Q4 2021 Hemisphere Media Group Inc Earnings Call
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Good morning, ladies and gentlemen, this issue out there your conference will begin momentarily. Please continue to standby.
Once again basis, you're up here your conference will begin momentarily. Please continue to standby.
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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.
Okay.
Thank you operator, and good morning, everyone I'd like to welcome everyone to today's conference call I'm, Danielle O'brien and with <unk>.
Edelman financial communication hemispheres outside Investor Relations firm.
Today's announcement is 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 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.
For the <unk>.
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 and we finished with a solid performance in the fourth quarter.
Year was highlighted by our acquisition of PON tire.
Our record breaking results at Wawa, several important partnerships and launches with virtual mvpds in the U S. The continued leadership positions of our U S cable networks.
For the year, we delivered a 29% increase in net revenues and even without including the impact upon tier 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 in growth and in particular during 2020 in 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 are 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.
So in a global pandemic our business model is proven and has tremendous runway for growth we have never been more excited about the prospects for hemisphere.
Turning to our performance continues to be the premier destination for exclusive premium Spanish language original series and movies as of yearend, we had close to a 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.
During Q4, given the limited amount of new content and chose not to chase 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 the highly acclaimed series Senorita 89 on February 27, and among our many projects we're commencing production on radical the latest bill starting with any of their beds. The number one box off the star of the U S. Hispanic universe over the past few months. We've also entered into development and co production deals with some of the most.
<unk> talent and most prolific production studios.
While we have significantly expanded our production.
Also important to emphasize that we are swimming in a completely different lane that the English language streamers. We are presently the only premium subscription streamer super serving their 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.
The English language series, we have further ability to significantly reduce our cost exposure by licensing Latin American rights to content to streaming such as Amazon, Netflix and Disney plus which typically pass well over 50% of our production budget in exchange for these rights.
Regarding franchise distribution.
We are in advanced negotiations with a 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 two five to 3 million subscribers by 2025.
Turning now to Puerto Rico.
We are very proud to announce that <unk> 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-19 related restrictions and lockdowns.
The macroeconomic situation of Puerto Rico continued to strengthen throughout the year with key metrics across business consumer and tourism activity trending very positively.
Puerto Rico is currently the strongest economic position that has been in for many years with it with very positive indicators for future growth.
It should be further bolstered by the issuance of an executive order this week, eliminating most COVID-19 related travel and capacity restrictions.
In January Puerto Rico, finally received approval to exit bankruptcy with a restructuring plan that reduces the largest portion of the government's debt by about 80%.
It will also save the government more than $50 billion in total debt payments.
Puerto Rico's commercial banks are anticipating the commonwealth's emerged from bankruptcy will spur an island economy that is in the early stages of a growth cycle.
Different bankruptcy will also provide the government with a 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.
Therefore 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 Rican 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. The expectations is that these funds will start flowing in the second half of 2022 and beyond.
All of this will benefit whopper, which is once again maintained at that its dominant ratings position in market share and has further solidified its growth profile.
The principal selling demographic of adults 25 to 54, while it had 24 of the 30 highest rated programs in the quarter. While this quarter was highlighted by the Miss Universe contest, which deliberate and it's down to 69% viewing share among women 25 to 54.
I'm proud that work has now been the number one station in the market for 12 consecutive years uninterrupted.
In Q4 would face a difficult comparison to the fourth quarter of 2020, which was the highest advertising revenue quarter in the history of Puerto Rico TV.
Nonetheless, despite supply chain issues impacting retail and auto this year's fourth quarter was very strong and in fact, while the 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 three of our networks, where we're among the top 10 highest rated Spanish language cable networks and four were among the top 15.
Notably posture on US was the number two span it rated Spanish language cable network in Prime time Monday to Friday.
And Wap Americas early fringe newscast was the highest rated newscasts 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 is 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 one all five of our channels have launched that flew both 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 in our rest of that would come out you know the economy is improving despite the recent spike in Covid cases, due to the almond crop area. The TV advertising market increased in Q4 by 18% over Q4 of 2020 and there was strong momentum heading into 2022, which is a presidential election year and should see strong political advertising.
Our ratings improved over the fourth quarter of 2020, we are optimistic heading into 2022 in closing we are managing an extraordinary portfolio of assets I believe we have a tremendous value creation opportunity in front of us.
