Hemisphere Media Group Inc (HMTV) 2015 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome the Hemisphere Media Group's second-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host for today Mr. Craig Fischer, Chief Financial Officer. Sir, you may begin.

Thank you 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. Eastern time today by dialing 855-859-2056 or from outside the United States by dialing 404-537-3406. The conference ID for the replay is 97442451. 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 the management of Hemisphere and are subject to uncertainty and change 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-K and our other public filings including our 10-Q filed earlier this morning 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 call over to Alan.

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

We are very pleased with the results of second quarter, achieving double-digit revenue and EBITDA growth, an exceptional outcome. Our strong results were driven by double-digit growth in both of our revenue streams, advertising as well as retransmission and subscriber fees across all of our networks.

The result and commentary of the past week have cast a spotlight on the future of the pay-TV ecosystem. While the overall pay-TV universe in the US is undergoing modest but continuous contraction our paradigm is significantly different and better. In just the first six months of 2015 the aggregate number of subscribers to our US cable networks increased by 6%.

The Hispanic program packages on which our networks are carried reach only about a third of Hispanic TV households providing us with a long runway for continued growth. Additionally the US Hispanic population is growing at five times the rate of non-Hispanics which will continue to fuel growth in the Hispanic pay-TV universe.

In the current environment pay-TV distributors are cognizant that Hispanics represent one of the few real opportunities for growth and we believe they will devote more resources to growing their Hispanic subscriber base. In addition as we have previously noted we still have a number of major distribution holes to fill in our networks, particularly the three networks we acquired last year. We have successfully secured meaningful new distribution in the past few months and are confident that we will continue to drive new launches which will result in stepped-up growth in our subscribers.

At the same time we are very aware of the increased consumption of video content through platforms outside of the traditional pay-TV ecosystem. With our control of unique, compelling and popular content we are well-positioned to take advantage of all future industry scenarios.

Our content is currently available on the Dish Sling and DIRECTV over-the-top platforms. We view SVOD and other over-the-top platforms as providing us with a major opportunity to reach the approximately 10 million US Hispanic households that do not subscribe to the Hispanic pay-TV program package.

While the general market pay-TV networks are focused on capturing cord cutters and cord trimmers, through these new platforms we will now have the opportunity to directly reach Hispanics who do not subscribe to the Hispanic program package whether due to cost, unavailability or any other reason. Unlike the general market, the Hispanic non-subscribers are largely cord nevers who we now have a chance to reach for the first time. We are examining and considering a wide range of options to make our content available via SVOD and other over-the-top platforms. We have the opportunity and intend to make our content available wherever and whenever our audiences choose to watch.

Turning to our individual networks, WAPA once again delivered terrific double-digit growth in both ad revenue and retransmission fees. WAPA maintained its record-setting share of ad revenue in the second quarter driven by its continued ratings dominance in the market.

Our performance in Puerto Rico would be admirable under any scenario but is especially impressive given the harsh economic conditions we're facing. The economic situation in Puerto Rico is obviously very complicated and uncertain with many as yet unknown variables potentially having a major impact.

Issues such as the nature and timing of any future bond payment defaults, the availability of a Chapter 9 option and the scope and timing of additional taxes could all have major repercussions. With all of these challenges and uncertainties the ad market declined by mid- to high single digits in the second quarter. However, with its massive audience delivery WAPA is a must-buy for advertisers.

Even in situations where advertisers have reduced their overall ad spend we have secured higher budgets than in previous years as these advertisers consolidate their buys around WAPA. We have ramped up our online and mobile efforts both WAPA and WAPA America and have seen very strong growth. With our unique must-have content we believe that we have an excellent opportunity to drive content monetization through our online and mobile offerings. During the first half of 2015 WAPA's mobile sites averaged over 1.4 million monthly unique visitors, an 86% increase over the first half of 2014.

Our US cable networks also all experienced strong ad revenue and subscriber fee growth this quarter. We launched advertising in Cinelatino in early July. We are optimistic that we will be able to convert Cinelatino's ratings and advertising-friendly environment into a meaningful new revenue stream.

As an example of Cinelatino's reach and appeal the premiere of Mexican box office hit Nosotros los Nobles was the highest rated non-sports program in all Hispanic cable in the second quarter. And over the upcoming months we will have the strongest lineup of blockbuster premieres in the network's history.

