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Hemisphere Media Group Inc (NASDAQ:HMTV)
Q3 2019 Earnings Call
Nov 5, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day ladies and gentlemen and welcome to the Hemisphere Media Group Inc.'s Third Quarter 2019 Financial Results Conference Call. My name is Kevin and I'll be your operator today. A replay of the call will be available beginning at approximately 1:00 PM Eastern Time today, Tuesday, November 5th 2019 by dialing 855-859-2056 or from outside the United States by dialing 404-537-3406. The conference ID for the replay is 4068992.

I will now turn the call over to Ms. Danielle O'Brien. You may begin.

Danielle O'Brien -- Vice President, Investor Relations

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, Hemisphere's outside Investor Relations firm.

Joining me on the call today is Alan Sokol, Hemisphere's Chief Executive Officer and Craig Fischer, Hemisphere's Chief Financial Officer.

Today's announcement and our comments may contain certain statements about Hemisphere that are forward-looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995. These statements are based on the current expectations of the management of Hemisphere and are subject to uncertainty and changes in circumstance, which may cause actual results to differ materially from those expressed or implied in such forward-looking statements. In addition, these statements are based on a number of assumptions that are subject to change. Please refer to our company's most recent Annual Report on Form 10-K and other public filings for a more complete discussion of forward-looking statements and the risk factors applicable to our company. Forward-looking statements included herein are made as of the date hereof and Hemisphere undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances.

During today's call, in addition to discussing results that are calculated in accordance with Generally Accepted Accounting Principles, we will refer to adjusted EBITDA, which is a non-GAAP financial measure. A reconciliation of GAAP to non-GAAP information is included in our earnings press release, which was issued earlier 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.

Alan J. Sokol -- Director, President and Chief Executive Officer

Thank you, Danielle, and good morning everyone. Our channels performed strongly during the quarter, maintaining or expanding our leadership positions. We continue to innovate and create fresh, compelling content for our unique and high growth audiences on a very cost-effective basis. We are also excited about the progress we are making in the value we are building on our strategic initiatives.

In Puerto Rico, WAPA's rating results showed strong year-over-year growth. WAPA's prime-time ratings in Q3 grew by 19% among adults 18 to 49, driven by WAPA's unrivaled programming lineup, including the new hit reality competition series, Guerreros. Guerreros ratings have increased every month since its May launch and during the third quarter, Guerreros ratings among adults 18 to 49 were higher than Univision and Telemundo combined. For several weeks during the summer, Puerto Rico experienced significant political unrest, culminating in the resignation of the Governor and [indecipherable] process to select the successor. While we are optimistic that these events will result in greater governmental transparency and accountability, the island did experience some short-term instability with an ensuing negative impact on advertising spending. Television ad spending in the third quarter was materially weaker than expected and this impacted our third quarter results. However, we do not expect any long-term spillover from these events and we are seeing confidence and stability return to the market and in turn improve levels of advertising spend.

Notwithstanding these events, Puerto Rico's economic metrics continue to be largely positive. The unemployment rate has decreased to 7.6%, the first time it has been below 8% in at least 55 years and net migration out of Puerto Rico, January through July was 20,000, significantly below pre-storm levels according to the most recently released passenger data from the San Juan International Airport. As of October 24th, we reached an impasse negotiations with DISH regarding renewal of our WAPA and WAPA America agreements. As a result, DISH has blacked-out WAPA and WAPA Deportes in Puerto Rico and WAPA America in the US. During our extended negotiations with DISH, we have asked for a fair and equitable rate, but do not believe that DISH is properly valuing our channels' extraordinary lineup of news, sports and entertainment programming. DISH has frequently blacked-out networks. So this is not unusual for them. Despite being the third ranked distributor in Puerto Rico, DISH refuses to pay the established market rate being paid by significantly larger distributors. In the meantime, we have received a tremendous outpouring of support from our viewers in Puerto Rico and the US, which we are hopeful will encourage DISH to responsibly serve this important customer base that properly value our networks.

