Hemisphere Media Group Inc (HMTV) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Hemisphere Media Group, Inc. Second Quarter 2017 Financial Results Conference Call. My name is Michelle, and I will be your operator today. (Operator Instructions) A replay of the call will be available beginning at approximately 1 p.m. Eastern Time today by calling (855) 859-2056, or from outside the United States by dialing (404) 537-3406. The conference ID for the replay is 59093954. (Operator Instructions)

I would now like to turn the call over to Ms. Erica Bartsch. Ma'am, please go ahead.

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

Today's announcement and our comments may contain certain statements about Hemisphere that are forward-looking statements within the meaning of the U.S. 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 on Form 10-K 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 would now like to turn the call over to Alan.

Thank you, Erica. Good morning, everyone. Our business delivered another solid performance in the second quarter, driven by continued strong retransmission and subscriber fee growth, which mitigated a weak Puerto Rico advertising market.

Excluding political revenue from the year-ago quarter, during Q2, net revenues increased by 2% and adjusted EBITDA increased by 9%. And for the first 6 months, net revenue increased by 5% and adjusted EBITDA increased by 9%. We remain on track to achieve our adjusted EBITDA guidance for the year.

Before I review our operating results, I'd like to update you on our new strategic investments. First, regarding Canal Uno in Colombia. Our joint venture assumed operating control of the network on May 1. We have drawn on our expertise and success in creating market-leading TV networks, and have developed a strong foundation for the launch of a formidable and exciting new broadcast TV network in a very compelling market. We will be formally launching the new Canal Uno on August 14.

We had implemented a full rebrand of the network with a fresh and exciting look and feel. We have entered into concept licensing agreements with some of the preeminent programming suppliers in the world, including NBC Universal, Fox, Paramount, Telemundo, and Globo. We have also licensed several very popular Turkish dramas, which have been ratings hits worldwide.

From inception, we will be offering a strong slate of fresh and differentiated locally-produced programming, including a world-class news product, and 2 original prime time entertainment series, which we are very excited about. The first is Guereros, or Warriors, a daily reality competition series. This format has been a huge rating success in Peru and Panama.

We are also producing our first scripted series in Colombia, Infieles, or Affairs, based on a successful Chilean format. As an example of the synergies created by Canal Uno, we will also be airing Infieles on our networks in Puerto Rico and the U.S. and syndicating its drive direct to the world. Infieles is a template for the strategic production leverage that Canal Uno affords us.

We believe that Canal Uno will be competitive in Colombia within a short period of time, and are confident that we have the unique opportunity to create an important and valuable media business.

As you may have seen, on August 1, we and Lionsgate announced the launch of PANTAYA, our premium OTT movie platform. We believe that the PANTAYA offering is extremely attractive, with an unrivaled selection of blockbusters and award-winning movies, and attractively priced at $5.99 per month. We are confident that there is a large and underserved audience for this product, especially among the estimated 35 million U.S. Hispanics who do not subscribe to the Spanish pay-TV package.

Finally, we are very enthusiastic about our recent investment in REMEZCLA. We believe that REMEZCLA has an original and authentic voice that resonates with young acculturated Hispanics. Our investment and strategic resources will accelerate REMEZCLA's growth and visibility. REMEZCLA's value proposition is evidenced by the fact that since Q2, it has successfully secured ad buys from a number of blue-chip clients, including General Motors, Toyota, Universal Pictures, and Delta Airlines. All of whom recognize and appreciate REMEZCLA's unique connection to its influential and hard-to-reach millennial audience.

Turning to our networks. After a strong first quarter, WAPA was affected by a weak Puerto Rico ad market in Q2. While WAPA once again outperformed the overall TV market, ad revenues did decline. The softness in Q2 was in part timing-related, with ad dollars shifting into Q1 as a result of the success of the World Baseball Classic, which aired on WAPA. Notwithstanding the challenging economic environment, for the first half of the year, excluding political, WAPA's ad revenues actually increased over 2016, underscoring our continued strength.

We continue to focus on improving our programming to grow ratings and share of ad revenue. During Q2, we launched the new locally-produced comedy series on WAPA, Such Is Life. This is the first series to feature a mix of Puerto Rican and Dominican talent that has been embraced by the audience. The premiere of Such Is Life was the #1 rated program in Puerto Rico in June. Such Is Life is simulcast on WAPA America and will also be broadcast in Television Dominicana.

