Hemisphere Media Group Inc (HMTV) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Hemisphere Media Group third-quarter 2015 financial results conference call. My name is Carmen, and I will be your operator today.

(Operator Instructions)

I would like to turn the call over to Mr. Josh Hochberg. Please begin.

Thank you, and good morning, everyone. I would like to welcome everybody to today's conference call. I'm Josh Hochberg, and I'm with Sloane & Company, Hemisphere's outside investor relations firm.

Joining me on the call today is Alan Sokol, Hemisphere's Chief Executive Officer; and Craig Fischer, Hemisphere's Chief Financial Officer. A replay of the call will be available beginning at approximately 12:00 PM 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 73247122. A recording of this call may also be accessed through our website at www.hemisphereTV.com.

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 current expectations of the Management of Hemisphere and are subject to uncertainty and changes in circumstance which may cause actual results to differ materially from those expressed or implied in such forward-looking statements. In addition, these statements are based on a number of assumptions that are subject to change.

Please refer to our Company's most recent annual report on Form 10-K, and our other public filings including our 10-Q filed 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 the call over to Alan.

Thank you, Josh. Good morning, and thank you all for joining us today. Our results in the third quarter continue our strong 2015 performance with 9% net revenue growth and 7% growth in adjusted EBITDA. Year to date, our net revenues were up 19% and adjusted EBITDA is up 21%.

We continue to experience strong growth in the third quarter in both of our revenue streams, advertising as well as subscriber and retransmission fees across all of our networks. Our results this quarter reaffirm that we are in a sweet spot of the pay-TV universe. Our subscribers once again increased this quarter, and for the first nine months of the year, our overall US subscriber base has grown by 8%.

This is a different and much better trajectory than we are seeing from widely distributed general market cable networks which have generally reported declines of 1% to 2%. Given the under penetration of the US Hispanic program packages and the continued robust growth in the US Hispanic population, our organic subscriber growth should continue to significantly outperform the overall pay-TV universe.

At the same time, we are extremely well positioned to target our audiences through SVOD and other additional platforms. We recently entered into our first content licensing deal with a major SVOD distributor in Latin America. To date, while we have resisted the short-term dollars from licensing our content to US SVOD distributors, we are evaluating participating in new SVOD platforms and we will continue to support and encourage our MVPD partners in their over-the-top initiatives such as Dish's Sling Latino platform.

We believe that we are the gatekeepers in our content categories and the over-the-top platforms as providing us with a major opportunity to build new assets to reach the approximately 34 million US Hispanics who do not subscribe to this Hispanic pay-TV programming package. Many of these non-subscribers are cord-nevers, whom we will have a chance to reach for the first time.

Turning to our individual networks, WAPA once again delivered terrific ad revenue and retransmission fee growth. WAPA reached an all-time high in its share of TV ad revenue in the third quarter driven by its continued ratings dominance. These results are particularly impressive given the great economic uncertainties that Puerto Rico continues to confront.

Although Puerto Rico faces many ongoing challenges, we are encouraged by the attention that Puerto Rico has received from the federal government in recent weeks and the urgency with which this situation is being addressed. We believe swift action by the government should jump start investment and restore consumer confidence. Notwithstanding these challenges and uncertainties, the Puerto Rico TV ad market in third quarter showed some resiliency with a decline in mid-single digits, a sequential improvement from second-quarter results.

In fact, September saw modest ad revenue growth, the first such growth since March 2014. We don't want to over emphasize a single month of growth but we are encouraged by this shift. Our US cable networks all experienced strong ad revenue and subscriber fee growth this quarter.

We launched advertising on Cinelatino in July, a few months later than originally planned. As a result, we were late to the game for much of the 2015-2016 upfront activity. While this will result in modest ad revenues this year, we are confident that advertising will represent an important revenue stream in 2016 and beyond.

We have received virtually no negative feedback from our viewers regarding the addition of advertising on Cinelatino. We believe this is a reflection of the modest commercial load as well as our commitment to preserving the premium viewing experience our audience has come to expect.

