Start Time: 10:00 January 1, 0000 10:30 AM ET
Hemisphere Media Group, Inc. (NASDAQ:HMTV)
Q4 2021 Earnings Conference Call
March 08, 2022, 10:00 AM ET
Alan Sokol - President and CEO
Craig Fischer - CFO
Danielle O’Brien - Edelman Financial Communications, IR
Conference Call Participants
Steven Cahall - Wells Fargo
Curry Baker - Guggenheim Securities
Good day, ladies and gentlemen. And welcome to the Hemisphere Media Group, Inc.’s Fourth Quarter and Full Year 2021 Financial Results Conference Call. My name is Paul, and I'll be your operator today.
I will now turn the call over to Danielle O’Brien. You may begin.
Thank you, operator, and good morning, everyone. I'd like to welcome everyone to today’s conference call. I'm Danielle O’Brien. I am with Edelman Financial Communications, Hemisphere’s outside Investor Relations firm.
Today’s announcement and 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 circumstances, 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-K and 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 release, which was issued earlier this morning. Management believes that this non-GAAP information is important to investor’s understanding of our business.
I will now turn the call over to Alan.
Thank you, Danielle, and good morning, everyone. 2021 was another strong year for our business, and we finished with a solid performance in the fourth quarter. This year was highlighted by our acquisition of Pantaya, the record breaking results at WAPA, several important partnerships and launches with virtual MVPDs in the U.S. and the continued leadership positions of our U.S. cable networks.
For the year, we delivered a 29% increase in net revenues. And even without include of the impact at Pantaya, we achieved growth across all of our revenue streams. Before I dive into our performance, I want to briefly address the market value of our business, which has deteriorated in recent months. Very simply, our stock price does not in any way reflect the fundamental value and strength of our company.
We have consistently delivered strong results and growth and in particular, during 2020 and 2021, we delivered industry leading growth and despite the headwinds relating to the pandemic, we set all-time revenue records. Last year, we acquired the leading Spanish language streaming platform in the U.S., which will be a major growth engine for us over the coming years.
Our very talented and seasoned team has continued to prove its ability to perform with speed, creativity and agility despite difficult macroeconomic circumstances, including successfully navigating through hurricanes and earthquakes in Puerto Rico and a global pandemic. Our business model is proven and has tremendous runway for growth. We have never been more excited about the prospects for Hemisphere.
Turning to our performance. Pantaya continues to be the premiere destination for exclusive premium Spanish language original series and movies. As of year-end, we had close to 1 million subscribers, a modest quarter-over-quarter contraction, largely due to a reduction of fresh content as a result of production slowdowns during the pandemic.
We also pulled back on marketing spending during Q4 given the limited amount of new content and chose not to chase subscribers inefficiently. As we previously indicated, we ramped up production in second half of 2021 and our increasing investment in both programming and marketing in 2022 to drive subscriber growth and retention.
This year, we expect to release 16 original series and many premiere movies, representing an extraordinary and unprecedented lineup of world class content. Most recently, we premiered the highly acclaimed series Señorita 89 on February 27. And Among our many projects, we're commencing production on Radical, the latest film starring Eugenio Derbez [ph], the number one box office star of the U.S. Hispanic universe.
Over the past few months, we've also entered into development and co-production deals with some of the most popular talent and most prolific production studios. While we have significantly expanded our production, it's also important to emphasize that we are swimming in a completely different lane than English language streamers. We are presently the only premium subscription streamer super serving a 60-plus-million and fast growing U.S. Hispanic community.
And we have a very cost efficient production infrastructure, which enables us to produce at a small fraction of the cost of English language series. We have the further ability to significantly reduce our cost exposure by licensing Latin American rights to content to streamers, such as Amazon, Netflix and Disney Plus, which typically pay us well over 50% of our production budget in exchange for these rights.
Regarding Pantaya's distribution, we are in advanced negotiations with a major telco to be included in a bundled package, which we believe will deliver a meaningful number of new subscribers. At the same time, we are also in negotiations with several other major telco and connected TV distribution partners. For all of the above reasons, we are confident that we will drive significant subscriber growth over the course of the year and remain on track to achieve our long-term target of 2.5 million to 3 million subscribers by 2025.
Turning now to Puerto Rico. We are very proud to announce that WAPA had the highest revenue year in its history with all-time records in both advertising and retransmission revenues. This result is especially impressive given the challenges posed by COVID-related restrictions and lockdowns. The macroeconomic situation in Puerto Rico continues to strengthen throughout the year with key metrics across business, consumer and tourism activity trending very positively.