We are also investing and upgrading our news and weather technology at WAPA and modernizing our sets during the second half of this year, as we continue to have commitment to maintaining and expanding our leadership position. The overall economy in Puerto Rico remains challenged, but relatively stable. During Q2, the PROMESA oversight board approved the governor's operating budget for fiscal 2018, and what is expected be a protracted debt restructuring process has commenced.

In the short run, the reduction in government spending under the approved budget may negatively impact in the economy. However, we believe that the measures being implemented will result in improved fiscal discipline and imaginable debt load, which will lead to a stronger and more stable economic climate and renewed growth.

Our cable networks continue to defy overall U.S. subscriber trends, once again achieving organic subscriber growth in what is traditionally the most challenging quarter of the year. Over the past 12 months, while the decline in total U.S. subscribers has accelerated, our U.S. subscribers have grown by 4%, which reflects both the value of our networks and the continued growth runway in U.S. Hispanic pay-TV.

Cinelatino continues to perform well, and we were proud to recently premiere our most ambitious production ever, El Desconocido, a 5-part miniseries which tells the compelling story of the right-hand man to Mexico's most notorious drug lord. The premiere of El Desconocido on July 30 was the highest rated program on Spanish pay-TV based on Nielsen coverage ratings.

We also plan to license El Desconocido to PANTAYA and to third-party platforms outside the U.S. El Desconocido is just one example of the high-quality productions in the Cinelatino pipeline. Cinelatino has successfully closed a number of both upfront and scatter national advertiser buys, including Sprint, Unilever, Honda, Chrysler, [Ducati] and Dos Equis. While still early days and most of these buys were modest, they represent important strives to Cinelatino in breaking new account and growing its ad revenue.

We continue to have strong results with our other networks, including an agreement to launch Pasiones on Cablevision, Argentina's largest cable distributor. Pasiones has seen terrific ratings growth in both the U.S. and Latin America with its differentiated programming strategy resonating with viewers. The strength of our networks is evidenced by the fact, excluding sports networks, in Q2, we had 3 of the 8 highest-rated Spanish language cable networks, and all 5 of our networks were among the top 15 based on comScore's coverage ratings.

While we're heavily involved in our new ventures and driving improved performance across all of our channels, including monetizing our content and production across our growing number of platforms, we also continue to pursue new acquisitions, which represent natural expansions in our business and strong strategic opportunities.

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

Thank you, Alan, and good morning, everyone. Net revenues in the quarter was $35.2 million, up modestly as compared to $35 million in the same period in 2016. For the first 6 months, net revenues were $68.3 million. An increase of 4% as compared to $66 million for the same period in 2016. The increases in both the 3- and 6-month periods were due to growth in subscriber and retransmission fees and other revenue, partially offset by a decline in advertising revenue. Excluding political advertising revenue in prior year periods, net revenue in the 3 and 6 months increased $0.9 million and $3.1 million, or 2% and 5%, respectively.

Subscriber and retransmission fees across all of our channels grew 9% in both the 3- and 6-month periods, driven by subscriber growth, new launches, and annual rate increases. Advertising revenue decreased $2.1 million and $1.4 million, or 12% and 5% in the 3- and 6-month periods, respectively. The decline in both periods is due to political advertising in 2016 and softness in the direct response advertising market in the U.S., which impacted our cable networks. In addition, as Alan noted, the market was impacted by the shift in ad dollars from Q2 to Q1 due to the world baseball classic.

Other revenue, which is primarily related to the licensing of content, grew $0.6 million and $0.5 million in the 3- and 6-month periods, respectively. The increases were due to the timing of revenue recognition of certain licensing agreements with third parties, including PANTAYA. Going forward, we expect licensing revenue to vary depending on the timing of delivery of content.

Subscriber and retransmission fees represented approximately 56% of our revenue in the quarter, up from approximately 51% in the same period in 2016. Operating expenses were $24.7 million for the quarter, an increase of 1%, as compared to operating expenses of $24.4 million for the comparable period in 2016. Operating expenses for the first 6 months were $50.8 million, an increase of 5%, as compared to $48.2 million for the comparable period in 2016.

The increases for the 3 and 6 months were driven by transaction costs related to our strategic investment activity, as well as higher stock-based compensation. The increase in the 6-month period was also due to costs incurred in connection with the amendment of our term loan. These increases were partially offset by lower news and programming costs.

