Q3 2019 Earnings Call
Ladies and gentlemen, please standby your conference call will begin momentarily once again, ladies and gentlemen, please stay on the line.
My name is covenant I'll be your operator today, a replay of the coal will be available beginning at approximately one PM Eastern time today Tuesday November 15, 2019 by dialing 855859 Tuesday or five six.
Outside the United States by dialing 404 or five through seven three 406.
The conference I'd for the replace Where's the Euro 6899 too.
Well now turn the call over to Miss Danielle Brown 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, and I'm with Edelman financial communications atmosphere, the outside Investor Relations firm joining me on the call today is Alan Sokol Hemispheres, Chief Executive Officer, and Craig Fisher Hemispheres, 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 could 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 companies. 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 here in our 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.
Reconciliation of GAAP to non-GAAP information is included in our earnings press release, which was issued earlier this morning.
Sure and 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.
Our channels performed strongly during the quarter, maintaining or expanding their leadership positions. We continue to innovate agreed fresh compelling content for our unique anhydrous audiences on a very cost effective basis. We're also excited about the progress we are making it the value we are building on our strategic initiatives.
In Puerto Rico, Wap is ready results showed strong year over year growth Wapas Primetime ratings in Q3 grew by 19% among adults 18 to 49, driven by wireless unrivaled programming lineup, including the new hit reality competition series get adipose. Good Editas ratings have increased every month since its may launch during the third quarter.
Order get us ratings among adults 18 to 49 were higher than it Univision and Telemundo combined.
For several weeks during the summer, Puerto Rico experienced significant political unrest, culminating in the recognition of the governor and a tumultuous process to select the successor.
While we were optimistic that these beds will result in greater governmental transparency and accountability. The island did experience some short term its stability within its suing negative impact on advertising spending.
Television AD spending that third quarter wasn't materially weaker than expected and this impacted our third quarter results. However, we do not expect any long term spill over from these events, we are seeing confidence and stability return to the market and in turn improved levels of advertising spend.
Notwithstanding these beds, Puerto Rico's economic metrics continued to be largely positive.
The unemployment rate has decreased to 7.6%.
First time it has been below 8% in at least 55 years.
Net migration out of Puerto Rico January through July was 20000 significantly below pre storm levels. According to most recently released passenger data from the San Juan International Airport.
As of October 24th we reached an impasse in negotiations with dish regarding renewal or WAPA and WAPA America agreements as a result dishes blacked out Wap and walk with important this in Puerto Rico, and WAPA America in the U.S.
During our extended negotiations with dish, we have asked for fair and equitable rate, but do not forget that do not believe that this is properly valuing our channels extraordinary lineup of news sports and entertainment programming dishes frequently blacked out networks. So this is not unusual for them.
During the third rank distributor in Puerto Rico distributions to pay the established market rate being paid by significantly larger distributors in the meantime, we've received a committed outpouring of support from our viewers in Puerto Rico, and the U.S., which we are hopeful we'll encourage dish to responsibly started this important customer base properly value our networks.
Turning to our U.S. cable channels, we continue to see strong momentum and in a world where most networks are seeing large audience declines we saw overall ratings growth.
WAPA America markets highest rated quarter ever driven by spring next coverage of this summer's protests and political crisis in Puerto Rico.
WAPA Americas ratings grew by an impressive 48% over the third quarter of 2018.
25th the data the Governor's resignation WAPA America delivered its highest audience ever, peaking at nearly 300000 households, and making WAPA America number one Spanish language cable network on that day.
Plus the oldest marked its 11th consecutive quarter up year over year growth, most notably for the first time past Crs outperform Univisions Telenovelas channel in total day ratings by an impressive 25% and delivered more than double the audience a tone of else in prime time.
You'll notice continues to find new audiences, who are attracted to us unique offering of the best novell's and dramas from throughout the world.
The Latino continues as the second highest rated Spanish language cable network in Nielsen coverage ratings, our quarter was highlighted by the premiere of Mexican box office. It when we had seen Peterle, which was our highest rated program of the year among adults 18 to 49.
Central America day also posted another quarter of strong ratings growth, increasing total day ratings by a robust 49% over the third quarter 2018.
This represents.
Quarter of year over year audience growth.
