Hemisphere Media Group Inc (HMTV) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Hemisphere Media Group Inc. second quarter 2016 financial results conference call, my name is Brian and I'll be your operator today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference.

A replay of this call will be available beginning at approximately 1 PM Eastern time August 5, 2016, by dialing 855-859-2056. Or from outside the United States by dialing (404)-537-3406. The conference I.D. for the replay is 56385056. (Operator Instructions). I would now like to turn the call over to miss Erica Bartsch, proceed, ma'am.

Thank you operator. And good morning, everyone. I'd like to welcome everyone to today's conference call. I am Erica Bartsch, and I am with Sloan and 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.

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 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 or form 10-Q 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 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, Erica. Good morning and thank you all for joining us today. We are very pleased with our results in the second quarter, with net revenues up 7% and adjusted EBITDA up 5%. We remain on track to achieve our adjusted EBITDA guidance of low double digit growth for the year. Our performance in the quarter was highlighted by strong subscriber growth across all of our networks.

Our overall US Hispanic tier subscriber base has seen organic growth in excess of 4% year-over-year, a stark contrast to the overall US pay TV universe, which continues to undergo modest subscriber contraction. We see organic growth continuing in the back half of 2016 and beyond, fueled by the continued Hispanic population growth and increased take-up of Hispanic program packages.

In addition, we are confident that we will continue to successfully secure new launches, which will drive stepped-up growth in our subscriber base. As our most recent example, we will soon be launching Pasiones on Cox Cable in our largest markets. And we have secured a significant expansion of WAPA America's carriage with Cox in the key markets of Las Vegas, Phoenix, San Diego and Orange County. We are having similar discussion with other major distributors and are confident that we will continue to secure new launches for our network.

Let's now turn to our individual networks, beginning with WAPA and market conditions in Puerto Rico. WAPA continued its dominant performance in Puerto Rico in the second quarter. WAPA's ad revenue increased in Q2, even before taking political revenue into account. An impressive achievement in difficult market conditions. And WAPA continues to meaningfully outperform the market.

WAPA again grew its share of the TV ad market in Q2, once more setting a new all-time high. Demonstrating our unrivaled position, WAPA's sign-on, sign-off ratings were higher than those of Univision and Telemundo combined. Building on WAPA's unprecedented success of Fatmagul, the first Turkish novela to air in Puerto Rico, WAPA launched a new Turkish novela, Tormenta de Pasiones, which is currently Puerto Rico's highest rated daily series.

WAPA also recently launched Sila, one of the most successful Turkish dramas ever produced and a huge ratings hit across Latin America. Despite all of the negative headlines regarding Puerto Rico's economy, the Puerto Rican television ad market, excluding political revenue, was down only 1% in the second quarter. And as noted, WAPA outperformed the market once again.

As a result of a competitive primary election in June, WAPA realized political revenue in Q2. With WAPA's dominant ratings position and world-class news organization, WAPA was able to secure over 50% of the political dollars in the second quarter, a positive sign for WAPA's political revenue going forward. The status of government matching funds is still uncertain although we are optimistic that a certain amount of matching funds will be made available.

We are also encouraged by the enactment of the Puerto Rico Oversight Management and Economic Stability Act, or PROMESA, which should begin to restore confidence and provide a clearer path to long-term fiscal and economic stability. While we don't want to understate the severity of Puerto Rico's economic situation, as we saw during the second quarter, the advertising market has been resilient and should improve as the initiatives under PROMESA begin to be implemented.

In fact, we are already beginning to see positive signs that the market is strengthening. According to the United Automobile Importers' Group, after a prolonged period of more than 20 months of negative sales, the local auto industry in Puerto Rico experienced a third consecutive month of positive sales in June. It's also important to realize that WAPA has seen unparalleled growth in re-transmission revenues, which are largely inflated from the island's economic situation.

Given WAPA's unique and massive ratings dominance, we're confident that this growth will not abate. Our cable networks continue to perform well in the second quarter. Driven by its lineup of blockbuster movies, Cinelatino was once again the second highest rated non-sports Spanish language cable network. The launch of advertising on Cinelatino continues to progress nicely. We are pleased with the feedback and momentum we generated following our up front presentation in early June.

We have been meeting with and presenting proposals to numerous agencies in order to enhance our visibility and secure portions of Hispanic budget. We expect that the results of our efforts will begin to be reflected in the fourth quarter and beyond. WAPA America continues to perform well, delivering growth in subscribers and revenues as well as strong Nielsen ratings. WAPA America continues to have the highest Nielsen coverage ratings among all the Spanish language cable networks in the key day part of 5pm to 7pm weekdays. A true testament to the unique appeal of our content offering.