Adjusted EBITDA was $16.1 million for the 3-month period ended June 30, an increase of 4%, as compared to adjusted EBITDA of $15.5 million for the comparable period in 2016. Adjusted EBITDA for the 6-month period ended June 30 was $30.6 million, an increase of 6% as compared to adjusted EBITDA of $28.8 million for the comparable period in 2016. Excluding political revenue, adjusted EBITDA for both the 3- and 6-month periods increased 9%. As Alan mentioned, we remain on target for mid- to high single-digit increases in adjusted EBITDA for full year 2017, excluding political advertising revenues and our attributable interest and minority investments.

Turning to the balance sheet. We had $212.3 million in debt and $155.5 million of cash. Our leverage ratio is approximately 3.2x, and net leverage ratio was approximately 0.9x. In terms of our strategic investments, we guided at the beginning of the year that we expected to fund $30 million to $35 million in 2017 for Canal Uno and PANTAYA. Following our investment in REMEZCLA, our total investment spend in these 3 initiatives is now expected to be $35 million to $40 million in 2017. Through June 30, we have funded $14 million in strategic investments.

Finally, in late June, we announced a $25 million share repurchase plan. As we were in the cooling-off period following the announcement, no shares were repurchased during the second quarter. We were, however, active in the market starting in July. Going forward, we will update you on the amounts repurchased each quarter.

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

(Operator Instructions) Our first question comes from the line of Steven Cahall with Royal Bank of Canada.

Maybe to kick off with the advertising outlook. You called out some of the direct softness in the quarter. So I was wondering if you can give us maybe a little bit of the outlook both on the domestic cable side, where you see that trending in the back half of the year? And then you also spoke at length on Puerto Rico and how the new budget could cause some short-term weakness. So do you see deceleration in advertising in the short term on the Puerto Rico side? Or have we sort of bottomed to a more stable point there? Any more color would be great.

Steve, it's Alan. I think those are relevant questions. Questions that we obviously ask ourselves every day, and try to get answers to. The visibility on both of those is somewhat limited. On the Puerto Rico side, there has not been much visibility historically, and revenues on a quarter-to-quarter, or even month-to-month basis have been somewhat volatile. We're not seeing any significant downturn beyond what we've seen in the past. We're anticipating that there could be some additional bumpiness depending on how the advertising and how the economy reacts to the austerity measures in the new budget. But we haven't seen anything materially change. And I think a lot of the second quarter weakness was more timing related to shifting into first quarter as opposed to things that were endemic to the second quarter. And if you look at the first half of the year, the advertising revenues actually down only low single digits versus first half of 2016, excluding political, which is actually a little bit better than we had forecast. So I wouldn't read too much into 1 quarter. And I think the market is performing generally as we anticipated it would. And as of now, we don't see things changing in the second half of the year. On the domestic side, we have seen some weakness in the DR market. We've also seen that there's been a little bit of shifting of DR dollars into the broadcast networks, who have traditionally not pursued that revenue, but because of their own ratings weakness with Telemundo and Univision, they've chased some of those dollars that they previously wouldn't. So we're competing with those networks, which was not the case historically. So I think it's a combination of some weakness and some softness in the DR market and the additional competitor pressures. Again, hard to have visibility we have. We think that the market will not get worse, and may get better in the second half of the year, but these buyers have done -- the scatter buyers that are on such short-term basis that it's hard to know -- to have a crystal ball into it. We are encouraged by the national buyers that we have received on Cinelatino. We think that the fact we've gotten bought by some of these major blue-chip Fortune 500 advertisers is a great sign for us and their confidence in our business and their recognition of the value that Cinelatino provides. And these things tend to have a snowball effect. Once you get certain advertisers in certain industries to start buying into you, then you get on the radar screen of all of the other advertisers in those industries. So we're encouraged by that. Those numbers won't really be reflected until -- the earliest is the fourth quarter. In some cases, not until 2018 because they're upfront calendar buys in some situations. But we are, nonetheless, very encouraged by that.

Okay. And then on the domestic distribution side, do you have anything upcoming that gives you opportunity either to accelerate your affiliate fee or improve carriage on domestic networks?

Well, we don't comment on renewals and negotiations. But we don't see any -- anything that will negatively impact our growth that we've experienced. We expect that growth to continue both from a rate -- from a fee and from a subscriber standpoint. Our organic subscriber growth has been strong and has been a completely different paradigm to what you're seeing in the overall market. And we think given the fact that there are still only about 5 million subscribers to the U.S. Hispanic package in a market with 16 million Hispanic households in the U.S., we think there's still tremendous growth opportunity, especially the distributors would focus on this audience and would market and price the product properly. Remember that our networks are still being offered in standard definition in 2017. And the fact that we have grown 4% organically while having standard definition networks, to me, is just proof of the hunger the audience has for these networks and the variety and content that these networks provide. And we anticipate that one or more of our networks will go HD in the near term. We've had very positive conversations with distributors that recognize that they're essentially providing on inferior product to the one segment of the audience that is actually growing for them. So we remain optimistic on the continued growth, and we also believe that there will be new OTT bundles being offered by DIRECTV and others. DirecTV Now, for example, currently does not have a Hispanic package, but we believe will have a Hispanic package in the near term. It will present further incremental growth opportunity.

