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Hemisphere Media Group Inc (HMTV)
Q1Â 2020 Earnings Call
May 11, 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 the Hemisphere Media Group Inc.'s First Quarter 2020 Financial Results Conference Call. My name is Bella, and I will be your operator today. A replay of the call will be available beginning approximately 1 PM Eastern Time today, Monday, May 11th, 2020 by dialing (855)-859-2056, or from outside the United States by dialing (404)-537-3406. The conference ID for the replay is 4888365.
I would now turn the call over to Ms. Ashley Firlan.
Ashley Firlan -- Investor Relations
Thank you, operator, and good morning, everyone. I'd like to welcome everyone to today's conference call. I'm Ashley Firlan, 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 U.S. Private Securities Litigation Reform Act of 1995. These statements are based on the current expectations of the management of Hemisphere, and are subject to uncertainty and changes in circumstance, which may cause actual results 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. I am hopeful that you and your families and colleagues are healthy and well. Since the onset of the global pandemic, we have prioritized protecting the health and safety of our employees, working closely with our distribution and advertising partners, identifying and implementing cost savings measures, and critically providing our audiences with the most comprehensive, continuous and relevant news and information.
The pandemic is unprecedented in its impact on the world's population, the global economy, public policy and our business operations. We understand the implications of all of this, and as such, are taking our role very seriously as a trusted news source, just as we have in the past during the hurricanes, earthquakes and crises. Despite challenges presented, we are well positioned to weather this difficult period. We remain well capitalized with a strong balance sheet and ample liquidity. Virtually all of our programing, other than sports continues to be produced and aired, giving us a significant advantage over other networks which are unable to produce fresh programing.
Nonetheless, we are managing expenses closely and cutting costs where we can. We have reduced executive salaries across the Company and furloughed certain employees. In addition, we have aggressively renegotiated program and contracts with our suppliers and reduced capital expenditures. We may also have meaningful savings, if sports and live events such as Miss Universe Puerto Rico are ultimately canceled. Most importantly, we have a world-class and innovative team with tremendous experience and a tested playbook for operating during times of crisis. We are confident that we will navigate this period as we have others from a position of strength and emerge as an even more dynamic and forward-looking company.
Turning now to Puerto Rico and WAPA. The Governor of Puerto Rico implemented curfews and stay-at-home orders on March 15th, the first state or Commonwealth to do so. Puerto Rico currently has approximately 2,300 confirmed cases. On a per capita basis, Puerto Rico has fewer cases than any state other than Montana, Alaska and Hawaii. The Governor began taking small steps to reopen Puerto Rico as of May 4th, but the island remains largely in lockdown mode. Puerto Rico, like other US states, is eligible to participate in the CARES Act relief programs, and as a result, is projected to receive over $5 billion of federal relief funds. Residents are also eligible for the supplemental unemployment benefit of $600 per week.
We are extremely proud of and grateful to our team at WAPA for its commitment to serving as a primary source of news and information for Puerto Ricans on the island and in the U.S. WAPA has not only continued to produce all of its newscast, it has actually expanded the number of hours of news being produced. WAPA has provided Puerto Ricans with vital and current information and reassurance for the most trusted journals in Puerto Rico. WAPA has also continued to produce nearly all of its talk and entertainment programming, including a socially distanced version of the hit reality series, Guerreros. In total, WAPA is currently producing over 70 hours a week of news and entertainment programming, a testament to our commitment to serving Puerto Rico, an affirmation of WAPA's unique and tremendous value as a television network.
The results of these extraordinary efforts speak for themselves. In Q1, WAPA broke all historical ratings records since the inception of Nielsen for viewing among both total persons and the key advertising demographic of adults 18 to 49. WAPA delivered an astounding 43% overall share among adults 18 to 49, higher than Telemundo and Univision combined. And in Q2 to date, WAPA has surpassed its Q1 viewing records, and is well on its way to another historical ratings quarter.
WAPA's dominant position as the leader in news and entertainment programming in Puerto Rico ensures that it [Phonetic] will continue to receive a very strong share of the advertising spend and it's more than ever a must-have in any pay TV service in Puerto Rico. Notwithstanding this dominant performance, WAPA's ad revenue declined by 10% in Q1. As I noted in our last call, Puerto Rico has struck by series of strong and damaging earthquakes in January, which dampened the ad market as many advertisers paused or reduce their spending in January and February. And the subsequent lockdown of the island in mid-March resulted in a further significant contraction of the market. All of this occurred against the backdrop of the island making a steady recovery from the effects of Hurricane Maria. While these events are both serious setbacks, we are optimistic that Puerto Rico will be in a position to rebound once it is able to reopen.
