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Hemisphere Media Group Inc (NASDAQ:HMTV)
Q4 2019 Earnings Call
Mar 3, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to Hemisphere Media Group Fourth Quarter and Full Year 2019 Financial Results Conference Call. My name is Crystal, 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, March 3rd 2020 by dialing 855-859-2056 or from outside the United States by dialing 404-537-3406. The conference ID for the replay is 9578254.

I will now turn the call over to Ms. Ashley Scott.

Ashley Scott -- Investor Relations

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

Today's announcement and our comments may contain certain statements about Hemisphere that are forward-looking statements within the meaning of the 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 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 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, Ashley, and good morning, everyone. Before I discuss our performance, I want to let you know that Craig Fischer is unable to be in our call today due to a personal matter, so I'll be delivering our remarks and handling Q&A.

As we close out 2018, we continue to execute on our mission to drive value across our entire platform and deliver fresh and compelling content to our unique and valuable audience. The fourth quarter had some challenges, but our fundamentals remained strong and we are well positioned to succeed in an evolving media landscape. In Puerto Rico, WAPA was once again the dominant number one station across all key sales demographics, and in fact expanded its lead against Telemundo.

Among adults 18 to 49, WAPA's ratings increased by 18% versus Q4 2018. WAPA's performance was highlighted by our new hit reality series Guerreros, which nearly double the time period viewing in adults 18 to 49. In December, we produced our first WAPA Canal Uno crossover event with our Puerto Rican Guerreros facing off against Canal Uno's Colombian Guerreros. The event was a huge hit in both markets setting ratings records for the franchise.

As previously announced, we are pleased to have reached a multi-year agreement with DISH Network to distribute WAPA and WAPA America ending this relatively short dispute and blackout. WAPA was restored in December 16th and WAPA America on January 28th. We are very pleased with the economic terms of our agreement, which reflect the tremendous value of our channels. In conjunction with these agreements, we also entered into multi-year renewals with DISH for Centroamerica TV and Television Dominicana.

Following a very tumultuous summer of political unrest in Puerto Rico, the fourth quarter was relatively calm. Nonetheless, there still has been a great deal of uncertainty as to the upcoming 2020 gubernatorial elections and whether the government is ready to move forward productively and transparently. This has had a dampening effect on the advertising market in Q4. While WAPA's results were impacted by these issues, we continue as the clear revenue leader in the market with a very strong share.

As we look ahead, economic metrics in Puerto Rico are stable and generally positive. According to the US Census Bureau, Puerto Rico's population in 2019 actually had a modest increase, the first such increase in 15 years. Similarly, according to Nielsen, the number of TV households in Puerto Rico increased by 1.4% in 2019, the unemployment rate remained stable at 8.4% in December, at or near 50-year lows. That said, Puerto Rico did experience a 6.4 magnitude earthquake which struck the southwest part of the island on January 7th and was followed by numerous aftershocks. Fortunately, none of our employees was injured and our facilities were unaffected as the damage was geographically limited to the southern part of the island.

While there was an immediate widespread power outage, electricity was fully restored within a few days. The lives of many people in the effective part of the island, however, remain disrupted and numerous schools remain closed. The earthquake and aftershocks have adversely affected the advertising market in the first quarter and advertisers have left the post spending preferred to show sensitivity to the population's concerns and priorities.

Beyond Puerto Rico during Q4, we entered into a multi-year renewal with Comcast for carriage of all five of our US cable networks, a further testament to the value of our content and our important audiences. While most linear cable networks are suffering significant ratings erosion, our channels continue to perform strongly. Pasiones saw its 12th consecutive quarter of year-over-year ratings growth and continues to outpace Univision's telenovelas channel in total day ratings by 22% and a primetime ratings by over 100%. WAPA America's audience increased by an impressive 21% versus fourth quarter of 2018, led by over 65 hours per week of the best live news and entertainment programming for Puerto Rico.

Centroamerica TV had a sixth consecutive quarter of year-over-year ratings growth with a robust 53% increase in total day ratings versus fourth quarter of 2018. Cinelatino continues in its position as the second highest rated Spanish language cable channel in total day according to Nielsen. Our joint venture Colombia Canal Uno continues to experience impressive growth in both ratings and revenue. Additionally, we are very encouraged by the robust double-digit growth in the Colombian TV ad market in Q4. Canal Uno has entered into strategic programming alliances with Sony as well as Semana, Colombia's leading digital and print news magazine, which we believe will accelerate the joint venture's growth.

Our premium subscription streaming service Pantaya continued its terrific momentum in India with over 600,000 subscribers, a very strong growth trajectory. Pantaya subscribers have embraced its original series, which by virtue of their limited length, contemporary subject matter, and high production values are unlike anything available in Spanish television.

