we had $211.8 million in debt and $147.2 million of cash on hand. Our leverage ratio was approximately 3.6 times and net leverage ratio was approximately 1.1 times. As was previously announced during the quarter, we repurchased 2.8 million shares of our common stock for $29.4 million dollars. Our capital allocation priorities remain investing in organic growth and the growth through acquisitions for US and Latin America. This was a solid quarter and as Alan noted, we are on track to achieve our annual guidance.

With that, let’s open the call for your questions.

Question-and-Answer Session

Operator

[Operator instruction] For our first question comes from the line of Ben Mogil with Stifel. Please proceed.

Ben Mogil

Good morning and thanks for taking my question. I’ve got a couple of questions. So on the sub situation in the States, maybe you can talk a little bit about, you’re obviously thinking everyone else is sagging which is a great place to be. Maybe you can talk a little bit about not specifically the construction driving the MVPDs and what’s given to add more channel in a tough environment. And maybe talk about any conversations you have with any of the virtual or over the top MVPDs as well.

Alan Sokol

Hi Ben. Good morning. As you’ve seen consistently quarter over quarter, we continue to benefit from organic growth in the market. As I’ve mentioned throughout our conversation, we benefit from the fact that the Hispanic program packages are so under penetrated relative to the size of the pay TV audience in the overall population. And as that population continues to grow and penetration continues to increase, we have events that compound that effect and we will continue to experience organic growth. In terms of adding channels, I think what we’ve gone for is the fact that the MVPDs recognize there’s not many places for them to grow in the current environment. Hispanic is the low hanging fruit. So they are refocused on Hispanic as an opportunity to grow.

A number of them have initiated low cost packages to incentivize take up of the Hispanic package and those we’ve seen significant growth, particularly in those distributors that have done that and we think that’s a smart strategy for them. And as they need to focus on Hispanic, they obviously are also focused on improving these packages to making them more relevant and more attractive to their customers and prospective customers. I think also the context of consolidation. What we’re seeing is that the new owners of these systems are being more strategic about Hispanic and are more focused on the Hispanic opportunity in front of them, particularly where they benefit from being located in large and underpenetrated static markets.

Ben Mogil

And I gather that’s specifically in the Time Warner footprint?

Alan Sokol

That’s a valid assumption, yes. Considering that Time Warner has the two biggest Hispanic markets in the US, Charter -- the Charter pre-Time Warner does not overlap with many significant Hispanic markets, but now as owners of Time Warner with markets such as New York, LA and Dallas, we believe that they’re going to be very focused on Hispanic as a growth opportunity and we’re very optimistic about getting our channels carried on the systems where they’re not carried today.

Ben Mogil

Okay, that’s great. And then maybe two on the advertising front. When you were looking and making comments around WAPA around the Puerto Rico, I’m sorry, around the better ad sales, because this is somewhat new, historically was that a big category for you to drop off when the economy kind of went into a big slowdown? Has auto come back?

Craig Fischer

You’re talking specifically about auto?

Ben Mogil

Yes, I am. Yeah, thanks Craig.

Craig Fischer

The part about industry categories, none of the categories are greater than 10% of our revenue. I’m not speaking specifically to anyone, but it’s been, we haven’t seen massive fluctuations year to year.

Alan Sokol

And that’s just more sort of an indicator of the fact that the economy is showing some green shoots and the possibility of starting to -- if not coming out of it, at least not getting worse.

Craig Fischer

That is specific with our trend of our ad revenue from auto.

Ben Mogil

Has Zika -- I know it’s somewhat early, but have you seen any impact on Zika on some of the advertisers that rely on auto home experiences pull back? Have you seen ratings increase because people are spending more time at home? I’m kind of curious of that.

Alan Sokol

We haven’t really seen it yet. Clearly it’s not a positive fact and we know that Puerto Rico is really struggling with trying to contain the situation. And it will have an impact on tourism, but we don’t think the impact on tourism should have a significant impact on us.

Ben Mogil

That’s great. Thank you very much guys.

Operator

Our next question comes from the line of Steven Cahall with Royal Bank of Canada. Please proceed.

Steven Cahall

Thank you. A few questions. Maybe first Craig, I think you said it’s too early to estimate what the balance of political was going to be. So I was just wondering how we think about the way political comps out vis-à-vis your guidance. Is it all upside or is there sort of a middle of a fairway assumption that’s in there and so we’ll just have to wait and see whether or not it comes out to the upside or the downside or what’s baked in?

Craig Fischer

Yes. I think in 2012 we mentioned that we did about $5 million of political and you should assume something similar to that figure is baked into our guidance.

Steven Cahall

Got it.

Alan Sokol

As I noted, more majority of it comes in the back half of the year, obviously around October, November timeframe when the election kicks in. but we’ve been optimistic given the early showings here in the quarter relative to 2012.

Steven Cahall

And then for the Puerto Rico ad market ex-political, based on what you’ve seen in Q2, at least from a market growth perspective looks like a positive acceleration, a pretty notable positive acceleration from Q1. Is your expectation from what you’re seeing from advertisers that we’ll continue to see the market accelerate as we move through the back half of the year?