Turning to our US cable channels. We continue to see strong momentum and in a world where most networks are seeing large audience declines, we saw overall ratings grow. WAPA America marked highest rated quarter ever, driven by its unmatched coverage of this summer's protests and political crisis in Puerto Rico. WAPA America's ratings grew by an impressive 48% over the third quarter of 2018. On July 25th, the date of the Governor's resignation, WAPA America delivered highest audience ever peaking at nearly 300,000 households and making WAPA America the number one Spanish-language cable network on that day.

Pasiones marked its 11th consecutive quarter of year-over-year growth, most notably for the first time, Pasiones outperformed Univision's telenovelas channel in total day ratings by an impressive 25% and delivered more than double the audience of telenovelas in prime-time. Pasiones continues to find new audiences who are attracted to its unique offering of the best novelas and dramas from throughout the world. Cinelatino continued as the second highest-rated Spanish language cable network in Nielsen coverage ratings. Our quarter was highlighted by the premiere of Mexican box-office hit, [Indecipherable] which was our highest-rated program of the year among adults 18 to 49. Centroamerica TV also posted another quarter of strong ratings growth, increasing total day ratings by a robust 49% over the third quarter of 2018. This represents the [Technical Issues] quarter of year-over-year audience growth.

Regarding our US subscriber growth, although we continued 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 altered subscription sign-up process in a way, which makes it much more difficult to 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 production in our first series under our previously announced joint venture between Snap Media and MarVista Entertainment. The series [Indecipherable] is an action comedy co-produced with Viacom. The Snap MarVista joint venture will receive a production fee and importantly, we will have US rights to the series for Pantaya and Cinelatino. This is a template which works very well for us and which we hope to replicate.

Turning to our strategic investments. Canal Uno in Colombia again experienced strong and a proactive 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, Canal Uno has entered into a content ad sales alliance with Discovery. We are optimistic that this important strategic partnership will bolster our programming and sales efforts. This month we will be producing a first Canal Uno WAPA crossover event with our Colombian Guerreros based on [Indecipherable] the Puerto Rico Guerreros. This event will air in both markets and should be a big hit.

Our subscription streaming service Pantaya has experienced terrific growth. As reported by Pantaya in October, the service ended the quarter with approximately 500,000 subscribers. Pantaya has recently launched two new hit series, both of which are unlike anything that has been seen on Spanish television with a fresh, modern and premium feel 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 US. We are very excited about Pantaya's future. We've also recently begun to develop a new revenue stream from licensing our valuable and 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 will now turn the call over to Craig.

Craig D. Fischer -- Chief Financial Officer

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 US cable networks, we saw a decline in advertising revenue due to softness in the direct response advertising market. Affiliate revenue for the quarter increased $700,000 or 4% over the comparable period in 2018, primarily due to rate increases and the launch of Pasiones on Spectrum

Net revenues for the nine months ended September 30th, 2019 were $110.1 million, an increase of 9% as compared to $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-months period increased $5.6 million or 10% over the comparable period in 2018 due to rate increases and subscriber growth. The increase in 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 reduced costs at WAPA following Hurricane Maria. The aforementioned gain from the FCC spectrum repack is included in operating income, but 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 in debt and $85.2 million of cash as of September 30th, 2019. Our gross leverage ratio was approximately 3.1 times and net leverage ratio was approximately 1.8 times.

Capital expenditures were $600,000 in the quarter, including $100,000 for equipment purchases to replace equipment damaged by Hurricane Maria and for equipment required by the FCC spectrum repack. We anticipate that insurance proceeds and 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 Uno, 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 Uno continues to build scale. Additionally, we funded $900,000 into Pantaya. As Alan mentioned, given the impact of the unexpected political unrest in the Puerto Rico advertising market in the third quarter and the uncertain length of the DISH blackout, we are now forecasting a low double-digit percentage increase in adjusted EBITDA for 2019 as compared to our previous guidance of mid-teen percentage growth. However, our business fundamentals remain strong and we are confident in our ability to create long-term value for our shareholders.

We'll now open the call to your questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Curry Baker with Guggenheim.