Puerto Rico is currently in the strongest economic position it has been in for many years with very positive indicators for future growth. The economy should be further bolstered by the issuance of an Executive Order this week eliminating most COVID-related travel and capacity restrictions.
In January, Puerto Rico finally received approval to exit bankruptcy with a restructuring plan that reduces the largest portion of the government debt by about 80%. The deal will also save the government more than $50 billion in total debt payments. Puerto Rico's commercial banks are anticipating that the Commonwealth's emergence from bankruptcy will spur an island economy that is in the early stages of a growth cycle. The exit from bankruptcy will also provide the government with the certainty to engage in long-term planning and infrastructure investments.
Virtually all key economic metrics in Puerto Rico continue to trend very positively through the end of 2021. Employment levels have now surpassed pre-pandemic levels. By inventory shortages, auto sales had their best year since 2005. Airport passenger volume doubled compared to 2020 and even increased by 3% versus 2019. Similarly, hotel occupancy rates actually exceeded 2019 by 4% as tourists were attracted by Puerto Rico's convenience and high vaccination rates.
Puerto Rico's economic recovery will be further bolstered by the tens of billions of federal funds that have yet to be dispersed. The expectation is that these funds will start flowing in the second half of 2022 and beyond. All of this will benefit WAPA, which has once again maintained its dominant ratings position and market share and has further solidified its growth profile.
The principal selling demographic of adults 25 to 54, WAPA had 24 of the 30 highest rated programs in the quarter. WAPA's quarter was highlighted by the Miss Universe contest, which delivered an astounding 69% viewing share among women 25 to 54. I am proud that WAPA has now been the number one station in the market for 12 consecutive years uninterrupted.
In Q4, we faced a difficult comparison to the fourth quarter of 2020, which was the highest advertising revenue quarter in the history of Puerto Rico television. Nonetheless, despite supply chain issues impacting retail and auto, this year's fourth quarter was very strong and in fact WAPA's second highest quarter in history with growth of 31% over the fourth quarter of 2019. We're confident that this strong performance will continue going to 2022.
Turning now to our U.S. cable channels, our networks continue to be leaders in their respective content categories. Based on coverage ratings, three of our networks were among the top 10 highest rated Spanish language cable networks and four were among the top 15. Notably, [indiscernible] was the number two rated Spanish language cable network in primetime Monday to Friday. And WAPA America's Early Fringe newscast was the highest rated newscast on Spanish language cable in any daypart.
We have been successful in expanding our distribution with launches on virtual MVPDs and expect this trend to continue. Last year, we entered into an agreement with YouTube. YouTube's launch of its Hispanic package has been delayed, but we now expect that launch to occur soon and believe it will result in meaningful subscriber growth.
Additionally, as of March 1, all five of our channels have launched on FUBO's Latino package. We are in discussions with other platforms that are optimistic on securing additional launches. While we continue to experience organic attrition with our cable subscribers, we have mitigated these losses with new launches and expanded carriage agreements.
Turning to Colombia and our investment in Canal Uno, the economy is improving despite the recent spike in COVID cases due to the Omicron variant. The TV advertising market increased in Q4 by 18% over Q4 of 2020, and there is strong momentum heading to 2022 which is a presidential election year and should see strong political advertising. Our ratings improved over the fourth quarter of 2020 and we are optimistic heading into 2022.
In closing, we are managing an extraordinary portfolio of assets and believe we have a tremendous value creation opportunity in front of us. Pantaya's upcoming slate of content is unprecedented. We are producing the kinds of premium series and movies that have never been available until now, and we have the ability to monetize and license that content outside of the U.S.
We are well positioned to dominate this unique and untapped market from multiple angles and are confident that our transformed business will prosper as a result, creating significant long-term shareholder value. Thank you, everyone.
I'll now turn the call over to Craig.
Thank you, Alan, and good morning, everyone. We're excited to have continued our strong performance for the end of the year. Net revenues for the fourth quarter were 56.8 million, an increase of 21% as compared to 46.9 million for the same period in 2020. Subscriber revenue increased 13.3 million or 70%, primarily due to the inclusion of Pantaya, which contributed 13.6 million.
Our cable networks benefited from contractual rate increases and new launches. However, these increases were offset by a decline in pay TV subscribers. Other revenue increased 1.6 million driven by licensing of our content to third parties.