Turning to Pasiones and Centroamerica TV; I am pleased to report that both networks delivered record breaking performances in the first half of 2016. In Q2, according to Rentrak, Pasiones delivered its highest rated quarter ever, a record that it previously set in the first quarter of this year. Our ratings success was driven by the exclusive US premiere of the blockbuster Turkish series Mercy. As the first Turkish novela to air on Pasiones, it has been a resounding success, delivering a 41% ratings increase in its time slot over the same period a year ago.

Looking ahead, we have two novelas that will be premiering in the US exclusively on Pasiones in the third quarter. Unforgettable, another highly successful Turkish novela, and Gabriela, a major co-production between Rede Globo of Brazil and Warner Brothers. Our investment in series such as Mercy, Unforgettable and Gabriela, evidences our commitment to make Pasiones a compelling and differentiated viewer destination. Centroamerica TV is continuing to grow its audience and according to Rentrak, had its best six-month performance in its history, driven in part by the continued success of our first co-production, Calle Siete, a daily reality show.

Finally, we continue to invest in programming at Television Dominicana, including a long-term renewal of our agreement with the Dominican Professional Baseball League. The most popular sports league in the Dominican Republic. We'll also be launching our new on-air look later in the third quarter. Latin America continues to experience strong subscriber growth. In only the first six months of 2016, Cinelatino subscribers grew by more than 9% and Pasiones subscriber base increased by over 6%.

During the second quarter we picked up new key launches for Pasiones on Claro in several major countries and on Cable Onda, the largest cable operator in Panama We also continue to develop digital and mobile extensions of all of our properties. During the second quarter, we relaunched the WAPA mobile app, with an updated design and enhanced features, and we launched the Noticentro mobile app, fully dedicated to breaking news. These apps have been immediate hits with over 1.4 million visits in just the first 45 days following launch. We are also focused on creating compelling and innovative Social Media extensions across all of our networks.

On the acquisition front, we continue to actively explore a pipeline of opportunities. While we would like to have completed a transaction by now, certain factors outside of our control have impeded this process. We are dealing in certain cases with sellers who do not typically partake in these transactions and are not being advised by investment banks, so some of the opportunities we are looking at are just taking more time to come to fruition.

That said based on our current pipeline, we are confident that we will enter into one or more transactions by year end. In conclusion, we continue to efficiently execute our strategies, as evidenced by our strong results this quarter, affirming the strength and growth opportunities in our business.

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

Thank you, Alan. And good morning, everyone. Net revenues were $35 million for the quarter, an increase of $2.4 million or 7% as compared to $32.6 million for the same period in 2015. For the first six months of the year, net revenues were $66 million, an increase of $3.9 million or 6% as compared to $62.1 million for the same period in 2015.

These revenue increases in both the three and six-month periods were due to higher subscriber and re-transmission fees, driven by growth in subscribers and rate increases. These revenue increases were also driven by growth in advertising revenues, primarily as a result of political advertising revenue. Excluding political advertising revenue, net revenues in each of the three and six-month periods increased by 5%.

The political advertising for the six-month period in 2016 exceeded the political advertising in the same period of 2012, the last election year in Puerto Rico. We attribute this increase to one of the major political parties in Puerto Rico having a primary this year, whereas neither of the two major political parties faced a primary in 2012.

Additionally, year-to-date 2016, as Alan noted, WAPA secured over 50% of the total pie, an increase over our share in 2012. While we are pleased with the early returns on political advertising, historically the overwhelming majority of the political dollars are placed in the second half of the year, and it is too early to estimate the political revenue for the balance of the year.

Subscriber and re-transmission fees represented approximately 51% of our revenue in the quarter, consistent with the same period in 2015, and represented approximately 54% of our revenue in the first six months of 2016, compared to approximately 53% in the prior-year period. Operating expenses were $24.4 million for the quarter, an increase of 2%, as compared to operating expenses of $23.8 million for the year-ago period.

Operating expenses were $48.2 million for the first six months of 2016, an increase of 4% as compared to operating expenses of $46.3 million in the prior-year period. These increases were both the three and six-month periods were driven by increased investment in programming and higher sales and marketing costs, consistent with our efforts to upgrade our content and to drive viewership and advertising sales across our networks.

Adjusted EBITDA was $15.5 million in the current quarter, an increase of 5%, as compared to adjusted EBITDA of $14.7 million for the same period in 2015. Adjusted EBITDA was $28.8 million for the six-month period of 2016 an increase of 5% as compared to adjusted EBITDA of $27.5 million in the prior-year period. While the vast majority of our revenue is sourced from the US, we do have some distribution deals priced in foreign currency, which were affected by the depreciation of the US dollar. Excluding foreign currency affects, our adjusted EBITDA growth was 6% in each of the three and six-month periods.