Curry Baker -- Guggenheim Securities, Inc -- Analyst

Good morning. Thanks for the question, guys. I guess maybe starting with DISH. Is there any more color you can provide, I guess are you currently still talking to DISH and is there any sort of base case scenario when you expect resolution, i.e. sometime in the fourth quarter?

Alan J. Sokol -- Director, President and Chief Executive Officer

Hi, Curry, good morning. Yes, we're still in conversations with DISH. The gap is not that significant between the two of us, so hopefully we can get a deal done. But until you have a deal done, it's not done.

Curry Baker -- Guggenheim Securities, Inc -- Analyst

Okay, thanks. And then I guess maybe just broadly speaking about next year, I get the political noise for this year. But as we look for the advertising market in Puerto Rico and WAPA PR outlook, do you expect a more normalized environment next year in Puerto Rico on the advertising front and then maybe could you also comment about your expectations for political next year in Puerto Rico? Thanks.

Alan J. Sokol -- Director, President and Chief Executive Officer

Sure. It's a little early, but, and there's never been a lot of visibility in Puerto Rico because most advertising has done on a scatter [Phonetic] basis, so we don't have a real crystal-ball for any significant length of time. But that said, listen, what happened in the third quarter this year was something that nobody could have predicted and certainly was not anything that anybody could have seen coming, but these scandals happen from time to time and in Puerto Rico, this was a scandal of unprecedented in history. That said, we are seeing the market firm-up nicely in Q4 and we're feeling good about it 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 come into Puerto Rico, but we hope that that would 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 having primaries or whether just one party since we don't really have any incumbent Governor. Are we running for reelection? So there is a little uncertainty in it, but I do believe that it will be a very contentious election, which typically bodes well for spending.

Curry Baker -- Guggenheim Securities, Inc -- Analyst

Okay, that's helpful. And then maybe a final one, just on Pantaya. 500,000 subs, I think that's good. Can you maybe 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 $900,000 [Phonetic] this quarter.

Alan J. Sokol -- Director, President and Chief Executive Officer

Sure. On the funding side, I think the funding commitments going forward, we do not expect to be significant and we feel that hitting a break-even is within the near-term reach and we feel great about the growth of Pantaya. Growth has accelerated with the introduction of our new premium TV series and other products. We feel that our marketing efforts of Pantaya are really paying off and we are seeing a lot of traction and frankly feel like we're hitting sort of a critical mass in -- the audience becoming aware of Pantaya 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.

In terms of the addressable market, there is 17 million or so Hispanic households in the US, not all of them are going to subscribe to Pantaya, but we feel that we can get a significant percentage of Hispanic home just because there is nothing else like this on the market. It's not like the general market where you know have a plethora of competing streaming services, all of which offer top-flight premium, high priced content. We were the only ones out there with this type of product and it's a really good product. We've got great response from the audience. And if you look at the rankings, which are publicly available, you will see we are Top 10 entertainment streaming service on both Apple and Google. So all of that I think bodes really well for the future of Pantaya. We're super excited about it.

Craig D. Fischer -- Chief Financial Officer

Curry, just to add on the funding. As you previously stated, we committed to funding our share which totals about $10 million, we're about $8.5 million through 9/30, so another $1.5 million on our commitments to fund into the venture.

Curry Baker -- Guggenheim Securities, Inc -- Analyst

Okay, that's helpful. And then maybe one quick last one on Pantaya. Can you maybe speak to, is there an opportunity or appetite to maybe bring the service and consolidate it at some point. I know you obviously have a partner there, but can you maybe speak to that at all?

Alan J. Sokol -- Director, President and Chief Executive Officer

Well, obviously we have a partner there that I think is also enthusiastic about it and positive about it, but we like Pantaya and if that opportunity presents itself to own more Pantaya at a valuation that we think makes sense, we would seriously consider that.

Curry Baker -- Guggenheim Securities, Inc -- Analyst

Great. Thanks for the questions, guys.

Operator

Our next question comes from Steven Cahall with Wells Fargo.