Alan Sokol

We certainly hope that’s the case, but we’re far from certain that that would be the case. Last year if you recall fourth quarter of 2015 finished actually p versus the prior year and then first quarter was down high single digits. So quarter to quarter, month to month there’s very little visibility in the market. And so it’s really hard to judge based on one quarter how we’re going to progress to the next quarter, but it has not been real trends that we can hang on to, to predict how things are going to go going forward.

Steven Cahall

Great. And then on the content acquisition side, Netflix on its call highlighted a number of areas where it was expanding its content library in the Latin American market. Are you seeing any inflationary impact on the price of content or is what you’re buying and they’re buying different enough that it’s not directly impacted?

Alan Sokol

We’ve run into Netflix a couple of times, but beyond that it has not, we have not crossed paths with them and we’re really buying independently of them. In the US, their offering in Hispanic has been very shallow. They buy a few titles, but they don’t have a very deep offering, and frankly the kinds of titles they’re going for are titles that really are different than the titles we go for in terms of the target audience. In Latin America, their efforts have been mostly on bringing Hollywood content down there as opposed to native Spanish language content and with us we’re all about native Spanish language content.

Steven Cahall

Great. And just a final housekeeping one. Craig, you’ve called out the FX impact for the first half of the year. Is guidance on a reported basis or of a basis including currency?

Craig Fischer

Guidance is on a reported basis.

Steven Cahall

Okay, thank you very much.

Operator

Our next question comes from the line of Michael Morris with Guggenheim Securities. Please proceed.

Michael Morris

Thank you. Good morning guys. Alan, you referenced the number of positive unit trends, fundamental trends. Talked about Hispanic tier penetration new launches with the distributors, international penetration, digital products. All of them you have very positive the direction. If you look at each of those, can you maybe help us a little bit with how much of that, like which of those and to what extent do they directly and immediately impact your revenue growth? And how much of it is ground work or laying a foundation for future growth? I’m trying to separate the difference between what we’re seeing right now but also the kind of equity that you’re building in your customer base going forward.

Alan Sokol

Sure. So I think probably the biggest factor is our organic subscriber growth in the US and our growth through new launches in the US. That has a direct and positive correlation with our revenue, our direct revenue on subscribers and indirectly through increased advertising opportunity as we grow our subscriber and viewing base. On the digital side, that’s laying groundwork. As I’ve said in the past, we own digital and over the top rights to virtually all of our content. And I think again what sets us apart from the general market peers is that whereas they’re dealing in a universe that’s basically fully saturated and mature on the pay TV side, on Hispanic only about a third of Hispanic households subscribe to the Hispanic program package. So we have a significant and huge number percentage of cord-nevers, not cord-cutters but cord-nevers that have not subscribed and don’t subscribe to the Hispanic program package, but that’s a really ripe and exciting target to go after for potential SVOD and over the top package opportunities.

Michael Morris

And outside the US, the Latin American penetration?

Alan Sokol

Latin America has been great growth for us and there’s tremendous organic pay TV growth in Lat Am and we are augmenting that by new launches. The dollar amounts in Latin -- the subscriber numbers are effective. The per subscriber fees are significantly lower, or a small percentage of what they are in the US and part of that is because of the pricing of Latin American packages being much lower than, the ARPUs being much lower than those in the US. And second, we are distributed on basic packages in Latin America whereas in the US we’re distributed on the tiers. So that price -- the per-sub fee we receive in Latin America is much lower than it is in the US. So the impact of getting those additional subscribers is not as nearly as significant as it is in the US, but it is obviously very helpful and important for us.

Michael Morris

And when you look at the potential for growth in the pricing, those Latin American subs, how do you think about it? Do you feel like you’re at equilibrium and it’s a matter of the growth of consumer power in those local economies? Or is it the kind of thing where a lot of times if you want to get early carriage, you maybe take -- you don’t take as aggressive a stance on fees as you otherwise could with the initial objective to build the following and then from there you feel like you can take more share of the spend.

Alan Sokol

It’s a really good question and a question we debate all the time. But I think the our viewers we get, we are as aggressive as we can be on pricing early on, because once you set a price precedent in Latin America, even if you don’t have MFNs, it’s very hard to get significant increases beyond that, even if you’re delivering really the product. So we try to be very aggressive on pricing, as aggressive as we can be. But frankly the growth that we’re looking to is more on growth in number of subs and growth in launches on new systems and rather than getting aggressive price increases. Latin America is not that different than the US from a price philosophy perspective. The distributors are very tough on price increases and the days of getting double digit annual price increases are over, but we are getting significant revenue increases by virtue of our annual escalators, coupled with the significant organic growth we’re seeing.

Michael Morris

Great. Thanks for the help, Alan.

Operator

Thank you. There are no further questions so I’d now like to hand the call back over to Alan Sokol, Chief Executive Officer for closing comments.

A - Alan Sokol

I have no further comments. Thank you to everybody for joining and have a nice weekend.

Operator

Ladies and gentlemen, this does conclude today’s program and you may all disconnect. Everybody have a wonderful day.

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