Hemisphere Media Group Inc (HMTV) 2021 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Hemisphere Media Group, Inc. Fourth Quarter and Full Year 2021 Financial Results Conference Call. My name is Paul, and I'll be your operator today. I will now turn the call over to Danielle O'Brien. You may begin.

Thank you, operator, and good morning, everyone. I'd like to welcome everyone to today's conference call. I'm Danielle O'Brien with Edelman Financial Communications, Hemisphere's outside Investor Relations firm.

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 release, which was issued earlier this morning.

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, Danielle, and good morning, everyone. 2021 was another strong year for our business finished with a solid performance in the fourth quarter. This year was highlighted by our acquisition of Pantaya, a year of record-breaking results at WAPA, several important partnerships and launches with virtual MVPDs in the U.S. and the continued leadership positions of our U.S. cable networks.

For the year, we delivered a 29% increase in net revenues and even with added impact of Pantaya, we achieved growth across all of our revenue streams. Before I dive into our performance, I want to briefly address the market value of our business, which has deteriorated in recent months. Very simply, our stock price does not in any way reflect the fundamental value and strength of our company.

We have consistently delivered strong results and growth and in particular, during 2020 and 2021, we delivered industry-leading growth. And despite the headwinds relating to the pandemic, we set all-time revenue records.

Last year, we acquired the leading Spanish language streaming platform in the U.S., which will be a major growth engine for us over the coming years. Our very talented and seasoned team has continued to prove its ability to perform with speed, creativity and agility despite difficult macroeconomic circumstances including successfully navigating through hurricanes and earthquakes in Puerto Rico and a global pandemic.

Our business model is proven, tremendous runway for growth. We have never been more excited about the prospects for Hemisphere. Turning to our performance. Pantaya continues to be the premier destination for exclusive premium Spanish language original series and movies. As of year end weighted close to 1 million subscribers, a modest quarter-over-quarter contraction, largely due to a reduction of fresh content as a result of production slowdowns during the pandemic.

We also pulled back on marketing spending during Q4 given the limited amount of new content and chose not to take subscribers inefficiently. As we previously indicated, we ramped up production in the second half of 2021 and our increasing investment in both programming and marketing in 2022 to drive subscriber growth and retention.

This year, we expect to release 16 original series and many premier movies, representing an extraordinary and unprecedented lineup of world-class content. Most recently, we premiered a highly acclaimed series, Señorita 89 on February 27. And among our many projects, we are commencing production on radical, the latest film starring Eugenio Derbez, the #1 box office star in the U.S. Hispanic universe.

Over the past few months, we have also entered into development and coproduction deals with some of the most popular talent and most prolific production studios. While we have significantly expanded our production, it's also important to emphasize that we are swimming in a completely different lane than the English language streamers.

We are presently the only premium subscription streamer super serving a 60-plus million and fast-growing U.S. Hispanic community. And we have a very cost-efficient production infrastructure, which enables us to produce at a small fraction of the cost of English language series. We have the further ability to significantly reduce our cost exposure by licensing Latin American rights to content to streamers such as Amazon, Netflix and Disney+, which typically pay us well over 50% of our production budget in exchange for these rates.

Regarding Pantaya's distribution, we are in advanced negotiations with the major telco to be included in a bundled package, which we believe will deliver a meaningful number of new subscribers.

At the same time, we are also in negotiations with several other major Telco and Connected TV distribution partners.

For all of the above reasons, we are confident that we will drive significant subscriber growth over the course of the year and we remain on track to achieve our long-term target of 2.5 million to 3 million subscribers by 2025.

Turning now to Puerto Rico. We're very proud to announce that WAPA had the highest revenue year in its history, with all-time records in both advertising and retransmission revenues. This result is especially impressive given the challenges posed by COVID-related restrictions and lockdowns.

The macroeconomic situation in Puerto Rico continued to strengthen throughout the year, with key metrics across business, consumer and tourism activity trending very positively. Puerto Rico is currently in the strongest economic position it has been in for many years with very positive indicators for future growth.

The economy should be further bolstered by the issuance of an executive order this week eliminating most COVID-related travel and capacity restrictions. In January, Puerto Rico finally received approval to exit bankruptcy with the restructuring plan reduces the largest portion of the government's debt by about 80%.

