Q1 2021 Hemisphere Media Group Inc Earnings Call
Ladies and gentlemen, this is the operator your conferences scheduled to begin momentarily until that time your lines will once again be placed on hold thank you for your patience.
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Good morning, ladies and gentlemen, and welcome to the of Hemisphere Media Group incorporated first quarter 2021 of the financial results Conference call. My name is Jason and I will be your operator today at this time all participants are in a listen only mode. After the speaker's presentation, there will be a quest.
And the answer session to ask a question during the session you will need to press star one on your telephone.
Please be advised the today's conference is being recorded if you require any further assistance. Please press star Zero I will now turn the call over to Danielle O'brien. Please go ahead.
Yes.
Thank you operator, and good morning, everyone I'd like to welcome everyone to today's conference call.
Hello, Bryan and I'm with Edelman financial Communications hemispheres 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 the uncertainty and changes in circumstance, which may cause actual results to differ materially from those expressed or implied in such forward looking statements.
In addition, these statements are based on a number of assumptions that are subject to change.
Please refer to our company's most recent annual report on form 10-K, and our other public filings 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 the non-GAAP financial measure of.
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'll now turn the call over to Alan.
Thank you Danielle and good morning, everyone.
We delivered yet another exceptional quarter of results reflective of the differentiated nature of our business and our continued strong execution.
Further bolstered by the overall economic recovery.
Following the industry, leading performance in the third and fourth quarters of 2020, our strong momentum continued into the first quarter of 2021, we grew net revenues by 16% led by an outstanding quarter of advertising revenue growth of 35%. This top line growth drove a 37% increase in adjusted EBITDA in the quarter.
Beyond our exceptional results last month, we announced the acquisition upon diet, which we believe will accelerate the growth profile of our business.
Since we bought on tie in partnership with Lionsgate. It has quickly become the go to Spanish language subscription streaming service amassing of approximately 900000 subscribers and we have just begun to scratch the surface of the addressable market.
In three short years since its launch it's become clear the tightest sits at the sweet spot of the large fast growing and undisturbed U S. Hispanic market the metrics are incredibly compelling.
The 60 million Hispanics in the U S. Today estimated to grow to 75 million by 2030 of.
The 60 million 39 million fall into our core target of bicultural and Spanish dominant adults of huge subscriber acquisition opportunities.
And you'll be 90 per cent of the 39 million of our already accessing at least one streaming service demonstrating the strong appetite for screening.
On tie had the unparalleled deep library of critically acclaimed original titles from put the highest production ramp on Italy on.
As well as from World Class of third party content producers, such as Televisa, Sony and Lionsgate.
While some of the large general Mark the streaming platforms offer small sample of Spanish language content, none of them come close to competing with the depth quality of popular appeal up on day is offering and absolutely of previously stated we intend to meaningfully increase investment in content. We're very excited by the upcoming content pipeline, especially as production has broadly.
Resumed in two weeks, we will be releasing the second season of our hit reality series, the best family vacation, which was a massive success in its first season of 2019.
This will be followed by very strong out of the schedule for the second half of the year, including season. Two of Panther is most successful series to date and if whether the longevity.
While the business itself is incredibly exciting there are many compelling opportunities created by the combination of die and hemisphere.
Adding the ability to leverage our content production capabilities deep library promotional platforms and distributor relationships.
We are already negotiations of various connects D V platforms have virtual mvpds about adding per dire.
The goal is to attain to $5 3 million subscribers by 2025 of work.
Confident we can achieve that objective objectives.
Turning to the Puerto Rico business trends and consumer activity continued to improve building upon the momentum seen in the second half of 2020 as many of the COVID-19 related restrictions that were in place have been rescinded.
Employment levels have improved new auto sales are near historical highs cement sales are at their highest level since 2016, and the hotel booking rates are above 2019 levels, which was a record year of the recent census reported Puerto Rico's population of $3 3 million slightly higher than expected and a strong indication that out.
The migration has abated.
In April the by the administration announced the release of an additional 8 billion in the Hurricane Maria funding that had been previously withheld.
Puerto Rico is the tens of billions of hurricane recovery funds that have yet to be dispersed, which we expect will start flowing at a faster pace. We are more optimistic about Puerto Rico's economic future of than we have been in many years with our leading market position, we are well positioned to benefit from and improve the economy.
We saw another outstanding quarter of revenue growth at Whopper. This period represented the highest first quarter and what the history in both AD revenue and market share as a result of improved economic conditions. The overall TV AD market grew an extraordinary 35% in the first quarter and once again of what the outperformed the overall market.
While the retransmission fee revenue also increased substantially as newer loans became effective on January one at.
At the same time subscriber levels have remained very stable of Puerto Rico.