Turning to our cable networks. We saw a terrific ratings performance in Q1 and further across the board ratings growth in April. Our news-driven channels, WAPA America, Centroamerica TV and Television Dominicana, have provided their audiences with comprehensive and exclusive round the clock news coverage from their home countries. The value of our U.S. cable networks was evident by the relatively modest declines in ad revenue in April as compared to the overall U.S. television industry.
WAPA America, with over 200 hours per month of news produced in Puerto Rico, saw a robust 29% increase in audience in the first quarter of 2020 versus Q1 2019. In April, WAPA America continued its ratings growth and had a 32% ratings increase over April 2019. Centroamerica TV had its sixth consecutive quarter of year-over-year audience growth with total day ratings increasing an astounding 65% versus the first quarter of 2019. During April, the channel has more than doubled its audience delivery of April 2019. This terrific performance reflects Centroamerica TV's position as a leader in news and information for the 6 million Central Americans living in the U.S.
Pasiones total day ratings were up 24% versus the first quarter of 2019, resulting in its 13th consecutive quarter of year-over-year audience growth as people are looking for unique and original entertainment content while at home. April brought further viewing increases and ratings outperformed April 2019 by 33%. Pasiones growth has been driven by its unique mix of compelling dramas from throughout the world, including Turkey, India and Brazil.
In the first quarter, Cinelatino remained the second highest Nielsen rated Spanish language cable network. This strong performance continued into April with audiences increasing 12% over April 2019. Cinelatino's value proposition is further evidenced by its video on demand performance. Video on demand usage nearly doubled in April versus 2019. Cinelatino's movie offering is well positioned for the remainder of 2020 with a strong pipeline of box-office hits and critically acclaimed films.
Notwithstanding our terrific growth in both WAPA and our U.S. cable networks in Q1 and April, our ad sales have been hurt by the pandemic. In April, our gross ad revenue in Puerto Rico and the U.S. declined by 23% in comparison to April 2019, and May is pacing down 35% versus May 2019. It's very difficult to forecast the ad market going forward as advertising buying decisions are being made on a week-to-week basis and improvement is highly dependent on the reopening of commercial activity.
We made the decision not to renew our Nielsen contract for Cinelatino following its expiration on April 30th in light of the difficult advertising environment amplified by the pandemic. While we have succeeded in attracting a number of major national advertisers to Cinelatino, the savings [Phonetic] from canceling Nielsen and related personnel and research costs will significantly outweigh any potential lost to advertising revenues.
In the U.S., we continued to see a decline in subscribers in Q1. Obviously, this is a concern for us going forward. The decline is primarily from two major distributors. I had previously mentioned that one of these distributors began to experience declines only after initiating a sign-up process, which made it much more cumbersome to subscribe to the Hispanic programming package. We have had numerous discussions with this distributor. But despite their assurances, to date they have failed to alter their process. We are nonetheless encouraged that certain large distributors continue to show subscriber increases, giving us confidence that there remains a significant untapped growth. Pricing and aggressive marketing are the keys to growing the Hispanic tier.
In Colombia, the president implemented early strict measures in response to COVID-19, resulting in a relatively low number of cases to date. However, the pandemic, coupled with the drop in oil prices, has resulted in economic distress and significant advertising contraction. The Colombian peso has also declined in value. We are hopeful that the country will recover quickly, but Canal Uno implemented significant cost cuts that will offset in large part any revenue declines.
Pantaya has seen impressive growth in 2020. As of today, Pantaya has 750,000 paying subscribers. April viewing on Pantaya broke all previous viewing records by a wide margin, including a 52% increase in streams viewed as compared to March and more than five times streams viewed on April 2019. Pantaya launched two new premium series in April, including the first series in Spanish produced in quarantine. Pantaya has a sufficient pipeline of movies and series for the balance of 2020.
In closing, I am proud that the value of our services are once again shining in the midst of crisis. I am grateful to all our on-air talent that has continued to work and serve as a source of information, stability and reassurance to our audiences. Looking ahead, with our solid financial position helping us to weather this storm, we are confident that we will emerge stronger and well positioned to grow organically and to potentially take advantage of M&A opportunities with attractive valuations.
Thank you, everyone. I'll now turn the call over to Craig.