Regarding the U.S. subscriber growth, although we continue to outperform the overall pay TV market in the third quarter, we experienced a small decline in our subscriber numbers. This decline was largely driven by one distributor that alternatives that alternate subscription signup process in a way, which makes it much more difficult subscribe.
To the Spanish language package.
We are in conversations with this distributor and they are addressing this issue, which we believe to be short term in nature.
During the quarter, we completed a production at our first series under our previously announced joint venture between that more of its not media and harvest. The entertainment. The series ebay is it action comedy co produced with Viacom the snap Mar Vista joint venture was will receive a production fee and importantly, we will have us rights to the series for upon tie and still.
You know this is attempt which works very well for us and which we hope to replicate.
Turning to our strategic investments come out with Columbia again experienced strong at attractive ratings growth with total day ratings up 23% over the third quarter 2018, including a 35% increase in prime time.
As we announced in October cut out you know with entered into a content AD sales alliance with discovery, we are optimistic thats important strategic partnership will bolster our programming its sales efforts.
This month, we would we will be producing a first cannot who know WAPA crossover vest without Colombian could add on facing off against the Puerto Rico get Aeros. This event will air in both markets and should be a big hit.
Our subscription streaming service punt tie up has experienced terrific growth as reported by PON tie in October . The service ended the quarter was approximately 500000 subscribers by Tai has recently launched two new hit series both of which are unlike anything that has been seen us banners television with a fresh modern and premium.
Field and subscribers have responded enthusiastically importantly, they were both produced on a cost effective basis at a fraction of the cost of series on other streaming services in the U.S., we're very excited about monetize future.
We also recently begun to develop a new revenue stream from licensing our valuable at deep content library to existing and new streaming platforms in Latin America.
With the proliferation of streaming services in Latin America, we expect this to be an area of growth for us. Thank you everyone I'll now turn the call over to Craig.
Thank you Alan and good morning, everyone.
Net revenues in the third quarter were 35.8 million a decrease of 4% as compared to net revenues of 37.2 million for the year ago period.
The decrease was due to decline in advertising revenue offset in part by an increase in affiliate revenue.
Advertising revenue declined 2.1 million or 13% due to the disruption to the Puerto Rico advertising market caused by the political unrest, including the resignation of the governor.
As well as the timing of Miss Universe, Puerto Rico, which as noted last quarter was produced and broadcast in the second quarter of 2019 as compared to the third quarter of 2018.
Notwithstanding the strong ratings performance at our U.S. cable networks, we saw a decline in advertising revenue due to softness in the direct response advertising market.
The affiliate revenue for the quarter increased 700000 or 4% over the comparable period in 2018, primarily due to rate increases and the launch of posture on based on spectrum.
Net revenues for the nine months ended September Thirtyth 2019 were 110.1 billion, an increase of 9% as compared to a 101.1 million for the year ago period.
The increase was driven by growth across all of our revenue streams advertising revenue for the nine month period increased 2.1 million or 5% over the comparable period in 2018, primarily due to the favorable comparison with the first quarter of 2018, which was negatively impacted by Hurricane Maria.
Affiliate revenue for the nine month period increased 5.6 million or 10% over the comparable period of 2018 due to rate increases and subscriber growth.
The increase the nine month period was also due to an increase in other revenue of 1.3 million driven by higher content licensing fees and the contribution from snap media, which we acquired in November 2018.
Operating expenses in the third quarter were 25.3 million a decrease of 1% as compared to 25.4 million for the year ago period, due to lower depreciation and amortization expense and the timing and production of Miss Universe, Puerto Rico, partially offset by higher stock based compensation.
Operating expenses for the nine month period were 74.3 million a decrease of 2% as compared to 76.1 million for the comparable period in 2018, due to lower depreciation and amortization expense as well as hurricane related expenses incurred in the prior year period, which we did not incur in the current period.
We also benefited in the current year from incremental gains related to the FCC spectrum Repack. This decrease was partially offset by higher stock based compensation and higher programming and production expenses relative to the prior year period, when we reduce costs at WAPA following hurricane Maria.
The aforementioned gain from the FCC spectrum Repacked is included in operating income backed out of adjusted EBITDA.
Adjusted EBITDA in the third quarter was 15.7 million a decrease of 2% as compared to $16.1 million for the comparable period.
Adjusted EBITDA for the nine month period was 48.1 million, an increase of 16% as compared to 41.5 million for the comparable period.