Upcoming slate of content is unprecedented we are producing the kinds of premium series and movies that I've never been available until now and we have the ability to monetize or license that content outside of the U S.
We are well positioned to dominate this unique and untapped market from 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're excited to have continued our strong performance for 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 <unk>, which contributed $13 6 million.
Our cable networks benefited from contractual rate increases and new launches. However, these increases were offset by decline in pay TV subscribers other.
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 and 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 <unk>, 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% after 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.
These increases were primarily driven by the inclusion of pump higher.
We also incurred higher noncash charges, including amortization of intangible assets recognized as part of the <unk> 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, reflecting 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 country did not have in the current year.
As we said last quarter marketing spend will be tied to the launch of content pantoja, some marketing costs may vary from quarter to quarter and 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 <unk>, which is in growth and investment mode.
Excluding PON Tiger 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 of debt and $50 million of cash our revolver is currently undrawn.
At quarter end, our gross and net leverage ratios were approximately five two times and four two times, respectively, which includes <unk> operating results since the acquisition.
We expect leverage to tick up over the year as we continued to invest in programming and marketing and as we roll into a full trailing four quarters of <unk> operating results.
Further we expect leverage to trend lower as top tier matures.
Capital expenditures were approximately 1 million in the quarter, bringing capex to $4 2 million for the year.
We funded $2 4 million into 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 ponds highest 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.
Portion of which will be for content that will premiere on the service in 2023.
It is important to note that we will have offsetting inflows as we license our content outside of the U S and Puerto Rico. In fact, we've already finalized terms of multiple license licensing agreements in Latin America.
We are pleased to have continued our momentum and finished the year on a strong note. We'll now open the call to your questions.
We will now begin the question and answer session.
As a reminder, if you have a question you May Press Star then one on your telephone keypad again star one on your telephone keypad. Please standby, while we compile the Q&A roster.
Yeah.
Your first question is from the line of Steve Cahall with Wells Fargo. Your line is open.
I think a few for me. This morning. So maybe first I was wondering if you could give us any detail on what type of subscriber acceleration you've seen on <unk>.
Since launching senior eat at 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.
Hi, Steve Good morning.
We just launched ingredient in about a week and a half ago. So it's a little early to tell but we're really encouraged by both the viewing numbers and the 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 had 16 new series at a plethora of new movies that are dropping we expect to see growth over the term over the course, you're 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.
Okay.
Great and then.
You talked a lot about content spend and marketing costs. I was 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 do we think about subscribers has kind of been correlated to the increase in content spend whether it's year on year growth or total dollar number just one.
If there's any more color you can provide there.
Yes, we're not going to get into specifics.
Dollar amounts on the programming, obviously that will build throughout the year as Alan noted.
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.
Given the programming lineup, we have this year, we're pretty optimistic about having a consistent cadence of 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 look the cash programming spend as an upfront expenditure right. So we are funding the production of a 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 pompe tire is not available and so we've seen and we've actually entered into.
A couple of deals currently in it started this year that we're recouping the majority of our production cost that licensing revenue also will come in starting from delivery of the products. So that's.
That'll 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 <unk> in Q4, maybe right around $4 50, a month, which is pretty strong. So maybe just first is is that a good number or in the ballpark was wondering if you could make any comment there and then a lot of the media appears in streaming, especially early on are using distribution deals like bundle.
Those with telcos to.
To help expand their distribution I'm wondering how you think about <unk>.
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 billion 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 language screamers screamers have and thats sort of given them chunks of subscribers at a time that said.
Where we think we're close to one deal and we hope to enter the other bundled deals I think the telcos.
Very good.
Cognizant of the value that we've had have seen there are results of CNR product.
And are and think very highly of it. So I think that will help kind of create some step function growth for us on our on our subscribers clearly when you're when you're doing promotional subscribers, you're going to probably take a step back on <unk> in the short term, but in the long run out in the long run it should all wash out.
<unk>.
And although you've taken a step back in <unk>.
Not spending marketing dollars at least to the same extent against those subscribers. So the subscribers ultimately may be more profitable to you than the one at a time subscribers I'll, let Craig respond to the to the ARPA question. Yes. Your estimate is in the zone. The mid $4 range as you know our retail monthly subscriber fee is $5 nine.
Nine.
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 <unk> 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 then do direct relationships and we over index 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 <unk>.