The deal will also save the government more than $50 billion in total debt payments. Puerto Rico's commercial banks are anticipating as the common loss emergence from bankruptcy will spur an island economy that is in the early stages of a growth cycle.

The exit from bankruptcy will also provide the government with the certainty to engage in long-term planning and infrastructure investments. Virtually all key economic metrics in Puerto Rico continued to trend very positively through the end of 2021. Employment levels have now surpassed pre-pandemic levels.

Despite inventory shortages, auto sales had their best year since 2005. Airport passenger volume doubled compared to 2020 and even increased by 3% versus 2019. Similarly, hotel occupancy rates actually exceeded 2019 by 4% as tourists were attracted by Puerto Rico's convenience and high vaccination rates.

Puerto Rico's economic recovery will be further bolstered by the tens of billions of federal funds that have yet to be dispersed. Expectation is that these funds will start flowing in the second half of 2022 and beyond.

All of this will benefit WAPA, which has, once again, maintained its dominant ratings position and market share and has further solidified its growth profile. The principal selling demographic of adults 25 to 54, WAPA had 24 of the 30 highest-rated programs in the quarter. WAPA's quarter was highlighted by the miss universe context, which delivered an astounding 69% viewing share among women 25 to 54. I am proud that WAPA has now been the #1 station in the market for 12 consecutive years uninterrupted.

In Q4, we faced a difficult comparison to the fourth quarter of 2020, which was the highest advertising revenue quarter in the history of Puerto Rico television.

Nonetheless, despite supply chain issues impacting retail and auto, this year's fourth quarter was very strong and in fact, WAPA's second highest quarter in its history with growth of 31% over the fourth quarter of 2019. We are confident that the strong performance will continue going into 2022.

Turning now to our U.S. cable channels. Our networks continue to be leaders in their respective content categories. Based on coverage ratings, 3 of our networks were among the top 10 highest-rated Spanish language cable networks and 4 were among the top 15.

Notably, Pasiones was the #2 rated Spanish-language cable network in primetime Monday to Friday. And WAPA America's early fringe newscast with the highest rated newscast on Spanish language cable in any day part.

We have been successful in expanding our distribution with launches on virtual MVPDs and expect this trend to continue.

Last year, we entered into an agreement with YouTube. YouTube's launch of its Hispanic package has been delayed, but we now expect that launch to occur soon and believe it will result in meaningful subscriber growth.

Additionally, as of March 1, all 5 of our channels have launched on Globo's Latino package. We are in discussions with other platforms that are optimistic on securing additional launches.

While we continue to experience organic attrition with our cable subscribers, we have mitigated these losses with new launches and expanded carriage agreements.

Turning to Colombia and our (inaudible) Canal Uno, the economy is improving despite the recent spike in COVID cases due to the Omicron variant. The TV advertising market increased in Q4 by 18% over Q4 of 2020, and there's strong momentum heading into 2022, which is a presidential election year and shift strong political advertising.

Our ratings improved over the fourth quarter of 2020, and we are optimistic heading into 2022. In closing, we are managing an extraordinary portfolio of assets and believe we have a tremendous value creation opportunity in front of us. Pantaya's upcoming slate of content is unprecedented. We have positioned the kinds of premium series and movies that have never been available until now, and we have the ability to monetize and license that content outside of the U.S.

We are well positioned to dominate this unique and untapped market for multiple angles and are confident that our transform business will prosper as a result, creating significant long-term shareholder value.

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

Thank you, Alan, and good morning, everyone. We are excited to have continued our strong performance through the end of the year. Net revenues for the fourth quarter were $56.8 million, an increase of 21% as compared to $46.9 million for the same period in 2020. .

Subscriber revenue increased $13.3 million or 70%, primarily due to the inclusion of Pantaya, which contributed $13.6 million. Our cable networks benefited from contractual rate increases and new launches. However, these increases were offset by a decline in pay TV subscribers. Other revenue increased $1.6 million driven by licensing of our content to third parties.

Advertising revenue decreased $5 million or 18% compared to the prior year's record-setting quarter, which benefited from political advertising, pent-up demand related to the pandemic and unprecedented health care advertising spending. .