Great. And then on PANTAYA, you've mentioned the 35 million sort of total addressable market. I was wondering, if you've done any sort of testing or any other analytics that would give you any early indications of like what sub-numbers could be achievable in the first year or 2 for that venture?

Well, without going into detail, we have done extensive focus groups and research with Lionsgate on the market. And that research and those focus groups really reinforced that we think we're on to something here. We had very positive response almost universally among all -- among Hispanics from all countries of origin and all age groups and frankly, all levels of acculturation, that this is a product that would they would really like to have. So we think given the fact that there are nearly 60 million Hispanics in the U.S., nearly 40 million that don't subscribe to a Hispanic pay-TV package, this is a really big opportunity for us and we're very excited about the potential upside for this. We think this is a meaningful asset opportunity for both us and Lionsgate.

And then finally, Alan, both of you and Craig spoke sort of separately about both the M&A and the share repo side of things. So how do we think about how close or not close you might be on major acquisition opportunities? And then what you see as an appropriate pace for the buyback as we move through this year and next year?

Well, I'll answer on the M&A, and I'll let Craig respond to the buyback question. On the M&A, we continue to look at a number of deals. There are number of deals in the pipeline that we are enthusiastic about. But until you close the deal, it's not closed. So we're enthusiastic about a number of things we've seen. We are optimistic that we'll get one or more deals done. But again, whether -- hard for us to comment on timing because every time I have thought that we were close, one more or more things occur to delay or protract the process. So again, I'm optimistic and I think we'll get deals done. I think we'll get really interesting and deals done that are synergistically unique to us and synergistic to us. But I can't really -- I don't really want to comment on timing yet.

And on the share repurchase, as you know, we're constrained by volume limitations. So you can figure out where we are able to be in the market, it's based off of that. We find the stock attractive at these levels. You'll probably get a better sense to the pace when we announce what we bought back in the third quarter. Because as I noted, we had a cooling-off period after the announcement in June, so we didn't get into the market until July. But that said, the primary allocation of our capital is still to pursue M&A.

And our next question comes from the line of Curry Baker with Guggenheim Securities.

Maybe -- I have one on Canal Uno and the brand refresh and the relaunch that you guys have coming up here in about 2 weeks. Can you maybe speak more and give a little more color on the health of the advertising market in Colombia and advertiser interest that you're seeing in market so far ahead of the launch? And maybe a little color as far as how quick you think you'll be able to take share there.

The market distribution in Colombia has been soft. I think, generally, Latin America is experiencing a bit of a downturn in their overall -- in the economies and overall markets. So the market this year has been soft. But we believe, in the long run, it doesn't bother us. And we believe in the long run, Colombia, is a really strong economy, very solid geopolitically and has really tremendous upside in terms of its economic growth and, accordingly, its advertising market growth. So we look at this as a great, long-term opportunity and Colombia is really a great market. We've had really positive response from advertisers. Advertisers, frankly, are really hungry for an alternative. Colombia has been a duopoly for over 20 years. Just 2 competitors in a market of 50 million population, which is really unheard of on a global basis. So -- and those 2 competitors have, to some extent, worked in lockstep. So the idea of having a disruptive force like us in the market and also -- and network that, frankly, is going to be producing and broadcasting in what we believe is a more modern and viewer-friendly way, has gotten very -- has gotten really tremendous response from advertisers who are anxious to work with us and are anxious for an alternative to the existing duopoly.

Okay. Also, more of a housekeeping question. Is the other income line, I think you guys had a positive $121,000 this quarter. Is that where you're accounting for the equity method investments? And in aggregate, are these investments positive and should we continue to see that moving forward?

Just to clarify, other revenue is up $600,000 in the quarter. And this does not pick up our other income or equity interest in the joint ventures that is actually running through other income line below operating income. And so this is -- what's driving other revenue is the licensing of content to third parties, including PANTAYA.

And I'm showing no further questions at this time. And I would like to turn the conference back over to Alan Sokol for any further remarks.

No further remarks. Thank you, everybody. Have a great weekend.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.