Past, we also have a sizable number of subscribers that come through the <unk> Dot com.
Web platform, where we have no revenue splits at all on those so thats why youre seeing the high flow through on the ARPA.
Great and then maybe just switching over to the cable networks are you able to size what the.
Network growth will be from the flu bow in Youtube launches this year.
Football, it's easier because they are in existence.
So it's going to be six figures are subscribers for each of the networks from inception, and they've been growing at a very nice and impressive peso were optimistic that we will that will continue to grow.
Youtube is starting from zero, but.
They have expressed to us their intent to invest significantly in Hispanic against the 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 by 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 one of the few media companies that we follow where youre 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 do you think about strategic Optionality for hemisphere.
You can make any other comment that.
Wade you might pursue that in the future.
Thanks, Steve.
As I mentioned.
We are.
Our stock price bears no relation to our to a real intrinsic value.
Fundamental Bayou. This company is at least equal to what it was before we announced the equity offering which was well over $10 a share and we believe it's even that was undervalued in terms of our turns are true fundamental value our core business. The legacy business remains strong we have a unique asset with Wap and 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 TV, which is not subject to the attrition of viewership that youre seeing.
In the U S and other parts of the World and.
And the fact that we are out with that.
Advertisers cannot buy around us in Puerto Rico and.
And we have other other opportunity to drive new revenue streams to Puerto Rico, which we are which we are working on and hopefully will will develop and announce soon.
In our U S cable networks will they've seen some subscriber attrition like everybody else.
We've significantly offset that 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 Google and Youtube et cetera. So we feel there is tremendous.
That there that has not that the market does not recognize that that is not reflected in our stock price and then.
It seems to us that there is obviously some trepidation in the market around PON tie up but we're super confident in potash, we think it's a phenomenal opportunity we think the U S. Hispanic market of $60 million plus.
Has tremendous up gives us tremendous upside and tremendous addressable market that nobody else's currently serving.
We also don't have the cost exposure to the cost risk that the English language stream is having that we produced at a small fraction of the cost that we further mitigate that by licensing rights to to Latin American streamers, which are which is a pretty competitive space right. Now we are getting tremendous value for our product among Latin.
Britain streamers when you effectively are both serving ourselves and building value building asset value upon tire, while remaining kind of an arms dealer.
<unk> third parties in Latin America, and mitigating the risks on.
On our on our 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 plate price in fact, we pulled our equity offering when our stock price went down to eight or $9. We felt that with that we would rather be a buyer than a seller at that price and clearly yet.
At this current price level we.
Absolutely our buyer rather than rather than a seller.
But we continue to look for ways to strategically unlocked value and we will continue to do so and and you know are very frustrated with the way. The stock is valued right now and up and are looking at all options to increase value.
Great. Thank you.
Yeah.
Your next question is from.
Curry Baker with Guggenheim Securities. Your line is open.
Hey, good morning, guys, maybe starting with advertising could you maybe give us a little bit more color on what youre seeing in Puerto Rico, and the first first quarter and then maybe.
Just your overall expectations for the year Andy.
Any comps to flag at any point.
Hey, good morning, we don't comment on the current quarter, but I will say is as I said in my in my.
In my speech that I think that.
We're very optimistic about 2022, we feel this really strong commercial momentum going into 2022 of the economy is.
Frankly, hitting on all cylinders in Puerto Rico in a way that it has been since we acquired this asset in 2007.
And while <unk> has maintained its dominant ratings position in the market and as such we think that that combination.
We will continue to lead to a very strong advertising result for Wap app and in the U S. We continue to see sort of consistent results with where it was where we saw 2021.
And and 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. It's all scatter so.
So it's hard to really project out for the full year at this point.
Okay.
Sticking with Puerto Rico.
Can you give us a little bit more color I think you alluded to sub trends are 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.
Yes sub trends have remained stable there's 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.
We don't see you guys have any distribution agreement, we have we have one small renewal coming up at the end of the year Okay.
And then a quick one on pin Tayo 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.
I don't know that the revenue would.
Would the revenue realized will be significant enough to justify moving forward that that is something that we will continue to look at it.
As time goes by and as we build our subscriber base.
Okay. Thanks for the questions guys.
Yes.
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.
<unk>.
Thank you, Sir ladies and gentlemen. This concludes today's conference call. Thank you for joining you May now you may now disconnect.
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