Advertising revenue decreased 5 million or 18% compared to the prior year's record setting quarter, which benefited from political advertising, pent-up demand related to the pandemic and unprecedented healthcare advertising spending. Excluding political in the prior year period, advertising revenue decreased 2.3 million or 9%. Advertising revenue was up 25% as compared to the fourth quarter of 2019.
Net revenues for the year were 195.7 million, an increase of 29% as compared to 151.2 million for the full year 2020. Subscriber revenue increased 39.8 million or 51%, primarily due to the inclusion of Pantaya which contributed 39.1 million. Our cable networks benefitted from contractual rate increases and new launches, but these increases were offset in part by a decline in pay TV subscribers.
Advertising revenue increased 3.6 million or 5%, primarily due to growth in the Puerto Rico television advertising market. Excluding political, advertising revenue increased 12%. Advertising revenue for the full year 2021 was up 20% as compared to 2019. Other revenue increased 1.1 million or 22%, driven by licensing of our content to third parties.
Turning to expenses. Cost of revenues for the fourth quarter increased 3.2 million or 23% and for the year increased 11.2 million or 23%. SG&A expenses for the fourth quarter increased 14 million and for the year increased 49.2 million. These increases were primarily driven by the inclusion of Pantaya.
We also incurred higher non-cash charges, including amortization of intangible assets recognized as part of the Pantaya acquisition and higher stock-based compensation, which collectively increased 2.4 million in the quarter and 12.1 million for the full year.
Additionally, the prior year reflected cost reductions as a result of the pandemic, including the postponement or cancellation of certain programming and sporting events, as well as salary reductions and employee retention credits provided by the CARES Act, which the company could not have in the current year.
As we said last quarter, marketing spend will be tied to the launch of content on Pantaya so marketing costs may vary from quarter-to-quarter. In the fourth quarter, because of a lack of fresh product being released, we pulled back on marketing spend.
Adjusted EBITDA was 15.2 million for the fourth quarter as compared to 22 million in the prior year period. Adjusted EBITDA was 48.4 million for the year as compared to 63.6 million for the full year 2020. These decreases were due to the inclusion of Pantaya which is in growth and investment mode.
Excluding Pantaya and political advertising revenue, adjusted EBITDA was 17.4 million for the fourth quarter of 2021 as compared to 19.4 million in the prior year period, and was 63.8 million for the full year 2021, up as compared to 59.3 million in the prior year.
Turning to the balance sheet. As of December 31, we had approximately 252 million in debt and 50 million of cash. Our revolver is currently undrawn. At quarter end, our gross and net leverage ratios were approximately 5.2x and 4.2x, respectively, which includes Pantaya's operating results since the acquisition.
We expect leverage to pick up over the year as we continue to invest in programming and marketing and as we roll in a full trailing four quarters of Pantaya's operating results. Further, we expect leverage to trend lower as Pantaya matures.
Capital expenditures were approximately 1 million in the quarter, bringing CapEx to 4.2 million for the year. We funded 2.4 million into Canal Uno in the quarter, bringing our total year funding to 6.8 million.
For 2022, our capital allocation priority remains to invest in our business and fund Pantaya growth, particularly to investment in the production of original content and marketing to drive subscriber growth. Accordingly, we are expecting material increase in our cash content spend for the full year 2022, a portion of which will be for content that will premiere on the service in 2023.
It's important to note that we will have offsetting inflows as we license our content outside of the U.S. and Puerto Rico. In fact, we have already finalized terms on multiple licensing agreements in Latin America. We are pleased to continue our momentum and finish the year on a strong note.
We'll now open the call to your questions.
We will now begin the question-and-answer session. [Operator Instructions]. Your first question is from the line of Steve Cahall with Wells Fargo. Your line is open.
Thanks. A few for me this morning. So maybe first, I was wondering if you could give us any details on what type of subscriber acceleration you've seen on Pantaya since launching Señorita 89. And as we think about the seasonality of the business this year, are there quarters that will be particularly heavy with some of your content drops?
Hi, Steve. Good morning. We just launched Señorita 89 about a week and a half ago, so it's a little early to tell. But we're really encouraged by both the viewing numbers and the subscriber growth numbers as well as just the overall acclaim and attention the series has gotten. And in terms of the cadence of growth, because this year we have 16 new series and a plethora of new movies that are dropping, we expect to see growth over the course here. Obviously, not all series, not all movies are equal. So growth may vary somewhat depending on that. But I think you can expect to see growth occur over the course of the year.