Steven Cahall -- Wells Fargo Securities -- Analyst

Yeah, thanks. Maybe first, could you quantify the DISH sub-base or maybe just talk through about how significant DISH is in your US cable sub count fees days. And since they went through the big blackout with Univision a year or so ago, are there are significantly fewer Hispanic subs on DISH today than maybe there was a year or two ago?

Alan J. Sokol -- Director, President and Chief Executive Officer

Yeah. Hi Steve, good morning. Without going into specific numbers, because we don't want to bide [Phonetic] any confidentialities. DISH has lost a significant percentage of their subscribers that they had before the Univision blackout. The Univision blackout cost them several hundred thousand subscribers. And so they are much smaller today than they were a year ago, but they are still significant. In Puerto Rico, they are the number three distributor and significantly smaller than the Top 2 distributors and significantly smaller than they were before the storm.

Steven Cahall -- Wells Fargo Securities -- Analyst

Got you. 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 dialog to get that done.

Alan J. Sokol -- Director, President and Chief Executive Officer

We are. They realize the problem. I mean we started seeing their numbers start go in wrong direction after they consistently and historically performed very well with Hispanic and outperformed their overall result. We called them and they told us that they have been having issues with the way they -- they changed the way subscriber sign-up for subscriptions and somehow in the new sign-up, Hispanic had sort of become very difficult to find and locate and we were not ourselves honestly could not find it. So they're aware of it, they are working on it, they believe the system will be fixed and that they will be able to resume their prior practices. So we're hopeful that is the case. I mean I think it appears to be a completely fixable problem.

Steven Cahall -- Wells Fargo Securities -- Analyst

So does that primarily explain just kind of how, why subs were down year-on-year in the quarter? Is that what you mostly subscribe it to?

Alan J. Sokol -- Director, President and Chief Executive Officer

We outperformed the results of every other major distributor that's reported to-date, in terms of our results, for the quarter sequentially versus their results. So yes, we would have had positive results, but for that situation.

Steven Cahall -- Wells Fargo Securities -- Analyst

Got you. And then AT&T is selling some assets in Puerto Rico, I think to Liberty. Does that have any impact on your business or relationships in Puerto Rico at this point?

Alan J. Sokol -- Director, President and Chief Executive Officer

The deal hasn't closed yet, so a little early to tell. We have a really good relationship with Liberty. So we're optimistic that, their continued investment in the market will be a positive thing. They certainly will spend more money in advertising. They will have to rebrand AT&T and relaunch AT&T, so that generally represent -- that generally means signifies there'll be a meaningful increased investment in advertising in the market and I'm sure they will be-- we will be having conversations with them, ways in which we can help each other.

Steven Cahall -- Wells Fargo Securities -- Analyst

Great. And then last one from me. On the US 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 on that advertising dollars still up despite that and have you seen any change in the spot market since the quarter ended? Thanks.

Alan J. Sokol -- Director, President and Chief Executive Officer

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 is not a permanent thing, but a temporary thing, but these things happen from time-to-time based on the business, their own individual businesses, but that impacted our results in the quarter. That said, we are optimistic going forward that given the strength of our networks, given that we're not experiencing the same sorts of negative results that most other linear networks are experiencing that we think that there is tremendous value in our networks and advertisers recognize that and that once some of these advertisers come back into the market, we should be doing fine.

Steven Cahall -- Wells Fargo Securities -- Analyst

Thank you.

Operator

Ladies and gentlemen, this conclude the Q&A portion of our call today. I'd like to turn the call back over to our host.

Alan J. Sokol -- Director, President and Chief Executive Officer

No further comments or questions. Thank you everybody for joining.

Operator

[Operator Closing Remarks]

Duration: 24 minutes

Call participants:

Danielle O'Brien -- Vice President, Investor Relations

Alan J. Sokol -- Director, President and Chief Executive Officer

Craig D. Fischer -- Chief Financial Officer

Curry Baker -- Guggenheim Securities, Inc -- Analyst

Steven Cahall -- Wells Fargo Securities -- Analyst

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