Turning to the balance sheet, we had 207.5 million debt and 85.2 million of cash as of September Thirtyth 2019.
Our gross leverage ratio was approximately 3.1 times and net leverage ratio was approximately 1.8 times.
Capital expenditures were 600000 in the quarter, including 100000 for equipment purchases to replace equipment damaged by Hurricane Maria and for equipment required by the FCC spectrum repack.
We anticipate that insurance proceeds in FCC reimbursements will cover most of these expenditures.
The FCC repack is ongoing and we expect to be completed by the end of 2020.
Turning to strategic investments during the quarter, we funded $5.4 million into our joint ventures, including 4.5 million in canal Ono down considerably from the prior year due to the completion of concession payments earlier this year.
As well as lower working capital needs as canal window continued build scale.
Additionally, we funded 900000 into fun tire.
As Alan mentioned, given the impact of the unexpected political unrest in the Puerto Rico advertising market in the third quarter and the uncertain left of the dish blackout, we're now forecasting a low double digit percentage increase in adjusted EBITDA for 2019 as compared to our previous guidance at mid teen percentage growth.
However, our business fundamentals remain strong we are confident in our ability to create long term value for our shareholders will now open the call your questions.
Ladies and gentlemen, if you have a question or comment at this time. Please press Star then one key on your Touchtone telephone. If your question has been introduced and yourself from the Q. Please press the pound.
Our first question comes from Caribbean Guggenheim.
Good morning, Thanks for the question guys.
I guess, maybe starting with dish is there any more color you can provide I guess a are you.
Currently still talking the dish and.
Is there any sort of base case scenario when you expect resolution.
Sometime in the fourth quarter.
Hi, Good morning, Yes, we're still in conversations with dish. The you know the gap is not.
Significant between the two of us.
Hopefully, we can get a deal done but until you have a deal done it's not Doug.
Okay. Thanks.
Then I guess, maybe just broadly speaking about next year I get the political noise for this year.
But as we look for Abercrombie advertising Morgan, Puerto Rico, and the WAPA PR outlook.
Do you expect a more normalized environment.
Next year in Puerto Rico, only advertising front.
And then maybe could you also comment about your expectations for political next year I'm in Puerto Rico. Thanks, sure sure Hurts a little early but you know and there's not there's never been a lot of visibility in Puerto Rico, because most advertising is done on a quarter scatter basis. So we don't have a real crystal ball.
20.
Significantly at the time, but that said listen to what happened this quarter. This year with something nobody could have predicted and and certainly was not anything that anybody could have seen coming but these scandals happen from time to time in Puerto Rico. This was a scandal of unprecedented.
Precedent that in history that said, we're seeing the market from up nicely in Q4 and that we're feeling good about carrying over into next year. We also think that next year should be helped by.
Continued inflow of government funds, which have been very slow to commit to Puerto Rico, but we hope that that will be accelerating over the next year and then finally on the political side, we think it's going to be a very active political year again, a little early to say, we don't know how many candidates are going to be running we don't know whether both parties will be havent primaries.
Whether just one party since we don't really havent incumbent governor running for reelection.
So there's a little uncertainty in it but I do believe that it will be a very contentious election, which typically bodes well for spending.
Okay. That's helpful. And then maybe a final one just on 10 tie up.
500000 subs I think thats. Good can you maybe you talk about the total addressable market you see there.
And then maybe also any color on future funding commitments you know I think you're down just 900 K this quarter.
Sure on the funding side I think they the funding commitments going forward, we do not expect to be significant.
And we feel that hitting a breakeven is within the near term reach.
And we feel great about the growth upon type growth has accelerated with the introduction of of our new premium TV series and other products.
We feel that our marketing efforts upon entire really paying off and we're we're seeing a lot of fraction of Fran frankly feel like we're hitting sort of a critical mass in the what he has become aware petai yet.
And.
And subscribing to it and retaining it.
Churn is down.
Trials are up subscriptions are up so all the metrics are looking really good and we feel great about it sort of the addressable market. There is 17 million or sell Hispanic households in the U.S. now not all of them are going to subscribe to tie up but.
We feel that we can get a significant percentage of expanding home is just because there's nothing else like this on the market. There is not it's not like the general market were you now have a plethora of competing streaming services all of which offer top flight to premium high priced content. We're the only ones out there with this type of product.
And it's a really good product we've gotten great response from the audience.