Excluding political in the prior year period, advertising revenue decreased $2.3 million or 9%. Advertising revenue was up 25% as compared to the fourth quarter of 2019. Net revenues for the year were $195.7 million, an increase of 29% as compared to $151.2 million for the full year 2020.

Subscriber revenue increased $39.8 million or 51%, primarily due to the inclusion of Pantaya, which contributed $39.1 million. Our cable networks benefited from contractual rate increases and new launches but these increases were offset in part by a decline in pay TV subscribers. Advertising revenue increased $3.6 million or 5%, primarily due to growth in the Puerto Rico television advertising market.

Excluding political, advertising revenue increased 12%. Advertising revenue for the full year 2021 was up 20% as compared to 2019. Other revenue increased $1.1 million or 22%, driven by licensing of our content to third parties.

Turning to expenses. Cost of revenues for the fourth quarter increased $3.2 million or 23% and for the year, increased $11.2 million or 23%. SG&A expenses for the fourth quarter increased $14 million and for the year, increased $49.2 million. These increases were primarily driven by the inclusion of Pantaya. We also incurred higher noncash charges, including amortization of intangible assets recognized as part of the Pantaya acquisition and higher stock-based compensation which collectively increased $2.4 million in the quarter and $12.1 million for the full year.

Additionally, the prior year reflected cost reductions as a result of the pandemic including the postponement or cancellation of certain programming and sporting events as well as salary reductions and employee retention credits provided by the CARES Act, which the company can not have in the current year.

As we said last quarter, marketing spend will be tied to the launch of content on Pantaya. So marketing costs may vary from quarter-to-quarter.

In the fourth quarter, because of a lack of fresh product being released, we pulled back on marketing spend. Adjusted EBITDA was $15.2 million for the fourth quarter as compared to $22 million in the prior year period. Adjusted EBITDA was $48.4 million for the year as compared to $63.6 million for the full year 2020. These decreases were due to the inclusion of Pantaya, which is in growth and investment mode.

Excluding Pantaya and political advertising revenue, adjusted EBITDA was $17.4 million for the fourth quarter of 2021 as compared to $19.4 million in the prior year period and was $63.8 million for the full year 2021, up as compared to $59.3 million in the prior year.

Turning to the balance sheet. As of December 31, we had approximately $252 million in debt and $50 million of cash. Our revolver is currently undrawn.

At quarter end, our gross and net leverage ratios were approximately 5.2x and 4.2x, respectively, which includes Pantaya's operating results since the acquisition. We expect leverage to tick up over the year as we continue to invest in programming and marketing and as we roll in a full trailing 4 quarters of Pantaya's operating results.

Further, we expect to leverage the trend lower as Pantaya matures. Capital expenditures were approximately $1 million in the quarter, bringing CapEx to $4.2 million for the year. We funded $2.4 million in the Canal Uno in the quarter, bringing our total year funding to $6.8 million.

For 2022, our capital allocation priority remains to invest in our business and fund Pantaya's growth particularly through investment in the production of original content and marketing to drive subscriber growth.

Accordingly, we are expecting a material increase in our cash content spend for the full year 2022, a portion of which will be for content that will premiere on the service in 2023. It's important to note that we will have offsetting inflows and as we license our content outside of the U.S. and Puerto Rico.

In fact, we have already finalized terms on multiple licensing agreements in Latin America. We are pleased to have continued our momentum and finish the year on a strong note.

We'll now open the call to your questions.

(Operator Instructions)

Your first question is from the line of Steve Cahall with Wells Fargo.

A few for me this morning. So maybe first, I was wondering if you could give us any details on what type of subscriber acceleration you've seen on Pantaya since launching Señorita 89. And as we think about the seasonality of the business this year, are there quarters that will be particularly heavy with some of your content drops?

Steve, we just started Señorita about 1.5 weeks ago. So it's a little early to tell, but we're really encouraged by both the viewing numbers and the subscriber growth numbers as well as just the overall claim and attention that the series has gotten.

