Hemisphere Media Group Inc (HMTV) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Hemisphere Media Group Q4 and FY 2014 earnings conference call. My name is Allison, and I will be your operator for today. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. I would like to now turn the call over to Mr. Craig Fischer, CFO. Please proceed, sir.

Thank you, Allison, and good morning to everyone. I would like to welcome everybody to today's conference call. Joining me is Alan Sokol, Chief Executive Officer. A replay of the call will be available beginning at approximately 2 p.m. today by dialing 888-286-8010 or from outside the United States by dialing 617-801-6888. The conference ID for the replay is 70522278. A recording of this call may also be accessed through our website.

Today's announcement and our comments may contain certain statements about Hemisphere that are forward-looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995. These statements are based on the current expectations of management 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, the 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 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 a discussion of the 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.

Thank you, Craig. Good morning and thank you all for joining us today.

We had a very strong finish to 2014 and are very excited about our prospects for 2015. Through a combination of organic growth and solid execution of our acquisition strategy, we successfully grew net revenues by 28% and adjusted EBITDA by 56% compared to fourth quarter of 2013. As a result, we ended 2014 with full-year adjusted EBITDA of $50 million.

Our fourth-quarter results were a function of strong execution by our team across the board. WAPA TV completed its sixth consecutive year as the ratings leader in Puerto Rico and further cemented its dominant position in the market. This ratings leadership helped drive recent renewals and retransmission agreements on very favorable terms, which will result in significant retransmission fee growth. These renewals validate the strength of WAPA and its ascendancy in the Puerto Rico market under our watch.

Puerto Rico's economy continues to struggle, and the TV advertising market remained very soft in Q4. Nonetheless, as a result of our dominant audience share, WAPA was able to dramatically outperform the market and deliver meaningful ad revenue growth in fourth quarter. In fact, WAPA delivered its highest TV advertising market share in its history in fourth quarter. This performance gives us terrific momentum as we head into 2015, even in the face of a continued challenged economic environment.

The Puerto Rico economy, unfortunately, has not recovered, and we are not forecasting any improvement in 2015. Uncertainty regarding Puerto Rico's status under bankruptcy laws as well as the size and scope of the prospective value-added tax have adversely affected confidence and spending. As a result, we are projecting low to mid-single-digit declines in the Puerto Rico TV ad market this year.

A number of advertisers appear to be forgoing an upfront commitment in favor of scatter buying throughout the year. While the impact of these changes is unclear, we believe that with our dominant ratings and Univision's exit from local news production, WAPA will secure a higher share of both upfront buys and the overall TV ad market, mitigating the forecasted contraction in the market.

All of our cable networks continued to perform well in Q4. WAPA America became Nielson rated, and we are very encouraged by the early numbers. As an example, during fourth quarter, WAPA America was the number two rated Spanish-language cable network Monday to Friday from 5 to 7 p.m., behind only Galavision, which has 65 million subscribers versus WAPA America's 5 million subscribers. We expect to be able to start monetizing these ratings with upfront buys this year.

Cinelatino continues to perform well, and we are on track to launch advertising in second quarter of this year. This will allow us to capture upfront buying for the fourth quarter of 2015 and 2016. While we do not expect a significant advertising revenue contribution from Cinelatino this year, we are confident that advertising on Cinelatino will represent an important new revenue stream going forward.

Our newly acquired networks continue to grow and deliver on our expectations. All three networks were launched on Cablevision in November. In addition, this week we announced that Centroamerica TV has secured national distribution on Cox Cable, adding such key Hispanic markets as San Diego, Las Vegas, and Phoenix. Additional announcements regarding new distribution will be forthcoming very shortly.

In addition, as planned, we have begun to increase our investment in programming and marketing for these channels. For example, we have recently entered into a licensing agreement with Televisa for multiple novellas for Pasiones Latin America. And we will be rebranding Pasiones this year, providing it with a fresh and unique look and feel.

We have also invested in acquiring important stock rights for Centroamerica TV. We are confident that these investments will pay off with larger audiences, higher ad revenue, and improved distribution.

Although the overall US pay-TV subscriber universe experienced modest net losses in 2014, all of our pay-TV networks grew their subscriber bases. Our newly acquired networks all secured robust double-digit subscriber growth in 2014. WAPA America and Cinelatino both experienced low single-digit subscriber growth. In Latin America, both Cinelatino and Pasiones generated double-digit subscriber growth, reflecting the strength of these networks and the dynamic pay-TV growth environment in Latin America.

Over-the-top initiatives have received a significant amount of industry attention in the past few months. We control digital rights to the vast majority of our content and have the ability to make our unique content available wherever and however our audiences choose to view programming. We are in conversations with a number of the largest players in the SVOD space, but we value our content and our relationships with our traditional distribution partners very highly and will approach these decisions in a strategic and thoughtful way.