Leveraging our deep and valuable library, we have begun to generate revenues from licensing our content to streaming services in the US and Latin America, including Amazon in Latin America, which has driven solid revenues after just a few months. We should note that we did experience a decline in our subscriber numbers in Q4. As noted last quarter, we believe this decline was in large part due to one major US distributor that is alternate signup process making very burdensome to subscriber to this Spanish language package. We are in conversations with this distributor and are hopeful that they will address this issue in the near term. In the meantime, we are still seeing consistent growth from some of the largest distributors. We are also optimistic that YouTube TV and Hulu will soon introduce a Spanish language offering. We continue to pursue M&A opportunities that will accelerate our growth and remain hopeful that we will be able to successfully execute on such opportunities.

Before turning to the financial review, I would like to briefly share our viewpoint regarding the coronavirus. First, our thoughts go out to those affected and we hope the spread is contained and quick progress is made in terms of a global solution. Thankfully none of our employees have been affected, but we recognize that the outbreak is causing meaningful disruption to the daily life for many around the world. We're closely monitoring the situation. We currently don't believe that the virus will have a negative impact on viewership or subscriptions, but the potential impact on advertising is unknown.

Turning now to a quick review of our financials. Net revenue in the fourth quarter was $39.3 million as compared to net revenue of $46 million for the year ago period, which included $5.8 million in business interruption insurance proceeds we received in connection with Hurricane Maria. Excluding these proceeds, net revenues decreased by $1 million. Advertising revenue decreased $1.5 million due to a decline in the Puerto Rico advertising market as well as the blackout on DISH Network beginning on October 24. It is challenging to precisely describe the dollar impact on advertising of the DISH Network blackout. The decline in the advertising market was driven by Puerto Rico's uncertain political climate as well as continued delays in disbursement of earmarked federal relief funds.

Affiliate fees decreased $200,000 due to the DISH Network blackout but would have increased $600,000 when excluding the blackout impact. The decrease in affiliate fees was offset in part by contractual fee increases and the launch of Pasiones on Spectrum. Other revenue in the fourth quarter, excluding the $5.8 million business interruption proceeds received in the prior year period increased $700,000, driven by the higher licensing revenue for our content library and revenue contributed by Snap Media, which was acquired in November 2018.

Operating expenses were $25.9 million as compared to operating expenses of $26.2 million for the same period in 2018. Adjusted EBITDA in the fourth quarter was $18.4 million as compared to $18.6 million for the comparable period last year. Adjusted EBITDA for the full year 2019 was $66.5 million, an increase of 11% as compared to $60.1 million for the comparable period, in line with our guidance.

Capital expenditures were $5.4 million for the full year 2019, against which we received reimbursements of $1.7 million from our insurance policies as well as $1.7 million from the FCC. We expect 2020 capex, net of FCC reimbursement, to be about $3.5 million.

Turning to our strategic investments. During the fourth quarter, we funded $4.4 million into Canal Uno, down considerably from the prior year due to the completion of concession payments earlier in 2019, as well as lower working capital needs as Canal Uno continues to grow its revenues. This brings our full year 2019 strategic investments to total of $31.7 million.

Looking to 2020, we expect the annual investment in Canal Uno to continue to decline. Additionally, the remaining $1.5 million of our initial $10 million capital committed for Pantaya was met in the first quarter of 2020. We continue to view this as a strong investment and we'll keep you updated on the relationship moving forward. Regarding guidance, we are forecasting a low to mid-single digit percentage increase in adjusted EBITDA for 2020 as compared to 2019.

We'll now open the floor to your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question comes from Steve Cahall with Wells Fargo. Your line is open.

Steve Cahall -- Wells Fargo Securities -- Analyst

Thanks, Alan. Good morning. Maybe first, the distributor that you said has kind of been a problem child, but the sub-count is a little bit lower. I think you've mentioned that last quarter as well, so just wondering what kind of progress you might have had quarter-to-quarter getting them to fix it, and if you think this is something that can be sorted out within the next couple of months?

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

Well, it's absolutely something that can be sorted out. I think it's a relatively easy fix if they focus on it, but very large big bureaucratic telecom -- telco, which -- we're in the queue I know that, and know that they understand this is an issue for them. And this is a distributor that has historically done very well with Hispanic -- with their Hispanic package. So it's a little mystifying to us as to why they haven't moved with a little more urgency on this, but we expect that the problem will be addressed. I just don't know exactly when.

Steve Cahall -- Wells Fargo Securities -- Analyst

Okay. And then, on the Comcast deal, just wondering are those networks going to be in HD on Comcast?

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

As of now, there is no change. Although it's observed that in year 2020 these distributors do not carry all Spanish language networks in HD and honestly it's insulting to our audience that they don't. We're talking to Comcast as well as other distributors, some distributors, particularly Spectrum, have been more aggressive in converting networks to HD. Comcast has the intent to do it, but again there's a queue there and then it's a question of their level of priority. I will say, our VOD with Comcast is in HD.