And in terms of the cadence of growth, because this year, we have 16 new series and a plethora of new movies that are dropping, we expect to see growth over the course of the year. Obviously, not all series, not all movies are equal. So growth may vary somewhat depending on that. But I think we can -- you can expect to see growth occur over the course of the year.

Great. And then you talked a lot about content spend and marketing costs. Just wondering if you'd be able to size any of those investments for us, particularly content whether that's cash spend or amortization.

Often, we think about subscribers as kind of being correlated to the increase in content spend. So whether it's year-on-year growth or total dollar number. Just wondering if there's any more color you can provide there?

Yes. We're not going to get into specific dollar amounts on the programming. Obviously, that will build throughout the year, as Alan noted. Our plan is to prudently increase investment in content to accelerate subscriber growth. It is right that you would expect the growth in subscribers to be tied to those content premiers.

I think given the programming lineup we have, this year, we're pretty optimistic about having a consistent cadence of new fresh content on a regular basis. So I think you would expect that trend to continue with the subscriber growth, obviously, as you noted, tied to programming.

To your point about timing, yes, the cash programming spend is an upfront expenditure, right? So we're funding the production of the series and movies. So that outflow will happen upfront. And some of this expenditure in 2022 will actually be for content releases that won't happen until 2023.

At the same time, we're also licensing out this content to third parties in Latin America where Pantaya is not available. And so we've seen, and we've actually entered into a couple of deals currently in the start of this year that we're recouping a majority of our production cost.

That licensing revenue also will come in starting from delivery of the products. So that's -- that will be delayed relative to the upfront expenditure, but over time, we will recoup that cost and generate a positive ROI.

Great. And then I was getting to ARPU in Q4 maybe right around $450 a month, which is pretty strong. So maybe just first is -- is that a good number or in the ballpark? I was wondering if you could make any comment there.

And then a lot of the media peers in streaming, especially early on, are using distribution deals like bundles with telcos to help expand their distribution. I'm wondering how you think about direct distribution versus some sort of a bundling arrangement?

So Steve, it's a good question. I think it's important to note that we've built our nearly 1 million subscribers one subscriber at a time. To date, we have not entered into any bundled deals, which I think virtually all of the major English land streamers have and that's sort of given them chunks of subscribers at a time. .

That said, where we think we're close to 1 deal, and we hope to enter other bundled deals, I think the telcos are very cognizant of the value that we've had. They've seen our results, they've seen our product and think very highly of it. So I think that will help kind of create some step function growth for us on our subscribers.

And clearly, when you're doing promotional subscribers, you're going to probably take a step back on ARPU in the short term, but in the long run out -- in the long run, it should all wash out.

And although you're taking a step back in ARPU you're not spending marketing dollars, at least to the same extent against those subscribers. So those subscribers ultimately may be more profitable to you than the one-at-a-time subscribers.

I'll let Craig respond to the ARPU question. .

Yes. Your estimate is in the zone, the mid-$4 range. As you know, our retail monthly subscriber fee is $5.99. We do have promotional pricing plans, including what has proven to be rather successful for us an annual plan at $49.99, but that obviously would carry a lower ARPU than the monthly. But we've seen strong renewal rates on those annual plans, and we thought we would welcome those subscribers every day.

And then obviously, you have the distribution revenue share splits against that. And the wholesale distributors typically have higher revenue splits than do direct relationships. And we over-indexed to direct relationships rather than to wholesale.

So our revenue splits on a blended basis are lower, and I think we've said this in the past, we also have a sizable number of subscribers that come through the Pantaya.com web platform, where we have no revenue splits at all on those. So that's why you're seeing the high flow-through on the ARPU.

Great. And then maybe just switching over to the cable networks. Are you able to size what the network growth will be from the Globo and YouTube launches this year?

Globo is easier because they're in existence. So it's going to be 6 figures subscribers for each of the networks from inception, and they've been growing at a very nice and impressive pace. So we're optimistic that will continue to grow. YouTube is starting from 0, but they have expressed to us their intent to invest significantly in Hispanic against Hispanic audience.

And also, they have now indicated to us that they intend to launch a low-priced Hispanic package, which does not require an English language buy through, and that will be key to its success.