Also, it is important to recognize that we are not basing the same dynamics of subscriber attrition and audience erosion that are driving the general market cable networks to make their content available over the top. We continue to experience organic subscriber growth and significant viewership upside. That said, we are in the process of launching our first digital initiative, which we hope to announce shortly.

On the acquisition front, we continue to evaluate a number of really interesting opportunities in the channels and content areas. We are very pleased with our 2014 acquisition and look to enter into deals with similar characteristics. With that, I will turn the call back over to Craig. Thank you very much.

Thank you, Alan. The operating results reflect the inclusion of the acquired cable networks from April 1, 2014, and Cinelatino since April 4, 2013.

Net revenues for the three months ended December 31, 2014, were $33.2 million, an increase of 28%, compared to net revenues of $25.9 million for the comparable period. Net revenues for the full year ended December 31, 2014, were $112 million, an increase of 30% compared to net revenues of $86 million in the comparable period. The increases in both the quarter and full-year are primarily a result of the inclusion of the acquired cable networks and growth in subscriber and retransmission fees across all of our networks.

The fourth quarter also benefited from growth in advertising revenue, and the full year also reflect the inclusion of a complete year of Cinelatino. Consistent with our expectations, subscriber and retransmission fees represented approximately 50% of our net revenues in 2014, up from 39% in 2013.

Operating expenses were $23 million for the three months ended December 31, 2014, an increase of 10% from operating expenses of $20.9 million in the comparable period. Operating expenses were $86 million for the full year ended December 31, 2014, an increase of 10% from operating expenses of $78.3 million in the comparable period. These increases in operating expenses were due primarily to the inclusion of the operating results at the acquired cable networks.

The increase for the full-year period was also due to the inclusion of Cinelatino's operating expenses and corporate overhead for a complete year. These increases were offset in part by a reduction in production costs as a result of the decision not to produce Idol Puerto Rico in 2014, a decline in stock compensation expense, as well as one-time charges incurred in 2013 comprised primarily of fees and expenses related to the going public transaction and the cable networks acquisition.

Net income was $4.3 million for the three months ended December 31, 2014, an increase of $1.7 million over the comparable period. For the full year ended December 31, 2014, net income was $10.6 million, an increase of $14.9 million over the comparable period.

Adjusted EBITDA increased $5.7 million or 56% to $16 million for the three months ended December 31, 2014. For the full year ended December 31, 2014, adjusted EBITDA increased $16.2 million or 48% to $50 million, which is in line with our guidance. The increases in both the fourth quarter and full year were due to the inclusion of the operating results of the acquired cable networks and revenue growth at our combined networks.

The increase for the full year also benefited from the inclusion of a complete year of results of Cinelatino. These increases were offset in part by a full year of corporate overhead, which has increased as we expanded our infrastructure to support the growth in our business.

Turning to the balance sheet, as of December 31, 2014, the Company had $223.9 million in debt and $142 million of cash. Our gross leverage ratio was approximately 4.5 times and our leverage ratio, net of cash on hand, was approximately 1.6 times.

Looking to 2015, we are enthusiastic about our performance outlook. 2015 will be a growth and investment year. We are expecting solid growth in retransmission and subscriber fees as well as advertising revenue. We expect revenue growth to be driven by several factors, including new system launches announced late in 2014 and additional launches anticipated later this year, growth in retransmission fees, the conversion of Cinelatino to ad supported, and WAPA America benefiting from a full year of Nielsen ratings.

Consistent with the strategy we communicated when we announced the cable networks acquisition and as specifically discussed by Alan earlier on the call, we have and plan to continue to upgrade the content and increase marketing efforts at the acquired cable networks. We also plan to increase marketing and sales efforts for Cinelatino as we transition the channel to being ad supported. We believe this increased investment will build long-term shareholder value. As a result, we are forecasting EBITDA growth in 2015, assuming no acquisitions, in the low to mid-teens range.

That concludes our prepared remarks for this morning. Operator, will you please instruct our guests how to ask questions? Thank you.

(Operator Instructions) Mr. John Tinker, is your line on mute? You are now live on the call. Thank you.

Congratulations on hitting your guidance. And following up on that, the 2015 guidance, low to mid teens, if you excluded the -- you will still have an extra quarter of acquisition sort of kicking in next year. If you took that out, what is your actual -- how should we think about your organic rate?

And, secondly, if you do a quick back of the envelope on the margins, your margins -- the EBITDA margin this year was sort of mid-40s, up from about 40% last year. Can you discuss what is driving that increase and what is your sort of margin goal? Or do you actually think about a margin goal?

Thank you, John. First, to answer your first question, as we look into 2015, it is increasingly difficult to separate the organic from the acquisition growth. We manage the assets as a whole and will leverage the strength of one asset to the betterment of another channel, which should be value enhancing for the Company as a whole. This is part of the strategy of the acquisition of getting bigger and adding scale. So while I can't give specifics, I think you will see some announcements in the coming weeks that will show evidence of leveraging one channel relative to another.

