Hemisphere Media Group Q2 2021 Earnings Call Transcript

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August 9, 2021

There are 6 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Hemisphere Media Group Inc. 2nd Quarter 2021 Financial Results Conference Call. My name is Brandy, and I will be your conference operator today. Please be advised that today's conference is being recorded. I would now turn the call over to Danielle O'Brien.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. I'd like to welcome everyone to today's conference call. I'm Danielle O'Brien and I'm with Edelman Financial Communications, Hemisphere's outside Investor Relations firm. Today's announcements and our comments may contain certain statements about Hemisphere that are forward looking statements within the meaning of the U. S.

Speaker 1

Private Securities Litigation Reform Act of 1995. These statements are based on the current expectation 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 ks and other During today's call, in addition to discussing results that are included 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 this morning.

Speaker 1

Management believes that this non GAAP information is important to investors' understanding of our business. I will now turn the call over to Alan.

Speaker 2

Thank you, Danielle and good morning everyone. We continued our strong momentum into the 2nd quarter Following our industry leading results over the 3 previous quarters, our growth was driven by exceptional advertising revenue results and our acquisition of Pantaya. We're very excited by our early results at Pantaya. As we announced in March, we acquired Lionsgate stake at Pantaya, the first and leading Spanish language Subscription streaming platform featuring the best in premium movies and series. As of June 30, following just our Q1 after the We reached nearly 1,000,000 subscribers, a terrific beginning for us.

Speaker 2

With a large and untapped addressable US Hispanic market, which is expected to grow to 75,000,000 by 2,030, we have just begun to scratch the surface. Our previously stated goal is to obtain 2,500,000 to 3,000,000 subscribers by 2025 and we are very confident that we can achieve that objective. Pantaya offers subscribers an unparalleled deep library of premium original content and has significant first mover advantage Our 2nd quarter programming of Antaya was highlighted by the 2nd season of our hit reality series, Dervez Family Vacation, which during its 1st 30 days was the 2nd most watched series in Pantaya's history and helped drive a 90% increase in total hours viewed over the previous 30 day period. And as we have previously stated, we are meaningfully increasing investment in content. We've entered into a number of key talent deals and co production arrangements with some of the leading producers in Latin America.

Speaker 2

We are very excited about our as our production schedule is ramping up through the balance of the year. In September, we will be releasing season 2 of El Juego de las Alles, Pantaya's Since the close of our acquisition, we're confident that this thriller with an all star cast will be a big hit for Pantaya. We're also making great progress in growing Pantaya's distribution. Pantaya has entered into an important distribution agreement with YouTube TV and is in advanced We have begun to leverage the Hemisphere portfolio of assets With the support of a major promotional campaign on WAPA, since July 31, Pantaya has been the number one entertainment app in Puerto Rico on Android Ahead of Netflix, Disney Plus, Amazon and HBO Max. Now we are strategically leveraging Hematria's other assets to drive further growth.

Speaker 2

Now turning to our TV networks, we delivered an outstanding quarter of revenue growth, including an advertising revenue increase of 40% over the Q2 of 2020, as well as a 10% increase over 2019. In Puerto Rico, economic indicators for both business trends and consumer activity remain very encouraging. In fact, the economy is stronger than it has been in many years. In addition to the significant level of federal stimulus related COVID, Puerto Rico still has billions in hurricane recovery funds that have yet to be dispersed and which we expect will now start flowing at a faster pace. The combined impact of these factors and improved consumer confidence should drive renewed strength in many sectors for the coming years And we are well positioned to benefit from such growth.

Speaker 2

Key economic metrics reinforce Puerto Rico's improving economic picture. New order sales through June have more than doubled compared to the first half of twenty twenty and are up 31% from 2019. Cement sales through May were higher than the same periods in both 2018 2019 when the island was rebuilding following Hurricane Maria And the tourism ministry has seen a remarkable turnaround. Airport passenger traffic during June was the highest since privatization of the effort in 2013. We saw another outstanding quarter of revenue growth for WAPA As the network maintained its longstanding dominant position, as has been the case for every quarter since Nielsen began measuring the market, WAPA remains the number one station with at least 20 out of the top 30 shows in every key demographic category.

Speaker 2

WAPA experienced strong growth in both advertising and retransmission fee revenues. While the U. S. Continues to see organic subscriber declines, Puerto Rico has been very stable and once again had a quarter with no subscriber losses. Our audience ratings and advertising share were both outstanding in Q2.

Speaker 2

Our airing of the Miss Universe pageant on May 16 was the highest rated program in Puerto Rico in the past 6 years and delivered an outstanding 75% of audiences in the key demographics. These results are a testament to the single empower of WAPA as well as the continued overall strength of broadcast television in Puerto Rico. We are thrilled to announce that we have signed Jay Fonseca as a host and news commentator. Jay is a massively popular journalist, radio host and political analyst with a track record of very successful shows on WAPA's top competitor on the island And as over a 1000000 Facebook fans and 600,000 Instagram followers. We're confident that as a member of the WAPA family, Jay will Turning to our US cable channels, our performance was strong and our channels continue to be leaders in their respective categories as we delivered solid advertising revenue growth.