Turning to our U S cable channels, notwithstanding the challenging distribution environment. Our performance was strong and our channel to continue to submit their leading positions in the marketplace. We delivered solid advertising revenue growth across our cable networks.
Additionally, we executed a renewal of Cox communications for all of our cable channels, including expanded carriage for three of our networks, which will result in full national distribution of four of our five networks by July Another Testament to the singular value of our channels. We are also currently in advanced discussions with a major virtual MVP.
D and are optimistic that we will secure distribution this year.
We continued to see a contraction you of subscriber levels in Q1, although at a more modest rate on the year ago period. We are optimistic that we will be able to continue to mitigate organic subscriber declines with new virtual mvpds launches as they develop the Spanish language offerings and expanded carriage with existing distributors such as Cox.
All of our cable networks continued to perform well and deliver strong viewing.
Based on coverage ratings, all four of our measured channels. Among the top 15 rated Spanish cable channels with three of the top four with three of the floor of the top 10 Monday to Friday.
Specialty part of the patio on this is the second highest rated cable channel on Monday to Friday.
Turning to Colombia at our message of the Canal Uno the market remains challenged by the pandemic with the significant fourth wave of cases at low rates of vaccination to date Nonetheless.
Nonetheless Canal Uno had a solid first quarter with advertising revenue growth. Despite widespread lockdowns in January we.
We believe that Theres, a high level of pent up advertising demand that will be realized once case levels decline.
At closing we are thrilled to have continued our strong momentum into 2021, we continue to drive robust industry, leading growth in the face of challenging market conditions with peloton, we immediately become the market leader in the high growth Spanish language subscription streaming space and that transported the growth profile of our overall business. We are very excited about the <unk>.
Future of Hemisphere. Thank you everyone I'll now turn the call over to Craig.
Thank you Alan and good morning, everyone. We're excited to have continued our strong momentum into 2021. Please.
Please note that our operating results for the first quarter did not include part of tier as we closed the acquisition on March 31.
Net revenues for the first quarter were $37 6 million, an increase of 16% as compared to $32 $4 million per the prior year period with growth in all of our revenue streams.
Advertising revenue for the first quarter increased $4 1 million or 35% as compared to the prior year period, primarily due to growth in the Puerto Rico television advertising market, coupled with an increase in what the share of the market as well as an increase in advertising revenue at our U S cable networks.
Subscriber revenue for the first quarter increased 1% as compared to the prior year period due to contractual rate increases offset by decline in subscribers to our cable networks of.
Other revenue increased $1 million, driven primarily by the timing of the licensing of content.
Operating expenses for the first quarter were $32 5 million, an increase of 15% as compared to $28 3 million from the prior year period. The increase was primarily due to professional fees and financing costs incurred in connection with the acquisition of pump Tiger.
Excluding fees and expenses related to our strategic and financing activities operating expenses increased 2% in the first quarter of 2021 due to higher programming and production costs and higher third Party agency commissions driven by an increase in advertising revenue.
Offset in part by lower bad debt reserves, and lower depreciation and amortization expense.
As a result of our strong top line growth adjusted EBITDA in the first quarter was $15 7 million, an increase of 37% as compared to $11 5 million for the prior year period.
Turning to the balance sheet as of March 31, we had approximately $194 million of cash which includes the $124 million for the purchase of pump higher paid on April one.
And we had approximately $254 million of debt, which includes the $50 million add on to our amended term.
Our gross leverage ratio was approximately three eight times and net leverage ratio pro forma for the cash paid on the acquisition of <unk> was two seven times.
During the first quarter of the company repurchased approximately 127000 shares of class a common stock at a weighted average price of $10 from 37.
For an aggregate purchase price of approximately $1 3 million.
Capital expenditures were $2 4 million in the quarter, reflecting certain projects that were deferred from 2020 and consistent with our plan for the year.
We also funded the 900000 into canal Uno is the channel prudently manages its cash flow needs.
We are very excited about our strong start to the year reporting our third consecutive quarter of impressive growth and we look forward to continuing to deliver value for all of our stakeholders well now open the call to your questions.
At this time of if you would like to ask a question.
Okay.
Please press Star then the number one on your telephone keypad, we will pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Stephen Cahill from Wells Fargo. Your line is open.
Thanks, maybe first just on Penn tie a few questions. So on the content strategy and content spend maybe you could give us an update of what the content spend looks like today and maybe what plans are as to where you might like to take it.
And I think that you mentioned Televisa as one of your partners I know, they're also launching of service with Univision. So just wondering if you think theres going to be a lot of competition per content or if there's sort of plenty out there for everybody and with that competitor service do you see that is just growing the market overall or do you see that as as more of a.