Interesting. Okay. And then maybe just lastly for me. So the stock is at a pretty interesting level here, probably 1 of the few media companies that follow where you're not just below kind of pandemic levels, but you're below pre-pandemic levels.

I think the market had some issues with the potential equity raise last year and that may be spooked investors thinking about your willingness to participate in consolidation. So I'm just wondering how you think about the options to help unlock some of the value, how you think about strategic optionality for Hemisphere?

And if you can make any other comments as to ways you might pursue that in the future. .

Thanks, Steve. Well, look, as I mentioned, we are -- I think our stock price bears no relation to our real intrinsic value. The fundamental of this company is at least equal to what it was before we announced the equity offering, which was well over $1 a share, and we believe that even that was undervalued in terms of our true fundamental value.

Our core business, the legacy business remains strong. We have a unique asset with WAPA in Puerto Rico that is differentiated from anything else out there in the sense of our dominance in the market, the continued strength of Puerto Rico broadcast television, which is not subject to the attrition and viewership that you're seeing in the U.S. and other parts of the world. And the fact that we are -- the advertisers cannot buy around us in Puerto Rico. .

And we have other opportunities to drive new revenue streams to Puerto Rico, which we are working on and hopefully will develop and announce soon. And our U.S. cable networks, they've seen some subscriber attrition like everybody else, we've significantly offset that and mitigated that through new launches, expanded carriage, and we expect that to continue over time because we do have a good value proposition and there are still a number of distributors that especially on the virtual side, that don't have Hispanic packages that will need to in order to compete with Globo, YouTube, et cetera.

So we feel there's tremendous value there that has not -- that the market does not recognize that is not reflected in our stock price. And then it seems to us that there's obviously some trepidation in the market around Pantaya but we're super confident in Pantaya. We think it's a phenomenal opportunity.

We think the U.S. Hispanic market of $60 million plus has tremendous -- gives us tremendous upside and tremendous addressable market that nobody else is currently serving.

We also don't have the cost exposure, the cost risk that the English language streamers have and that we produce at a small fraction of the cost and we further mitigate that by licensing rights to Latin American streamers, which is a pretty competitive space right now.

We're getting tremendous value for our product among Latin American streamers. We effectively are both serving ourselves and building value, building asset value Pantaya while remaining kind of an arms dealer to third parties in Latin America and mitigating the risk on our production costs.

That said, we think the stock is incredibly attractively priced. We have no interest in a sales transaction at or anywhere near this price. In fact, we pulled our equity offering when our stock price went down to $8 or $9, we felt that we would rather be a buyer than a seller at that price.

And clearly, at this current price level, we absolutely are a buyer rather than a seller. Frankly, hitting on all cylinders in Puerto Rico in a way that it hasn't since we acquired this asset in 2007, and WAPA has maintained its dominant rating position in the market. And as such, we think that combination will continue to lead to a very strong advertising results for WAPA.

And in the U.S., we continue to see sort of consistent results of where we saw 2021. And a little early to tell where the market is going because we don't have -- we don't do upfront selling for our cable networks in the U.S. is all scatter. So it's hard to really project out for the full year at this point.

Okay. Maybe sticking with Puerto Rico. Can you give us a little bit more color? I think you alluded to sub trends there being stable. Can you just confirm that? And then do we know if any distribution agreements are up this year or early next year?

Yes. sub trends have remained stable. There has been very modest attrition in the fourth quarter, kind of low single digits, but we're seeing very those very stable sub trends continue into 2022. And I'm sorry, the second part of your question?

Do we know if you guys have any distribution agreements?

We have one small renewal coming up at the end of the year.

Okay. And then a quick one. On Pantaya, would you guys consider an advertising tier?

Yes, of course, we consider. I mean, we obviously are aware of what's going on in the market, the Disney announcement, et cetera. I think we're a little small now to do an advertising it. I don't know that the revenue -- would revenue realized will be significant enough to justify moving forward with that. But that is something that we will continue to look at a time booking as we build our subscriber base. .

There are no further questions at this time. I will now turn the call back to Alan Sokol for closing remarks.

No further remarks, operator. Thank you, everybody, for joining us today.

Thank you, sir. Ladies and gentlemen, this concludes today's conference call. Thank you for joining. You may now disconnect.