And if you look at the right rankings, which are publicly available you'll see we are a top 10.
Entertainment.
Streaming service on both both Apple and Google So all that I think bodes really well for for the future of anti we're super excited about it.
Okay.
Sorry, just add on the funding as previously stated we.
Committed to funding our share OTA totals about $10 million were about 8.5 million.
Through 930 sort of another billion to happen our commitment to fund into the venture.
Okay. That's helpful. And then maybe one quick last home and higher.
You can you maybe speak to is there an opportunity or appetite to maybe bringing the service on a consolidated at some point I know you obviously have a partner there bought up.
Can you maybe speak to that at all.
Obviously, we have a partner that I think it's also enthusiastic about it and positive about it but.
We like on tie and if we if that opportunity presents itself to own more appetite at evaluation that we think makes sense, we would we would seriously consider that.
Great. Thanks for the question guys.
Okay.
Our next question comes from Stephen Hart with Wells Fargo.
Yes. Thanks, maybe first could you quantify the dish sub base or maybe just talk to you about how significant dishes in your U.S. cable sub counts these days and since they went through the big blackout with Univision a year or so ago are there significantly fewer Hispanic subs on dish. Today, then maybe there was a year or two ago.
Yes, hi, Steve good morning, without going specific numbers, because we don't want to.
Hi, there any competence realities.
Dish has lost a significant percentage of their subscribers at that before the Univision blackout, the inefficient blackout cost them several hundred thousand subscribers and so they are much more today than they were.
Yes, a year ago, but there's still significant.
In Puerto Rico. They are the number three distributor and significantly smaller than the top two distributors and significantly smaller than they were before the storm.
Gotcha.
And then you mentioned the distributor that made it harder to sign up does that mean like you were moved to a more expensive tier or could you just give us maybe a little more color there and it sounds like you're in a constructive dialogue to to get that done we are they realize the problem I mean, they we started seeing their numbers.
Start going wrong Directionally after the consistently and historically.
Performed very well with Hispanic and outperformed their overall results.
We call, we call them and they told us that they've been having.
Issues with the way they approved by their they change the way subscriber sign up for.
For subscriptions and somehow in the nuisance in a new sign up Hispanic it sort of become very difficult to find that located.
And we were not in ourselves honestly could not find it.
So they're aware of it and they are working on it. They believe the system will be fixed and and that they will then that they'll be able to resume their prior practices.
So we're hopeful that that is the case I mean, I think it is a in it appears to be a complete fixable problem.
So does that primarily explain I'm, just kind of how why subs were down year on year in the quarter is that what you mostly out of scrap too. We outperformed every the result of every other major distributor that's reported today in terms of our results quarter to quarter sequentially versus their results. So yes, we would have had.
Positive results, but for that situation.
Gotcha.
And then TNT is selling some assets in Puerto Rico, I think to Liberty does that have any impact on your business relationships in Puerto Rico at this point for the deal hasn't closed yet so little a little early to tell.
We have a really good relationship with Liberty.
So we're optimistic that the their continued investment in the market will be a positive thing. They certainly we'll spend more money in advertising they will have to rebrand HCT and relaunch HGTV. So that generally represent that generally means signifies that there will be added.
A meaningful increase investment in advertising in the market and and I'm sure they will be.
We will be having conversations about ways that we which we can help each other.
Great and last one for me on the U.S. cable network advertising you mentioned some of the softness in direct response. So is the way we kind of think about this that your ratings were really strong and then just the spot market you saw some pricing soften a little bit and where us cable nets advertising dollars still still up despite that and and have you.
See any change in the spot market since the quarter ended thanks.
We have seen the market improve a little bit since the quarter ended but there were several major accounts that went dark in the third quarter, which not it not a permanent thing, but a temporary thing these things happen from time to time.
Based on the the business there on individual businesses, but that impacted our results in the quarter that said, we are optimistic going forward that given the strength of our networks the of and the fact that will not experiencing.
The same sorts of negative results that most other linear networks are experiencing that we think that there is tremendous value their networks that advertisers recognized that and that one some of these advertisers come back into the market, we should be doing fine.
Thank you.
Ladies and gentlemen, conclude the Q and a portion of recall today I'd like turn the call back over to our hosts.
No political no further comments or questions. Thank everybody for joining.
Ladies and gentlemen, does conclude todays presentation. You may now disconnect have a wonderful day.