Speaker 2

All 4 of our measured channels are among the top 15 rated Spanish cable channels in coverage ratings With 3 of the 4 in the top 10 Monday to Friday, including Pasiones, the number 2 rated channel Monday to Friday. Regarding distribution, we're excited to announce that we have reached an agreement with YouTube TV to carry 3 of our channels, Selo Latino, Guap America, With launches expected before year end, we're encouraged that this new launch together with our other recent launches will mitigate organic subscriber declines. We're also optimistic that YouTube launch will help accelerate the timeline for launches on other major virtual MVPDs. Turning to Colombia and our investment in Canals Uno. The market remains challenged by heightened COVID cases, though at a lower rate than seen in the past several quarters.

Speaker 2

Vaccines are becoming more widely distributed and we are beginning to see a more normalized advertising activity return. Despite these challenges, In closing, we're thrilled to have continued our strong momentum in the second quarter and we're off to a great start to the back half of the year. Pantaya is off to an exciting beginning and is very well positioned for continued robust growth as a market leader in the Spanish language streaming space. We look forward to continuing to transform the growth profile of our business and are committed to meaningful value creation for all of our stakeholders. Thank you, everyone.

Speaker 2

I'll now turn the call over to Craig.

Speaker 3

Thank you, Alan, and good morning, everyone. We are excited to have continued our strong performance into the Q2. Net revenues for the 2nd quarter were The increases in both periods were due to higher advertising revenue as well as growth in subscriber revenue due in large parts of the inclusion of Pantaya, which that the company acquired on March 31. Subscriber revenue for the 3 6 month periods increased $12,900,000 or 67 percent and $13,100,000 or 33 percent respectively as compared to the prior year periods. The increases were primarily due to the inclusion of Pantaya as well as contractual rate increases and new launches of our networks, offset in part by decline in U.

Speaker 3

S. Cable subscribers. Advertising revenue for the 3 6 month periods increased $4,900,000 or 40% and $9,000,000 or 37%, respectively, as compared to prior year periods. The increases were primarily due to growth in the Puerto Rico television advertising market, coupled with an increase in WAPA's share in the market. Additionally, we saw an increase in advertising revenue at our cable networks.

Speaker 3

As compared to the Q2 of 2019, advertising revenue increased 10%. Other revenue for the 3 6 month periods decreased $2,100,000 $1,100,000 respectively, as compared to the prior year periods. The decreases were driven primarily by the timing of the licensing of content. Operating expenses in the 2nd quarter were $43,300,000 an increase of 68% as compared to $25,800,000 for the comparable period. Operating expenses for the 6 month period were $75,800,000 an increase of 40% as compared to $54,100,000 for the comparable period.

Speaker 3

The increases were expected and were largely due to the inclusion of Pantaya. Operating expenses in the current periods were also impacted by higher sales commissions due to higher advertising revenue, Increased amortization of acquisition related intangible assets and costs incurred in connection with the Pantaya acquisition. The prior year period reflected cost reductions as a result of the pandemic, including the postponement or cancellation of certain programming and sporting events, as well as temporary salary reductions and employee retention credits. Adjusted EBITDA was $12,300,000 for the 2nd quarter, a decrease of 8% as compared to $13,300,000 in the prior year period. The decrease was expected as a result of the inclusion of Pantaya.

Speaker 3

Adjusted EBITDA was $28,000,000 for the 6 month period, an increase of 13% as compared to $24,800,000 for the same period in 2020. Turning to the balance sheet. As of June 30, we had approximately $254,000,000 in debt and $72,000,000 of cash. Our revolver is currently undrawn. Our gross leverage ratio was approximately 3.8 turns and net leverage ratio was approximately 2.7 turns, which reflects Fontaya's operating results since the acquisition.

Speaker 3

Capital expenditures were approximately $3,000,000 in the first half of the year, and we funded $1,600,000 to Canal Uno year to date as the channel prudently manages its cash flow. We are pleased with our performance and execution for the first half of the year and are off to a strong start in the Q3. With the growth of

Operator

We will pause for just a moment to compile the Q and A roster. Your first question comes from the line of Steven Cahall with Wells Fargo.

Speaker 4

Thanks. Maybe Alan first, it took a while to get the YouTube deal done. So congratulations on that. I was just wondering if you could So, why the digital distributors have taken a little longer to come on board with the networks? Is this just Them being a little slower to aggregate content, particularly Spanish language content, but were there some key sticking points like Advertising loads or affiliate rates versus your other networks.

Speaker 4

And you mentioned how this might accelerate some of the conversations with other digital distributors.

Speaker 2

So I

Speaker 4

was wondering if you could

Speaker 2

I think it has nothing to do really with us or with The market, I think it was just their own, you know, the virtual, it's just their own priorities. And obviously, we tried to push Hispanic and trying to push our channel as a higher priority for them. And we're finally able to break through, it took a while to Got through to YouTube TV and we think this should hopefully open the floodgates with all the other virtual MVPDs so that they all similarly Focus and realized opportunity with Hispanic market.