Similarly WAPA America is delivering strong and salable Nielsen ratings. WAPA America's Nielsen ratings increased 25% from first quarter to second quarter and in the second quarter WAPA America was the number one rated Hispanic cable network from 5 to 7 p.m. Monday through Friday.

We are in the process of launching a new on-air and graphics package for Pasiones. And we continue to invest in improving the programming of all three networks acquired last year.

In Latin America we continue to experience terrific organic subscriber growth and pay-TV penetration continues to increase at an impressive rate. In just the first six months of 2015 we saw a 7% increase in our total Latin America subscribers. On the acquisition front we are exploring a number of options in the channels and content spaces and are optimistic that we will identify some unique and attractive opportunities.

In conclusion we continue to efficiently execute on our strategies as evidenced by our strong results this quarter, affirming the strength and growth opportunities in our business. With that I will turn the call back to Craig. Thank you.

Thank you, Alan. The operating results presented reflect the inclusion of the operating results of the acquired cable networks from April 1, 2014 which affects the comparability of the Company's results for the six months ended June 30, 2015. However, the three months ended June 30, 2015 is a clean comparable quarter over quarter.

Net revenues for the three months ended June 30, 2015 were $32.6 million, an increase of 12% compared to net revenues of $29.1 million for the comparable period. Net revenues for the six months ended June 30, 2015 were $62.1 million, an increase of 24% compared to net revenues of $50 million for the comparable period. These increases in both the three- and six-month periods were driven by growth in advertising revenue primarily resulting from an increase in WAPA's marketshare as well as growth in subscriber and retransmission fees across all the companies networks due to the combined effect of subscriber growth and rate increases.

The increase for the six months ended June 30, 2015 was also due to the inclusion of the acquired cable networks which were not included in the prior year's first quarter. Subscriber and retransmission fees represented approximately 53% of our net revenues in the six months ended June 30, 2015 and advertising revenues made up the balance.

Operating expenses were $23.8 million for the three months is ended June 30, 2015, an increase of 6% from operating expenses of $22.4 million for the comparable period. Operating expenses were $46.3 million for the six months ended June 30, 2015, an increase of 16% from operating expenses of $39.7 million in the comparable period. These increases in both the three- and six-month periods were due to the Company's investment in programming at the acquired cable networks consistent with our previously stated plans as well as higher sales and marketing costs leading up to the launch of advertising on Cinelatino and continued growth in infrastructure to support the Company's expansion. The increase for the six months ended June 30, 2015 was also due to the inclusion of the acquired cable networks which were not included in the prior year's first quarter.

Net income was $3.4 million for the three months ended June 30, 2015, a decrease of $1.9 million compared to net income of $5.3 million for the comparable period. Net income was $5.9 million for the six months ended June 30, 2015, an increase of $0.3 million compared to $5.6 million for the comparable period. The 2014 net income was higher as a result of a one-time reversal of a $2.5 million valuation allowance related to foreign tax credits which resulted in an income tax benefit in those periods.

Adjusted EBITDA was $14.7 million for the three months ended June 30, 2015, an increase of $1.5 million, or 12% compared to $13.2 million for the comparable period. Adjusted EBITDA was $27.5 million for the six months ended June 30, 2015, an increase of $6.3 million or 30% compared to $21.2 million for the comparable period.

These increases in both the three- and six-month periods were due to growth in advertising revenue and subscriber and retransmission fees. The increase for the six-month period was also due to the inclusion of the acquired cable networks which were not included in the prior year's first quarter.

Turning to the balance sheet, as of June 30, 2015 the Company had $222.8 million in debt and $159.7 million of cash. Our gross leverage ratio was approximately 4 times and our leverage ratio net of cash on hand was approximately 1.1 times. Consistent with our growth strategy we expect to use our cash to invest in our core business and to fund potential acquisitions.

In May the Company completed a secondary offering on behalf of certain selling shareholders of 3.2 million shares of Class A common stock at a price of $12 per share. In connection with the offering the underwriters exercised a greenshoe and an additional 479,000 shares were offered by the Company. Net of underwriting discounts the Company received net proceeds of $5.4 million.