Your second question, about the margin -- the margin expansion was driven a lot by the growth in subscriber and retransmission fees, which are 100% margin dollars for us. We don't have reversed comps. So we keep all of our fees. And I noted that the mix of advertising revenue to subscriber fees increased from 39% to 50%. Those dollars come with higher margin dollars, and that has helped expand the EBITDA margin.

If I could follow up on that, so what is -- what are the current retrans revenue deals that are up in this year and next year?

John, we don't specifically give that information, and we are bound by confidentiality under our retransmission and subscription agreements. But we did enter into some material renewals at the end of last year, the results of which were very positive for us. We had very, very significant growth in our retrans revenues; and we expect that, going forward, we will also be able to generate significant growth from upcoming renewals.

Okay. Is there any -- you obviously -- I don't think I can say packaging, but the channels are coming together. Is there any one channel that has been doing a little better than you expected relative to any others that has been (inaudible)?

I think they are all doing well. I think the response of the -- of our distributors has been very positive to our ownership, and to the changes that we have made, and that we have committed to make going forward. They recognize, I think, that we're -- that under our ownership, there is going to be investment in programming and marketing, and they welcome that. And they are starting to recognize that and reward us for that by filling in the holes where we are not currently distributed and in the negotiations we have with them on our renewals.

Okay. And can you talk -- it may not be possible, but M&A pipeline -- how active is that at the moment? More domestically or internationally?

We are very active. We obviously -- we haven't announced any deals since our deals last year, but we are looking at a number of different opportunities, some of which look very interesting and intriguing to us. And we think we are in a good space, and we are the natural aggregator in our space. So we feel good about our ability to execute and to get some additional really interesting and unique deals done and be able to execute on them.

Good luck. Thanks.

John Hickman, Ladenburg.

Could you -- Craig, could you comment on what you expect your operating expense growth to be in the coming year? Do you have -- are you -- is your infrastructure pretty set for the growth that you envision?

Well, I think we have noted that we are going to make increased investments in programming and marketing of our channels. So that is what will be reflected in 2015. So it is not built into our infrastructure at the moment. The guidance we have given on EBITDA is what I can provide for 2015's outlook.

Okay. And then, I would like to follow up on the M&A question. What's the -- has there been any change in the competition out there for -- I mean, the people that you would be competing against to buy attractive properties?

Not really, John. I think the good news for our side is the kind of assets that we are looking at -- I don't feel like we are going to be competing with the big boys in our space for those assets, because they tend to be smaller than the types of acquisitions that those guys tend to do. I think less familiar for them. But I think very familiar for us and assets that we are very comfortable with. And I really think that we are in a sort of ideal negotiating position to do those deals.

And we also kind of know where all the bodies are buried in our space. We know all the players. We know who is interested in potentially selling, who is interested in a potential strategic partnership, and we can take advantage of those relationships.

Okay. Thank you. That's it from me.

Ben Mogil, Stifel.

On the affiliate retrans number, which I think you said was kind of north of 50% of revenue, what do you think it grows at in fiscal 2015 to get to your guidance?

Well, just to be clear, it is the retransmission fees and subscriber fees that are approximately 50% of our revenue.

Sure.

So we expect the ratio revenue -- of subscriber fees to ad revenue to remain fairly consistent into 2015, given the expectations for growth in advertising revenue as a result of the launch of Cinelatino being ad supported as well as the full-year benefit of WAPA America being Nielsen rated.

We have noted that we have had obviously some new launches of the acquired channels and the renewals of our retransmission agreements, which the rates will be effective, in the case of renewals, on January 1, 2015. So we think we will have healthy growth rates of both subscriber and advertising revenue.

Okay, that's great; thank you very much.

Gary (sic - Barry) Kaplan, Maple Tree Capital.

I have two questions. One is just really a follow-up on John's question about organic growth. Are you able to give us any kind of organic numbers for the already-reported fourth quarter and full year of 2014?

And then, Alan, I wonder if you could just -- if there is any more detail you could give us on the agreements you signed with Cablevision and Cox in terms of what terr it is going to be on, how many subs it involves, and anything else that you think is salient?

I will take the first part on the organic growth. There is really nothing more than what we could say that we have already said. The businesses are more and more intertwined. We manage them as a whole. Our sales and marketing teams and finance teams are all integrated with the channels. And, as I noted, we are increasingly bundling those channels together, whether it be in advertising or distribution deals. So it is difficult at this point in time to provide a breakout of the comparison between organic and strategic.

Okay.

And on the Cablevision and Cox question, I think -- again, we don't -- and then because of confidentiality reasons with our distribution contracts, we cannot give out specific subscriber numbers, but I think Cablevision is in the low single digits -- I'm sorry, the low six figures in the -- in terms of subscribers. And as well as -- and Cox is in the same range.

Okay, great. Thank you.

(Operator Instructions) No further questions. I would now like to turn the call back over to Alan Sokol. Thank you.

Thank you, everybody, for joining us today, and we look forward to a positive and strong year and look forward to speaking to all of you soon. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Thank you for joining.