Great. And then you talked a lot about content spend and marketing costs. Just wondering if you would be able to size any of those investments for us, particularly content, whether that's cash spend or amortization? Often we think about subscribers as kind of being correlated to the increase in content spend. So whether it's year-on-year growth or total dollar number, just wondering if there's any more color you can provide there?
Yes, we're not going to get into specific dollar amounts on the programming. Obviously, that will build throughout the year, as Alan noted. Our plan is to prudently increase investment in content to accelerate subscriber growth. It is right that you would expect the growth in subscribers to be tied to those content premieres. I think given the programming lineup we have this year, we're pretty optimistic about having a consistent cadence of new fresh content on a regular basis. So I think you would expect that trend to continue with the subscriber growth. Obviously, as you know, they’re tied to programming. To your point about timing, the cash programming spend is an upfront expenditure, right? So we're funding the production of the series and movies. So that outflow will happen upfront, and some of this expenditure in 2022 will actually be for content releases that won't happen until 2023. At the same time, we're also licensing out this content to third parties in Latin America where Pantaya is not available. And so we've seen and we've actually entered into a couple of deals currently in sort of this year that we're recouping a majority of our production costs. That licensing revenue also will come in starting from delivery of the product. So that will be delayed relative to the upfront expenditure, but over time we will recoup that cost and generate a positive ROI.
Great. And then, I was getting to ARPU in Q4 of maybe right around 4.50 a month, which is pretty strong. So maybe just first, is that a good number or in the ballpark? I was wondering if you could make any comment there. And then a lot of the media appears in streaming, especially early on are using distribution deals like bundles with telcos to help expand their distribution. I'm wondering how you think about direct distribution versus some sort of a bundling arrangement.
So, Steve, it's a good question. I think it's important to note that. We built our nearly 1 million subscribers one subscriber at a time. To date, we have not entered any bundle deals, which I think virtually all of the major English language streamers have and that's sort of given them chunks of subscribers at a time. That said, we think we're close to one deal and we hope to enter into other bundle deals. I think the telcos are very cognizant of the value that we've had, have seen our results, have seen our product, and think very highly of it. So I think that will help kind of create some step function growth for us on our subscribers. And clearly, when you're doing promotional subscribers, you're going to probably take a step back on ARPU in the short term, but in the long run it should all wash out. And although you're taking a step back in ARPU, you're not spending marketing dollars at least to the same extent against those subscribers. So those subscribers ultimately may be more profitable to you than the one at a time subscribers. I'll let Craig respond to the to the ARPU question.
Yes. Your estimate is in the zone, the mid $4 range. As you know, our retail monthly subscriber fee is $5.99. We do have promotional pricing plans, including what has proven to be rather successful for us, an annual plan at 49.99. But that obviously would carry a lower ARPU than the monthly. But we've seen strong renewal rates on those annual plans. And we would welcome those subscribers every day. And then obviously, you have the distribution, revenue share splits against that. And the wholesale distributors typically have higher revenue splits than do direct relationships. And we over index to direct relationships rather than to wholesale, so our revenue splits on a blended basis are lower. And I think we've said this in the past, we also have a sizable number of subscribers that come through the Pantaya.com web platform where we have no revenue splits at all on those. So that's why you're seeing the high flow through on the ARPU.
Great. And then maybe just switching over to the cable networks, are you able to size what the network growth will be from the FUBO and YouTube launches this year?
They are both easier [ph] because they're in existence. So it's going to be six figures subscribers for each of the networks from inception, and they've been growing at a very nice and impressive pace. So we're optimistic that will continue to grow. YouTube is starting from zero, but they have expressed to us their intent to invest significantly in Hispanic -- against Hispanic audience. And also, they have now indicated to us that they intend to launch a low priced Hispanic package which does not require an English language buy through. And that will be key to its success.
Interesting. Okay. And then maybe just lastly for me, so the stock is at a pretty interesting level here, probably one of the few media companies that we follow where you're not just below kind of pandemic levels, but you're below pre-pandemic levels. I think the market had some issues with the potential equity raise last year and that maybe spooked investors thinking about your willingness to participate in consolidation. So I'm just wondering how you think about the options to help unlock some of the value, how you think about strategic optionality for Hemisphere? And if you can make any other comments as to ways you might pursue that in the future?