Cinelatino continues to deliver big numbers. During the third quarter, Cinelatino led 46 of the 50 highest-rated programs of all non-sports channels in the Hispanic package, including all of the top 10 highest-rated programs. With performance like this, we are excited about the ad sales opportunity.

WAPA America is also delivering impressive ratings and audience growth. In fact, during third quarter, WAPA America's total day audience increased by 31% over third-quarter 2014. WAPA America is now squarely among the highest-rated Hispanic cable networks including Discovery en Espanol, ESPN Deportes, Fox Sports en Espanol, and Galavision.

Our investment in programming and marketing at our newer networks is already driving stronger performance. This quarter, we launched an entirely new on-air look on Pasiones, which conveys a more youthful and current branding metrics to our audience. In fact, according to Rentrak, in the third quarter both Centroamerica TV and Pasiones achieved their highest viewership levels since Rentrak began measuring these networks in 2011.

We are encouraged by the audience, advertiser, and distributor responses to our investment in these networks and are confident that this increased investment will continue to drive ad revenue and subscriber growth. Latin America also continues to experience robust subscriber growth. Year-to-date, Pasiones has grown subscribers by 12% and Cinelatino subscriber base has increased by 9%.

On the acquisition front, we have a strong pipeline of prospective deals and are optimistic that we will identify some unique and attractive opportunities. As you can see, our business is performing exceptionally well amidst an evolving pay-TV universe in the US and a cloudy macroeconomic environment in Puerto Rico. Our results this quarter once again underscore the strength of our differentiated business model, the quality of our execution, and the compelling opportunities ahead of us.

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

Thank you, Alan, and good morning, everyone. Our results reflect the inclusion of the operating results of the acquired cable networks, which were acquired in April of last year. This effects the comparability of our year-to-date results but not our quarterly results.

Net revenues for the quarter were $31.5 million, an increase of 9.3% as compared to net revenues of $28.8 million for the same period in 2014. Net revenues for the year-to-date period were $93.6 million, an increase of 18.7% as compared to net revenues of $78.8 million for the same period in 2014. These increases, for the three- and nine-month periods, were driven by growth in advertising revenues and higher subscriber and retransmission fees resulting from the combined effect of overall growth in subscribers and rate increases.

The increase for the nine months was also due to the inclusion of the acquired cable networks, which were not included in the prior-year's first quarter. The inclusion of the acquired cable networks also impacts our operating expenses and adjusted EBITDA for the nine-month period. While the vast majority of our revenue is sourced from the US, we do have some distribution deals priced in foreign currency but then remitted in US dollars, which were affected by the appreciation of the US dollar.

Excluding the effect of the currency, our revenue growth would have been 9.7% in the quarter and 19.1% in the year-to-date period. Subscriber and retransmission fees represented approximately 53% of our net revenues in the year-to-date period, up from 51% in the prior year. Operating expenses for the quarter were $23.5 million, an increase of 1.3%, and for the year-to-date period were $69.8 million, an increase of 10.8%.

These increases for both the three- and nine-month periods were driven primarily by increased investment in programming at the acquired cable networks and WAPA America consistent with our previously stated strategy. Additionally, operating expenses increased due to higher sales and marketing costs and continued growth in our infrastructure to support our expansion. Adjusted EBITDA was $13.7 million for the quarter, an increase of 7.2% as compared to adjusted EBITDA of $12.8 million for the same period in 2014.

Adjusted EBITDA was $41.3 million year to date, an increase of 21.2% as compared to adjusted EBITDA of $34 million for the same period in 2014. These increases were due to growth in advertising revenues and subscriber and retransmission fees. Excluding the currency effects, adjusted EBITDA growth would have been 8.2% in the quarter and 22% in the year-to-date period.