Steve Cahall -- Wells Fargo Securities -- Analyst

Okay. And then. with Pantaya, I think you're up around 100,000 subs sequentially. Can you speak at all on what kind of momentum you've seen early this year and what the original programming pipeline looks like for Pantaya?

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

I don't want to talk about current quarter, but we feel very good about the cadence of growth and the trajectory we think we're barely scratching the surface on the opportunity here. We see broad acceptance among our subscribers of the service and continued robust growth and we're hopeful that that will continue. We have great programming scheduled for 2020. We've increased our investment in programming based on the results we've seen today. We will have second seasons of our two biggest hit series that we introduced last year, as well as the new series that we're super-excited about.

Steve Cahall -- Wells Fargo Securities -- Analyst

And then, last one for me. There was a lot in the press about a bid for Univision, and I think you've got a fair amount of connectivity there between Vincent Sadusky and Searchlight. Can you just talk about what that relationship is like and is there an opportunity to work together going forward or do you still see them primarily as a competitor? Maybe just help put all that in context for us. Thanks a lot.

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

Sure. Well, clearly I can't comment on the rumors of our involvement in potential Univision bid, but they're based on Searchlight's involvement in both Hemisphere and Univision. I would -- although it's premature at this point to really talk about and we clearly have not had any specific discussions, I would believe that given that there is plenty of opportunity for us to pursue synergistic and strategic initiatives together with Univision, and we'll see as the deal moves forward and closes what happens, but I think there's some really interesting opportunity though.

Steve Cahall -- Wells Fargo Securities -- Analyst

Great. Thanks a lot.

Operator

Thank you. [Operator Instructions] And our next question comes from Curry Baker from Guggenheim. Your line is open.

Curry Baker -- Guggenheim -- Analyst

Thanks for the questions, Alan. Can you maybe talk a bit about what's embedded in your advertising outlook for 2020 just in terms of the low to mid-single-digit EBITDA guide? I understand you're seeing some softness in the first quarter due to the earthquake impact, you see this carrying forward beyond 1Q, just any incremental color on core advertising in Puerto Rico would be helpful.

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

Sure. I mean, I would love -- I wish I had a crystal ball in Puerto Rico, it's such a volatile market that changes very quickly. So, I don't have any long-term real strong point of view on it. I will say that first quarter has been adversely affected by this earthquake, which obviously it's a one-time event. We're hopeful with that, that the effect in the first quarter is more than a delay in advertising spend as opposed to a cancellation or reduction in advertising spend. We're not projecting a particularly robust market in Puerto Rico. We're looking at kind of a stable situation in Puerto Rico relative to where it was. However we think there's some potential upside there to the extent that federal funds do get disbursed and confidence is restored in both the government and in the economy. So I think we've taken a relatively cautious view, but in that cautious view is warranted, given the history of Puerto Rico.

From a performance standpoint, however, WAPA is running on all cylinders. We are -- we have a dominant first position in ratings in the market. We've grown since last year and we expect our share of the advertising market to be very strong.

Curry Baker -- Guggenheim -- Analyst

Okay. That's helpful. And then, maybe on political in Puerto Rico. Can you give us any sense of kind of expectations for this year and maybe a sense of what you guys did in 2016 and how you see this election cycle shaping up versus 2016?

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

Sure. There's a couple components to that. The Puerto Rican gubernatorial primaries are in early June. So it's a little early for spending to have taken place yet. For the first time in history, both parties have primaries, so that should normally be a positive sign. However, our belief is that neither party is particularly well funded and does not have a ton of money to be spending on TV advertising because that cuts against the opportunity. As a result, we're projecting our political to be kind of in line with where it was in 2016, which was in the $3 million range. We don't think it will be higher than that. We also expect some relatively small amount of money sort of like, say, six digits in -- for the presidential Democratic primary in March.

Curry Baker -- Guggenheim -- Analyst

Okay. Thanks. That's helpful. And then maybe just a bigger picture question. Can you maybe talk about your ability and appetite to consolidate some of the -- your investments in either Pantaya or Canal Uno?

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

Sure. Look, we are very pleased with both of those investments. We think that both big opportunities. And we would -- Canal Uno is in a difficult situation because the foreign ownership rules in Colombia will restrict us to owning 40% of the business. So as of today, consolidating is not a possibility that could change down the road but that's not possible legally today. On Pantaya, we love the business and we love to have more of it.

Curry Baker -- Guggenheim -- Analyst

Okay. Thanks. I think that's it for me.

Operator

[Operator Closing Remarks]

Duration: 20 minutes

Call participants:

Ashley Scott -- Investor Relations

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

Steve Cahall -- Wells Fargo Securities -- Analyst

Curry Baker -- Guggenheim -- Analyst

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