Thanks, Steve. Well, look, as I mentioned, we are -- I think our stock price bears no relation to our real intrinsic value. The fundamental value of this company is at least equal to what it was before. We announced the equity offering, which was well over $10 a share. And we believe that even that was undervalued in terms of our true fundamental value. Our core business, the legacy business, remains strong. We have unique asset with WAPA and Puerto Rico that is differentiated from anything else out there, in the sense of our dominance in the market, the continued strength of Puerto Rico broadcast television, which is not subject to the attrition of viewership that you're seeing in the U.S. and other parts of the world. And the fact that we are -- that advertisers cannot buy around us in Puerto Rico. And we have other opportunities to drive new revenue streams to Puerto Rico, which we are working on and hopefully will develop and announce soon. In our U.S. cable network, so they've seen some subscriber attrition like everybody else. We've significantly offset that and mitigated that through new launches, expanded carriage and we expect that to continue over time because we do have a good value proposition and there are still a number of distributors, especially on the virtual side, that don't have Hispanic packages that we'll need to in order to compete with FUBO and YouTube, et cetera. So we feel this tremendous value that the market is not recognized, that is not reflected in our stock price. And then it seems to us that there's obviously some trepidation in the market around Pantaya, but we're super confident in Pantaya. We think it's a phenomenal opportunity. We think the U.S. Hispanic market of 60 million plus has tremendous -- gives us tremendous upside and tremendous addressable market that nobody else is currently serving. We also don't have the cost exposure, the cost risk that the English language stream is having that we produce at a small fraction of the cost that we further mitigate that by licensing rights to Latin American streamers, which is a pretty competitive space right now. We're getting tremendous value for our product among Latin American streamers. We effectively are both serving ourselves and building asset value at Pantaya, while remaining kind of an arms dealer to third parties in Latin America and mitigating the risk on our production costs. That said, we think the stock is incredibly attractively priced. We have no interest in a sales transaction at or anywhere near this price. In fact, we pulled our equity offering when our stock price went down to $8 or $9, we thought that we would rather be a buyer than a seller at that price. And clearly at this current price level, we absolutely are a buyer rather than a seller. But we continue to look for ways to strategically unlock value, and we will continue to do so. I'm very frustrated with the way the stock is valued right now and are looking at all options to increase value.
Great. Thank you.
Your next question is from Curry Baker with Guggenheim Securities. Your line is open.
Hi. Good morning, guys. Maybe starting with advertising, could you maybe give us a little bit more color on what you're seeing in Puerto Rico in the first quarter? And then maybe just your overall expectations for the year, any comps to flag at any point?
Hi, Curry. Good morning. We don't comment on the current quarter. But I will say as I said in my speech that I think that we're very optimistic about 2022. We feel this really strong commercial momentum going into 2022. The economy is, frankly, hitting on all cylinders in Puerto Rico in a way that it hasn't since we acquired this asset in 2007. And WAPA has maintained its dominant ratings position in the market. And as such, we think that that combination will continue to lead to a very strong advertising result for WAPA. And in the U.S., we continue to see sort of consistent results with where we saw 2021. And little early to tell where the market is going because we don't do upfront selling for our cable networks in the U.S. It's all scatter. So it's hard to really project out for the full year at this point.
Okay. Maybe sticking with Puerto Rico, can you give us a little bit more color? I think you alluded to sub trends there being stable. Can you just confirm that? And then do we know if any distribution agreements are up this year or early next year?
Yes, sub trends have remained stable. There's been very modest attrition in the fourth quarter, kind of low single digits. But we're seeing those very stable sub trends continue into 2022. And I'm sorry, the second part of your question?
Do we know if you guys have any distribution agreements --?
We have one small renewal coming up at the end of the year.
Okay. And then a quick one on Pantaya. Would you guys consider an advertising tier?
Yes, of course we consider it. We obviously are aware of what's going on in the market, the Disney announcement, et cetera. I think we're a little small now to do an advertising. I don't know that the revenue would -- the revenue realized will be significant enough to justify moving forward. That is something that we will continue to look at as time goes by and as we build our subscriber base.
Okay. Thanks for the questions, guys.
There are no further questions at this time. I will now turn the call back to Alan Sokol for closing remarks.
No further remarks, operator. Thank you everybody for joining us today.
Thank you, sir. Ladies and gentlemen, this concludes today's conference call. Thank you for joining. You may now disconnect.