We are affirming our previously announced full-year guidance. Are performance to date has been very strong. However, with the fourth quarter being our seasonally highest revenue quarter it is premature to reevaluate guidance for the year, particularly given the lack of visibility in Puerto Rico as well as the effect of the slightly delayed launch of advertising on Cinelatino.

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

(Operator Instructions) David Bank, RBC Capital Markets.

Okay, thanks. Well done for not participating in the media slaughter of last week. Nice work On that one.

So your share gains particularly on the news side have given you I think a great deal of cushion given the volatility of the local Puerto Rican economy around WAPA TV advertising, especially probably more recently with the default. So can you remind us when you start lapping the changes in the competitive landscape around news that partially facilitates those share gains right now?

And do you think when you lap it we're likely to feel more of the local headwinds or will political start to come and kick in and compensate? How do you think about how that could change?

And second question is net leverage at one time you talked about being a consolidator but what exactly are you looking for? It doesn't seem like there are a lot of logical domestic candidates. Are we wrong there?

What does the international list look like and how big a priority incident? You mentioned content. How big a priority is content?

Do you want to vertically integrate more deeply into content? Would you rather own distribution assets with more earnings visibility and less hit risk or would you rather own more content assets with better operating leverage and upside but more kind of hit risk?

How do you guys think about that? Thanks very much.

Hi, David, it's Alan. Those are a bunch of questions. If I missed any of them tell me and I will go through it.

First, starting on Puerto Rico and on the lapping, Univision suspended their news operation in the middle of fourth quarter last year. So we saw some benefit from that in fourth quarter of last year so you'll start seeing lapping of that in fourth quarter this year and first quarter of 2016 will be the first full quarter in which we lap it.

However, as you noted we should start realizing some political upside in first quarter of next year. So that will help mitigate any effect in terms of our increase in our advertising share year over year. In terms of what was your next question --

Just on the acquisition side what does the target list look like, what is your view of content versus distribution (multiple speakers)

So I think it hasn't changed at all. We still think there are a number of very interesting opportunities both in US and Latin America on the distribution side.

We have looked at it, continue to look at a number of channels, networks and network groups that we feel serve underserved, valuable growing audiences that we think we can take to the next level both through our know-how and through our distribution leverage and relationships. And we view owning that content and owning those audiences as being a very valuable asset.

We still find Latin America to be very interesting. We have not as you know done any acquisitions down there yet but we are continuing to look at opportunities down there both on the pay-TV network side as well as the broadcast side which we still find compelling in certain markets down there.

Just like Puerto Rico remains notwithstanding the economy is secularly a very strong broadcast market, a market that is far better than the US or certain other regions. Latin America is much like Puerto Rico in that regard in that most markets are very secularly strong from a broadcast standpoint.

We are also, though, really focused on content. We think that with our distribution assets, with our knowledge of the industry, with our relationships with distribution partners and distributors out there we think there is a tremendous unsatisfied demand for quality Spanish-language content.

The production of Spanish-language content has been and is concentrated in the hands of very few players. The usual suspects, the Televisas, Telemundos, a few others in Latin America who also tend to produce very traditional forms of Spanish-language content and we think there are huge opportunities given the need and the hunger of existing and new distribution platforms that we feel we're ideally positioned to be that provider as well as use that content to fuel our own network operations.

Okay, thank you very much.

(Operator Instructions) Ben Mogil, Stifel.

Hi, good morning and thank you for taking my question. So first question, when you look at the traditional SVOD services Amazon, Netflix, Hulu, etc., do you see an opportunity from a content perspective that you guys could possibly fill either into the services or on your own system? And do you have any sense of within your marketplace whether or not your consumer or whether or not your customer is overweight or underweight some of the traditional SVOD services in terms of penetration?

Hi, Ben, it's Alan. We don't have the metrics from any of the big SVOD guys to know what their numbers are in terms of subscribers. Our sense is that again you can't really look at Hispanics as a monolith.

Our sense is that especially as far as our audience is concerned which are the Spanish dominant and bilingual Hispanics that they underindex to those services because those services frankly do not have much in the way of Spanish-language product. Hulu has some Univision product but it's essentially the Univision library product, Netflix just made a Univision deal again for library product, Amazon has very little.

So as of today we don't feel -- we don't view them as being a big competitor in terms of taking a slice out of consumption of Hispanic video content. That's not to say that won't change going forward.