Speaker 4

Yes. And then it seems like the ad market in Puerto Rico Is this strong as it's been since I followed the company? Do you feel like we're entering a period where this is more structural and there's some legs to it? Or Should we think about this as a little more cyclical like maybe has a couple of quarters left before it goes back More of a steady state, which was unfortunately historically sort of a state of volatility.

Speaker 2

I think we feel as good about the Puerto Rico economy as we have felt since we acquired WAPA in 2,007. And I think to a large extent, this is structural and sustainable, given the impending major infrastructure projects That will start occurring in Puerto Rico over the next 12 months. We think that will have a long term positive Tax for the island, the economy is healthy, unemployment is down, all the metrics are very positive. So we feel very good about it. In the long run though, The health of Puerto Rico will depend on an efficient government And an efficient way of operating the island in a way that has not been done before.

Speaker 2

But we feel good about where things are right now and we feel good for the foreseeable future.

Speaker 4

And then could you talk about the content pipeline that's upcoming at Pentaya a little bit? There is a lot of content, it seems like coming in the back half of the year from Sports to movies to lots of streaming services, sort of making up for stuff that was deferred during the pandemic. So how do you feel about kind of gross adds and churn and what that pipeline looks like for the back half of the year?

Speaker 2

Well, we're really optimistic, Steve. I mean, we We're starting to ramp up production on Pantai and acquisitions. We have a unique Set of relationships with the top producers and distributors in Latin America, which will be impossible to replicate. We have unique knowledge and experience of the Hispanic And a depth of content as well as our strategic advantages we use in the hemisphere assets to Promote and otherwise drive our highest growth. So that we feel great about the confluence of those different Facts that will help drive accelerated growth at Pantaya and we also just swim in a different lane.

Speaker 2

Nobody has the singular focus On Spanish language premium content that we do and nobody has the depth of content that we do in the market.

Speaker 4

And then lastly, I got to throw this one out. A couple of weeks ago, press reported that you might be exploring a sale of the company. I was wondering if you could make any commentary around that or talk about your view on what the backdrop is for industry consolidation at the moment.

Speaker 2

Well, on the first question, Steve, we don't comment on market rumors or speculation. And in terms of consolidation, I think Obviously, we've seen consolidation. We feel very good about where we are as an independent company. Although we're A large company within our space, we are a major company and we feel very good about our leverage and our ability to continue to grow

Operator

Question comes from the line of Curry Baker with Guggenheim Securities.

Speaker 5

Hey, good morning guys. I I was wondering if you could maybe to start out with, could you provide a little more color just how the advertising market for your U. S. Cable networks It's pacing and then maybe some color as well just on audience performance and metrics there?

Speaker 2

Sure. We had a good quarter in the U. S. We feel very good about our U. S.

Speaker 2

Business. Our numbers were up significantly over 2020, over 2019 as well. And I think for both Puerto Rico and the U. S. Being up over 2019 puts us in a somewhat unique position vis a vis our peer group of media companies, all of which were, to my knowledge, below the 2019 levels.

Speaker 2

And I'm sorry, second question, Curry?

Speaker 5

Just the ratings and audience metrics, any additional color you could share there?

Speaker 2

No, we're not our net loss is not illustrated. We have comScore ratings and they provide limited amounts of insight to Intuit ratings. But as I noted, all 4 of our net all 4 of our rated networks are top 15, Pantai is the number 2 network. So we feel great about our leadership position in the spaces that we occupy.

Speaker 5

Okay. And then on the subscriber front at the U. S. Cable networks, Can you give us any indication of what you're seeing kind of trends sequentially getting better? Just any incremental color there?

Speaker 2

Yes, I think our 2nd quarter results this year were better than they were a year ago in terms of subscriber losses, so That's a positive. I think second quarter tends to be a difficult quarter for the industry and we're also feeling great that our recent launches, Expansions of coverage and continued conversations about future launches will go a long way towards mitigating any future organic

Speaker 5

And then is there any way you guys can help us Think about kind of the path or metrics to profitability at Pentaya, kind of what that roadmap looks like at a high level?

Speaker 2

Yes, I think what I can say is that at our stated goal of 2,500,000 to 3,000,000 subscribers by 2025, we will be very profitable. Our model is different than that of the big channel market guys. We're not spending $1,000,000 an hour on programming. As I said before, our entire programming and production budget is a couple of episodes of The Mandalorian. So we produce at a much lower price point, at a much And our audience doesn't come to us to watch massive special effects.

Speaker 2

They come to us to watch content that is culturally relevant, They can't find anywhere else that speaks to them and it's of a premium nature that you can't find on broadcast television.

Speaker 3

Okay. Thanks. That's all I've got guys. Thank you.

Operator

Thank you. I will now turn the call back over to Mr. Alan Sokol for closing remarks.

Speaker 2

Nothing further. I appreciate everybody's attendance and have a good day.

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Earnings Conference Call
Hemisphere Media Group Q2 2021
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