Turning to the balance sheet. We had $211.8 million in debt, and $147.2 million of cash on hand. Our leverage ratio was approximately 3.6 times, and net leverage ratios was approximately 1.1 times. As was previously announced during the quarter, we repurchased 2.8 million shares of our common stock for $29.4 million.

Our capital allocation priorities remain investing in organic growth and the growth through acquisitions both in the US and Latin America. This is the solid quarter and as Alan noted, we are on track to achieve our annual guidance.

With that let's open the call to your questions.

Thank you. (Operator Instructions). Our first question comes from the line of Ben Mogil with Stifel. Please proceed.

Hi. Good morning. Thanks for taking my question. Question is, I got a couple of questions. So on the sub situation in the states, maybe you can talk a little bit about, you're obviously thinking everyone else is sagging which is a great place to be. Maybe you can talk a little bit about sort of not specifically, but the discussion driving the MVPD and what's given to ads in a tough environment. And maybe talk about any conversations you've had with any of the virtual or over the top MVPDs as well.

Sure. Hi Ben. Good morning. As you have seen consistently quarter-over-quarter, we continue to benefit from organic growth in the market. As I had mentioned throughout our conversations, we benefit from the fact that the Hispanic program packages are so under penetrated, relative to the size of the pay TV audience and the overall population. And as that population continues to grow and penetration continues to increase, we have the benefit of that compounded effect and we will continue to experience organic growth.

In terms of adding channels, I think what we have going for us is, is the fact the MVPDs recognize there's not many places for them to grow in the current environment, Hispanic is the low-hanging fruit. So they are refocused on Hispanic as an opportunity to grow. A number of them have initiated low-cost packages to incentivize take-up of the Hispanic package and those we've seen significant growth particularly in those distributors that have done that and we think that's a smart strategy for them.

And as they need to focus on Hispanic, they obviously are also focused on improving these packages to making them more relevant and more attractive to their customers and prospective customers. I think also in the context of consolidation, what we're seeing is the that new owners of these systems are being more strategic about Hispanic and are more focused on Hispanic opportunity in front of them, particularly where they benefit from being located in large and under-penetrated Hispanic markets.

I got it. That sort of specifically in the Time Warner footprint?

That's valid assumption, yes. Considering that Time Warner has the two biggest Hispanic markets in the US, Charter -- Charter pre-Time Warner, did not really overlap with many significant Hispanic markets. But now as the owners of Time Warner with markets such as New York, L.A. and Dallas, we believe that they're going to be very focused on Hispanic as a growth opportunity. And we're very optimistic about getting our channels carried on the systems where they're not carried today.

Okay. That's great. And then sort of maybe just two on the advertising front. When you were looking and making comments around WAPA, around the Puerto Rico, I'm sorry, around the better ad sales, because this is somewhat new, historically was ad a big category for you? Did it drop off when the economy kind of went into a big slowdown? Has auto come back?

You're talking specifically about auto?

Yes, I am. Thanks, Craig.

As far as the industry categories, none of the categories are greater than 10% of our revenue. I'm not speaking to any specific one but it's been, we haven't seen massive fluctuations year-to-year.

And that's more of an indicator of the fact that the economy is showing some green chutes and the possibility of starting to -- if not coming out of it, at least not getting worse.

[It's not as] specific, it's within our trend of our ad revenue from auto.

And has Zika -- I mean, it's somewhat early, have you seen any impact on Zika on some of the advertisers that rely on auto home experiences pull back? Have you seen ratings increase because people are spending more time at home. I'm kind of curious about that.

We haven't really seen it yet. Clearly it's not a positive fact. And we know that Puerto Rico is really struggling with trying to contain the situation. And it will have an impact on tourism. But we don't think the impact on tourism should have a significant impact on us.

Okay. That's great. Thank you very much, guys.

Thank you. Our next question comes from the line of Steven Chow with Royal Bank of Canada. Please proceed.

Yes. Thank you. A few questions. Maybe, first, Craig, I think you said it's too early to estimate what the balance of political is going to be. So I was just wondering how we think about the way political comes out, vis-a-vis your guidance. Is it all upside or is there sort of a middle of the fairway assumption that's in there and we'll just have to wait and see whether or not it comes out to the upside or the downside of what you baked in?

Yes. I think in 2012, we mentioned that we did about $5 million of political. And you should assume something similar to that figure is baked into our guidance for the year.

Got it.

As I noted, the majority of it comes in the back half of the year. Obviously around sort of October, November, timeframe when the election kicks in. But we've been optimistic given the early showings here in the quarter, relative to 2012.

And then for the Puerto Rico ad market, ex-political, based on what you've seen in Q2, at least from a market growth perspective, looks like a positive acceleration, a pretty notable positive acceleration from Q1. Is your expectation, from what you're seeing from advertisers, that we'll continue to see the market accelerate as we move through the back half of the year?