A competitive threat and also on <unk>, just wondering if you're contemplating any distribution partnerships like with telco companies or our Mvpds and then all of a cup.
A follow up.
Thanks, Thanks, Steve Let me try to get all your questions if I Miss any of them, let's let me know on a follow up I know there was a lot of the book first.
First of all on potash strategy and are on a program. So we we don't get into specific dollar numbers.
But as I've said, our strategy our core strategy is to increase materially the.
On the spend the programming spend up on tire and and we already in the process of doing that we.
We think that the content up on tie historically has been great. But we also feel there's opportunity to accelerate growth in subscribers and to improve retention by increasing programming spend and thats. Our attention. I also think it's important to note as I stated before that.
Our programming cost model is significantly different than that of the big General market players who are in this giant programming arms race, we kind of swim in the different lane.
Our program cost of much more modest than those of those of the big General marks of that until we get a lot more bank for our book. We also have the advantage of being able to use our entire ecosystem for all of our programs all of the program at the top on tie up will ultimately make its way through our all of our other channels of platforms and similarly programming that we create for our platforms.
Of that will make its way through parts of high as well. So we've created the virtuous cycle of.
Well you can cause high end of our existing.
Channels on platforms.
Waiting to Televisa, we are of great relationship with Televisa, we have of multiyear agreement in place of Televisa, which actually is very mutually beneficial because not only do we have access to televisa as theatrical films, but they also have act Televisa also has access to the leon's production for their own their own theatrical used in Mexico.
So it's a mutually beneficial arrangement that I know televisa values very much and we have a multiyear contracts. So we don't expect any interruption in that we also have as I've noted exclusive.
The output arrangements with the most important and most prolific film producers in Mexico, which is core to our.
Our program of supply.
On the distribution front, we are in discussions.
The discussions at various levels with with a number of different.
Telcos <unk>.
<unk> and connected TV.
Producers for carriage, we think that there was a good chance that we could make.
Make a deal a day.
The strategic deal with a with the total but it's a little early but we are we are in process of working those and that's a priority for us and I think it's also important note. The generally just generally speaking we have a big first mover advantage with non tie up what are the we are the only real player in the exclusive Spanish language premium.
Subscription space.
We think Univision new entry in the space brand day is the is going to be a formidable player in this space, but we also think that we complement each other in the sense that they are primarily.
A library of service focused on the Televisa and Univision Library all of that content is very valuable and very important and has the big audience, but we really play.
We really have a different offering.
We are the only ones with you offline original exclusive premium series of movies that really can't be seen anywhere else and we're the exclusive on to those.
Yeah.
Great.
Then just on the Puerto Rico side, I mean, it's an amazing level of AD growth that Youre seeing I think your share on whopper is already really high. So I'm just wondering with the economy of there being as strong as it's been at least since I've followed the stock.
How do you keep capturing more AD revenue can see Tms keeps going higher or do you have other levers you can pull to capture incremental demand, maybe just help us think about that opportunity.
Well, yes.
The market, especially for the last three quarters has been as good as any other market in the world I think.
And we have not only captured our share of that of that growth.
We have captured a disproportional share of that growth because of our positioning of the market because the fact that we are.
A must have from all advertisers in the market.
So we feel the market is strong as strong as it's been honestly since we acquired this business from 2007, we feel more positive about the outlook for Puerto Rico than we have felt on a very long time, the Puerto Rico is.
It's been a constant state of economic headwind since we acquired the business and this is the first time, we really give us some sense of tailwind at our backs.
Tween the government stimulus between the disbursement of previously allocated of Hurricane relief funding and just the overall economic recovery.
We feel great about where Puerto Rico is going.
Again, the hard to have a long term crystal ball, but we feel we feel very good about now and the way we get to you to take advantage of that it is doing what we're doing which is continuing to grow our audience continuing to deliver a great product for our for our viewers of our advertisers be creative in the way we are.
Can provide.
Advertising and services for our clients. We are of great digital platform that is growing at a very strong rate we are of great sports channel.
That is growing well and we still have the ability on our main channel to grow rates on and to grow the increase the amount of commercial inventory available.
Great and then last one for Craig.
Greg you mentioned the net leverage at two seven X does that include maybe some EBITDA dilution from Penn tire.
And as we think about leverage going forward.
The investment of <unk>, that's probably a bit of a drag but you've got some organic EBITDA growth in the rest of the business and a little bit of cash you'll be generating so how do we just maybe first think about the EBITDA trajectory of the company of those two things mix and also will you use your excess cash flow for debt reduction or could we see a combination of debt reduction.
And the more share buybacks.
Sure.
Those are the first one.
<unk> is not included in the EBITDA on an LTM basis for the calculation. The adjustment we made was to the cash balance since the cash was still sitting on our balance sheet of March 31, So thats the pro forma effect for upon tier.