I think everybody is aware that Netflix announced its first Spanish-language original production which is going to be launching any day now. So they are seeing an obvious opportunity there and they probably will continue to invest in it.

Many of these platforms have approached us about licensing our product. We believe that in our spaces we are a gatekeeper and that if any of these services want to capture the audiences that we reach, they need to go through us.

We have not done any significant deals in the US with any of these distributors, primarily because unless the money is really irresistible, frankly I don't have an interest or we don't have an interest in enabling these guys to become competitors with us. We'd rather own that product and do it ourselves or do it with partners that we feel are more compatible with our goals.

So it's a long-winded answer to say that we're keeping all options open. And right now we don't view these guys as being significant competitors but we're not being Pollyanna here.

We understand that that's a real possibility going forward. That said, though, we think we control enough of the important must-have content that we can capture those viewers through other platforms, either ourselves or in conjunction with partners.

Okay, that's great. Thanks, Alan.

Then maybe on just a broader issue, David obviously touched on it earlier, I mean you've got the secular trend that's obviously hitting the number of people getting MVPD service. You yourself or your customer base, I'm sorry, has traditionally been somewhat underweight that anyhow, so in some ways you've got protection around that.

But when you have conversations with the MVPDs and you're trying to get your channels onto more basic kind of tiers, I understand the rationale why that would make sense in order to keep people within the ecosystem. But given just sort of the overall pressures on the system, talk about the give and takes when you have conversations and what's some of the pushback you're getting from MVPDs on why they're not pushing some of your channels into more basic packages when at first blush it seems like it seems like a very obvious thing to do in order to either grow sub base or keep sub base from declining if you will?

Well I think you know for better or worse or right or wrong MVPDs I think largely look at Hispanic as being a separate business and they've traditionally put Hispanic cable services up on a tier. When you approach them about moving into a basic, more basic package their reaction tends to be that's just not the way we've done it or we do business.

I think as the pay-TV ecosystem continues to evolve I think we can continue to revisit those conversations. I think those conversations potentially become more relevant as ways to drive new customer take-up and retention.

And so although we haven't counted on that, we don't we haven't included that in any of our models or projections we do think that is an opportunity going forward with certain MVPDs and in certain markets. You look at a WAPA America and there's no reason that shouldn't be on digital basic in New York given the 1.5 million Puerto Ricans that live in New York.

So those are conversations that we plan to have and will continue to have and we'll see where those go. But these MVPDs are not the most agile guys in terms of changing the way they do business and changing their business model. So it does take a lot of work and a lot of massage and a lot of convincing to get to them.

That's great, Alan. Thanks for the color.

And sort of like David I applaud the fact that there was no carnage today for you guys. Thanks.

Aaron Watts, Deutsche Bank.

Hey guys, good morning. Alan, as you think about the target audience you hope to attract, both young and old and the type of programming you see them preferring to consume, I'm curious your thoughts on the attractiveness of potential programming targets that are Spanish-language versus English-language programming targeted at that demographic or the Hispanic audience you hope to attract? And whether you see the younger audiences preferring one of the other and how that makes you think about acquisition targets?

Thanks, Aaron. It's a complicated question because I think you have to look at Hispanics as being this somewhat complicated matrix of based on age and use and comfort with language. So there have never been more Spanish dominant Hispanics in the US than today.

They continue to grow even though a lot of focus has been on the English-speaking Hispanics. So we like our space. Our space is still a great growth space and there's not a lot of options for our audiences that we want to be, we want to represent the destination for Spanish-speaking audience that are really looking for an alternative to the traditional broadcasters.

That said the English language or English-speaking Hispanics represent a really attractive high-growth audience. It's just that they are difficult to capture given that once you're in an English-language world you essentially have unlimited options.

So whereas there have been a number of outlets that target African-American that have been very successful in reaching those African-Americans and in aggregating audiences the same has not happened on the Hispanic side for whatever reason. So I do think there's an opportunity there. I think it's been evasive.

I think we may very well play in that space down the road. Because we do think it's interesting and we do think we understand the market very well. But we also really like our Spanish-language space as well.

Got it. All right, helpful context. Thanks.

I'm showing no additional questions. I will hand the conference back over to management for any closing remarks.

No, we're good. Thank you very much to everybody for joining us today.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of your day.