Turning to the balance sheet, as of September 30, 2015, we had $222.2 million in debt and $170.4 million of cash. Our gross leverage ratio was 3.9 times, and our leverage ratio net of cash on hand was just under 1 turn. we have said before, we expect to capitalize on our strong balance sheet for both organic and acquisitive growth and continue to look to uncover potential deals that will augment our leadership position.

This was a strong quarter of execution for our business and we are pleased with where we stand as we head into the fourth quarter. Accordingly, we are timing our guidance to mid-teens adjusted EBITDA growth for the year.

We'll now open the call your questions.

(Operator Instructions)

David Bank, RBC Capital Markets.

Okay. Thanks. Good morning, guys.

Morning, David.

A couple of -- I wanted to follow-up on I think there was a comment Alan made about not getting any negative feedback on the ad ramp at Cinelatino. Is that -- and the performance has been solid. Can you comment on ratings trends? Has there been any Delta in actual ratings -- I'm assuming that's what you're referring to since you've seen the ad loads begin to ramp?

And the second question is, you guys have really shown some nice upside to the sub growth at all your cable nets. But there's still a fair amount of upside I think to get to the kind of numbers WAPA America gets even without the digital basic subs. Can you remind us of what you think the timeline is to get to close to parity with WAPA America or wherever your target is? What kind of timeframe you're thinking? Thanks very much.

Okay, David. It's Alan. Good morning. On Cinelatino, ratings have I would say held steady and have in fact somewhat increased since we launched advertising.

Part of that is we had -- we did save some of our stronger movies for the launch of advertising in order to drive ratings while we were launching advertising. But I would say we're very pleased with the ratings results post advertising, and I really see no fall off or no backlash or negative activity in any way from the introduction of the advertising. And I think we've done it in a very subtle and nonobtrusive way that really hasn't impacted viewer experience. And as I said, literally we've gotten zero complaints so it's from our perspective very positive.

Regarding your other question, I would say probably Cinelatino is probably our largest distribution today on the Hispanic package. Somewhere in the 4.5 million range, which is pretty close to full distribution within the tier.

So if you look at that as sort of being the opportunity, I think in addition to organic growth, the -- there are a number of holes to fill in our -- within our distribution and I believe we will get those filled over time. We've done a good job to date in getting those, so those primarily relate to networks that we acquired last year.

The -- I think some of the our ability to get those wholesale has been subject to some of the consolidation going on in the business and the fact that consolidation has delayed the decision-making among some of the involved distributors. But I think once this kind of consolidation gets put to bed and the new owners take over, we feel very good about the opportunity in front of us to fill those holes.

Terrific. Thank you very much guys.

Ben Mogil, Stifel.

Hi, good morning, and thank you for taking my question as well.

So domestically, it sounds like your preference is to stay within sort of the bundled OTT services that are being either offered like Sling or being sort of rumored rather than just go through [SVOD]. Can you give us a sense are you seeing a lot of activity on the bundled OTT environment front? And is your thought as well to offer your own standalone apps which would be TV everywhere authenticated but to also have your own separate apps to continue to focus on more direct to consumer relationships?

I think the answer is yes. I think we're actively working in partnership with our traditional distributors on their over-the-top initiatives and efforts, some of which are further along than others. Dish is probably the furthest along in that they have actually launched and that's started to market and secure customers although they're very early innings of that. I think some of the others are in consideration at some level in doing that and we're an important part of that in their efforts to do that.

At the same time, we are not ignoring the opportunity for -- to reach those customers that are not being served or reached by traditional distribution. As I said, that there were 34 million or so Hispanics who the program package does not reach today.

And in regard to that, we are evaluating the full spectrum of options from going on a standalone basis to partnering with other strong content owners in creating a compelling service with very robust and diverse content. And I think we'll figure this out. I don't feel from our side urgency to do this because I don't feel that we need to respond to somebody who is a first mover here because nobody really has moved first in this space. But that said, we don't want to be reactive and we are being proactive in figuring out what strategy is best for us in regard to this.

Okay. Thank you.