But as we indicated on tire is going to have a bit of an EBITDA drag here so naturally the leverage.
We will go up but you are correct that we will still see.
Growth in the organic business and free cash flow generation.
I think the primary allocation of our capital going forward will be to invest in our business, we've talked a lot about investment in content.
Upon tier in that content by the way will serve not just on tire, but across all of our platforms.
As we noted we put a share buyback plan in place in November that was active here in the first quarter, but as we regularly do we will continue to evaluate our.
Capital allocation plans with our board going forward.
Great.
Your next question comes from the line of Kirk on Morrow from RBC capital markets. Your line is open.
Great. Good morning, and thank you for taking the questions.
The entire deal is fairly transformative so I just wanted to.
I was hoping to dig in a bit deeper maybe first on advertising I know, Ken tier has a great corner of the market as the commercial free streaming destination, but now that you have full operational control is there an appetite to maybe widen your potential target audience by introducing a lower price AD supported tier.
Hey, Chris This is Alan.
It is absolutely something that we are looking at going forward right now our focus is on growing the core premium business.
But we have had.
Really surprising number of inbound inquiries from major advertisers about wanting to advertise on on.
The highest so that's that's really the open their eyes up to the opportunity plus we know the size of our audience and the potentially larger size, which which you could add in a lower price.
Kind of premium business. So it's something we're absolutely looking at going forward, although its not in our plans for the immediate future.
Understood. Thanks, and maybe when we think about your path to growing the pie of subscriber base from the 900000 today to the tune of half to $3 million. In 2025 would you expect that growth to be somewhat linear and benefit from the broader secondly trends that we're all seeing in the marketplace or would you expect some of the ditch.
Tribunal agreements that Youre currently working on to maybe accelerate growth in the back half of this year.
I think it's a little of all of the above and it's hard to know sort of how the mix shakes out.
It's going to be function of all that plus I think the quality and quantity of content that we are developing in the production I think as we as we <unk>.
Expand our content offering and have more frequent content releases on higher quality content releases, I think that will accelerate subscriber acquisitions and.
And also improved retention, so we're expecting that growth will be robust for the.
For the foreseeable future.
Yeah.
Understood. Thank you and just sorry, two more on <unk>, maybe maybe just on the content side I know, Steve you talked about ramping programming investments.
I guess I'm curious on how youre thinking about the evolution of your actual programming slate in terms of the do you expect to invest more on TV versus film or even across the two are there any specific genres of focus and maybe just over the long run as you build out <unk> pencil, the young and benefit from merger synergies like the share of production.
<unk> with the rest of Hemisphere do you expect to deemphasize. Some of these great third party programming relationships that <unk> had.
And maybe focus more on the origin of production side.
Yeah.
The good questions I think our lessons to date have been I think that the that the original series that we have produced have driven the greatest subscriber acquisition and retention.
And really they're really not widely available elsewhere in the market certainly not anywhere on free or pay TV.
Some of the general market players have some small number of premium Spanish language series as I'm sure you know, but but it's really very sparse and.
And haphazard offering so I think the intentional purposeful on.
Offering of a clear.
The being clear series strategy with continuous series drops and predictable series drop that day is core to our strategy of growing the business. We are going to continue to be the big feature of business. Because we also feel like that gives us the unique advantage in the marketplace and has and is the core of our.
Shifting to our strategic ventures, with our Mexican partners, so and that type of profile and.
And gives us.
A lot of sizzle and the ability to generate pops in subscribers. So we we think that that the value of a piece of the business as well and in terms of using the hemisphere assets versus third party I think it's both.
Look at it eats as either all we think having access and leveraging the hemisphere platforms hemisphere production infrastructure capabilities, just gives us another very significant source of.
Content and new production. In addition to what we have and will frankly, we are expanding our third party relationships as well part of it.
We will we will have some announcements coming forward in the near term about partnerships with other.
The brand named third party players in the.
In.
In Latin America, and the rest of the world.
That's perfect. Thanks, Alan and maybe sorry, just one last one im not sure if you'd be willing to share this but as you do grow that sort of the service from two and half of 3 million subs. What do you expect the U S versus international mix.
Eventually look like.
Well today. The service is just U S and Puerto Rico, So when I say, when we say today of $3 million. That's just the U S and Puerto Rico, We obviously are considering expanding into Latin America, but that would be a completely incremental subscriber opportunity to what we have what we have today.
Perfect. Thank you so much.
That concludes our Q&A I'll now turn it back over to Mr. Sokol for closing remarks.
No further remarks, thank everybody for joining and have a nice day.
That concludes today's conference call you may now disconnect.
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