We certainly hope that's the case, but we're far from certain that that would be the case. Last year, you'll recall, fourth quarter of 2015 finished actually up versus the prior year and then first quarter was down high single digits. So, quarter-to-quarter, month-to-month there's very little visibility in the market. And so it's really hard to judge based on one quarter how we're going to progress in the next quarter. But it has not been real trends that we can hang on to, to predict how things are going to go going forward.

Great. And then on the content acquisition side. Netflix on its call highlighted a number of areas where it was expanding its content library in the Latin America market. Are you seeing any inflation or any inflationary impact on the price of content or is what you're buying and they're buying different enough that it doesn't directly impact it?

We have run into Netflix a couple of times. But beyond that it is -- they've not -- we've not crossed paths with them. And we're really buying independently of them. In the US, they're offering in Hispanic has been very shallow. They buy a few titles, but they don't have a very deep offering. And frankly the kinds of titles they're going for are titles that really are different than the titles we go for, in terms of the target audience. And in Latin America their efforts have been mostly on bringing Hollywood content down there, as opposed to native Spanish language content. And with us we're all about native Spanish language content.

Great. And then just a final housekeeping one, Craig, you called out the FX impact for the first half of the year. Is guidance on a reported basis or a basis excluding currency?

Guidance is on a reported basis.

Okay. Thank you very much.

Thank you.

Thank you. Our next question comes from the line of Michael Morris of Guggenheim Securities. Please proceed.

Thank you. Good morning, guys. Alan, you referenced a number of positive kind of unit trends, fundamental trends. Talked about Hispanic tier penetration, new launches with the distributors, international penetration, digital products. All of them very positive direction.

If you look at those, each of those, can you maybe help us a little bit with how much of that -- like which of those and to what extent do they directly and sort of immediately impact your revenue growth? And how much of it is ground work or laying a foundation for future growth? I'm trying to separate the difference between what we're seeing right now, but also the kind of equity that you're building in your customer base going forward.

Sure. I think probably the biggest factor is our organic subscriber growth in the US and our growth through new launches in the US. That has a direct and positive correlation with our revenue. Our direct revenue on subscribers indirectly through increased advertising opportunity, yes, as we grow our subscriber and viewing base. On the digital side, that's laying groundwork. As I've said in the past, we own digital and over-the-top rights to virtually all of our content.

And I think again what sets us apart from the general market peers is that whereas they're dealing in a universe that's basically fully saturated and mature on the pay TV side, on Hispanic only about a third of Hispanic households subscribe to the Hispanic program package. So we have a signigicant and huge number of percentage of cord-nevers, not cord-cutters but cord-nevers, that have not subscribed and don't subscribe to the Hispanic program package and that's a really ripe and exciting target to go after for a potential SVOD and over-the-top package opportunities.

And outside the US? The Latin America penetration?

Latin America has been great growth for us. There's tremendous organic pay TV growth in Latin. And we are augmenting that by new launches. The dollar amounts in Latin -- the subscriber numbers are impressive. The per-subscriber fees are significantly lower, a small percentage of what they are in the US. Part of that is because of the pricing of Latin America packages being much lower than, the ARPUs being much lower than those in the US.

And second, we are distributed on basic packages in Latin America whereas in the US we're distributed on the tiers. So that price -- the per-sub fee we receive in Latin America is much lower than it is in the US. So the impact of getting those additional subscribers is not nearly as significant as it is in the US. But it is obviously very helpful and important for us.

And when you look at the potential for growth in the pricing, those Latin America subs, how do you think about it? Do you feel like you're at equilibrium and it's a matter of the growth of consumer power in those local economies? Or is it the kind of thing where a lot of times if you want to get early carriage, you maybe take -- you give -- you don't take as aggressive a stance on fees as you otherwise could. With the initial objective to build the following and then from there you feel like you cannot take more share of the spend.

It's a really good question. And it's a question we debate all the time. But I think our view is we get -- we are as aggressive as we can be on pricing early on. Because once you set a price precedent in Latin America, even if you don't have MFN, it's very hard to get significant increases beyond that, even if you're delivering a really good product. So we try to be very aggressive on pricing, as aggressive as we can be.

But frankly the growth that we're looking to is more on growth in number of subs and growth in launches in new systems, rather than getting aggressive price increases. Latin America is not that different in the US from a price philosophy perspective, the distributors are very tough on price increases. And and the days of getting double digit annual price increases are over. But we are getting significant revenue increases by virtue of our annual escalators, coupled with the significant organic growth we're seeing.

Great. Thanks for the help, Alan.

Pleasure.

Thank you. There are no further questions. So I'd now like to handle call back over to Alan Sokol, Chief Executive Officer, for closing comments.

I have no further comments. Thank you to everybody for joining and have a nice weekend.

Ladies and gentlemen, this does conclude today's program and you may all disconnect. Everybody, have a wonderful day.