And then on the ratings front, when you look at live same day L plus 3, L plus 7, are you seeing anything in terms of genres or specific channels you can call out, hey, this is a channel that's doing really well in L live same day. This one does really well in L plus 7. Curious what you're seeing on those fronts?

I think the good news in this is that our audience tends to watch live, which I think from an advertised perspective is very positive. DVR usage and indexing among our audience is significantly below that of the general market networks. So we have a much higher ratio of live or live plus same day than general market networks do. And that's partly a function of a couple things.

Number one, certain of our networks like WAPA America have a lot of live current programming and as result, it compels live viewing. WAPA America has twice as much live programming as any other Spanish-language network in America. So it makes it a very compelling option from a live standpoint and also as a result from an advertiser standpoint because the viewers are watching live. They're not fast forwarding through commercials.

And then even on those networks like Cinelatino that in which you could watch on a delayed basis, viewers tend to watch live or live plus same day at a much higher ratio than they do on the English side.

Okay. That's great. That's very helpful. Thanks, Alan.

And then Craig, I don't want you to feel left out on this call. On the M&A side, are you seeing -- you obviously are seeing a tremendous amount of cash. You continue to generate cash. What are you seeing that's interesting?

Are you seeing libraries that are interesting? Are you seeing some channels possibly pop up? Curious what you're seeing on your end?

We're seeing opportunities consistent with what we have stated both cable networks in the US and LatAm as well as broadcast opportunities in Latin America in markets that make sense for us. And we continue to look at content libraries as well and to help populate some of the OTT strategies that we have.

Okay. That's great. Thanks again, guys. Congratulations on a good quarter.

Thank you.

(Operator Instructions)

Michael Morris, Guggenheim.

Thank you. Good morning, guys.

Maybe to follow up on those 34 million potential subscribers out there. Can you tell us what you see in the behavior of your subscriber base -- your target demo?

You talked about the 8% growth on your I guess what's in the traditional ecosystem. Are you seeing a higher rate of growth on nontraditional? So I would say like I don't know like a Roku box or something like that on the TV? Are you seeing a higher rate of growth on mobile?

Like what do those trends look like compared to sort of the traditional subscriber growth? And then I have a follow-up on ads.

Hi, Mike. Good to talk to you. It's an interesting question, and it's a complicated question because you can't look at Hispanics as a monolith in the US. There are 55 million plus Hispanics.

Our target are Spanish dominant and bilingual Hispanics. Most of whom are still consuming media in a traditional way primarily focused on television.

Mobile usage and mobile adaptation is very high overall among the Hispanic market and over indexes the overall market. Broadband, under indexes by some significant level the overall market. And that's just sort of an interesting dichotomy.

And I think the mobile -- I think that's partly a function of the fact that the Hispanic market is so young and there are so many Hispanics under the age of 25 who are natural mobile users and natural users of new technology. However those viewers are primarily not our audience.

And those are -- that part of the audience tends to significantly over index on the acculturated English-speaking side. And those viewers in that audience is consuming a lot of video and a lot of entertainment through mobile devices, through games, through tablets, but that tends not to be the audience that consumes our product.

Okay, great. That's helpful.

And then on the advertising side, you spoke about the growth in September. Can you -- do you have the sort of data from October at this point to have a sense whether the trend is continuing into the fourth quarter or whether that was kind of an anomaly in the Puerto Rican market?

Well, Mike, we typically don't discuss current quarter numbers during the quarter. And especially in the fourth quarter which is seasonally our highest quarter in Puerto Rico, and November and December are seasonally our highest month of the year. So there is still a story yet to be told for fourth quarter.

That said, I will say that we don't see the trend getting any worse. Okay? We see it being stable with where we saw in third quarter overall to date.

Okay, thanks a lot, guys.

And I would like to turn the call back to Mr. Alan Sokol for any final remarks.

Nothing more from me. Thank you very much

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program and you may all disconnect. Have a wonderful day, everyone.