Craig D. Fischer -- Chief Financial Officer
Thank you, Alan, and good morning, everyone. Let's start with our near-term financial profile and some of the actions we are taking to mitigate the impact of the pandemic. We ended the quarter with $95 million of cash on hand. To conserve cash, we are reducing costs where possible, carefully managing our capital expenditures, and we are not buying back stock at this time. We had $206.4 million in debt as of March 31. It is important to note that we have no near-term maturities and do not have any maintenance covenants.
We made the difficult decision to furlough, terminate or reduce shifts for over 10% of our staff and have also reduced salaries across the organization, including at the executive and Board levels. We have also presently frozen hiring activities and salary increases. Additionally, we have cut back on discretionary spending and are renegotiating programming agreements to defer payments and seeking other concessions. In regards to the CARES Act, we are taking advantage of the deferral of payroll taxes until the end of 2021 and 2022. We are also exploring other options that may be available to us.
Capital expenditures totaled $300,000 in the quarter. We have reprioritized our capital plans for the year and have deferred certain capital projects into 2021. We expect our capital spend to be approximately $5 million in 2020, with nearly half of the spend expected to be for equipment related to the spectrum repack, for which we expect to be reimbursed by the FCC in 2020 and 2021.
The largest portion of our costs are related to news, production and programing. Our viewers are relying on us more than ever for news and information during this time. Accordingly, WAPA has been operating at near full production capacity, actually producing more news and a nearly full slate of entertainment programming. Additionally, our cable networks have not had any interruptions to the supply of news and entertainment content.
Now moving on to some more detail on our first quarter results. Net revenues in the first quarter were $32.4 million, a decrease of 8% as compared to net revenues of $35.1 million for the year-ago period. The decrease was due to declines in advertising revenue and affiliate revenue. Advertising revenue declined $1.3 million or 10%. The decline was due to the impact of the earthquake on the Puerto Rico TV ad market in January and February. We anticipated that the ad market would pick up again in March, but was then impacted by the pandemic.
Affiliate revenue for the quarter decreased $1.5 million or 7% over the comparable period in 2019 due to a decline in subscribers across our U.S. cable networks, the negative impact of the blackout of WAPA America on Dish until late January 2020, and a decrease in revenues at our Latin American cable networks as a result of subscriber and fee declines and unfavorable foreign currency movements.
Operating expenses, excluding non-operating items, were flat year-over-year even after taking into account an increase of $500,000 in reserve for bad debt, given the increased risk of collection due the pandemic. The quarter included non-operating expenses of $3 million in professional and advisory fees incurred in connection with our pursuit of strategic transactions and a decline of $1.5 million due to the timing of reimbursements received from the FCC for equipment purchases required as a result of the spectrum repack.
Adjusted EBITDA in the first quarter was $11.5 million, a decrease of 23% as compared to $14.9 million for the comparable period.
Turning to strategic investments. During the quarter, we funded $6.4 million into our joint ventures, including $4.8 million into Canal Uno and $1.5 million into Pantaya. During the quarter, we elected to take advantage of the favorable exchange rate and pre-funded Canal Uno through the second quarter. Additionally, during the quarter due to the onset of the current economic crisis and the resulting going concern risks, we recognized a one-time non-cash impairment charge totaling $5.5 million related to our investment in REMEZCLA.
For purposes of providing a bit more detail on the second quarter and year ahead, we expect advertising revenue, which represented approximately 40% [Phonetic] of our total revenue in 2019, to continue to be challenged in the near term due to pandemic. As Alan noted, April gross advertising revenue declined 23% and May is pacing down 35%. With the postponement of the Puerto Rico gubernatorial primaries from the second quarter to the third quarter, we anticipate political revenue to shift to the back half of the year, though it will be softer than originally expected.
Key sports programing and special events like Major League Baseball and Miss Universe Puerto Rico may also be impacted. While this will impact revenue, associated costs will also be reduced and therefore cushion the impact on profitability. To help us offset some of these revenue declines, we have and continue to implement cost reductions.
In closing, while our business certainly has not been immune to the issues caused by the pandemic, we are demonstrating resilience and strength and this crisis has brought up the best in us. We've been hit hard before, most recently in 2017 when we faced a generational natural disaster in Hurricane Maria. We rose to the occasion, ensuring that our viewers had the news and information they needed and rebounded quickly to growth. We are confident that we will do it once again and will emerge from this pandemic a stronger company.
We'll now open the call to your questions.
Questions and Answers:
Operator
[Operator Instructions] Our first question comes from the line of Curry Baker from Guggenheim Securities. Your line is now open.
Curry Baker -- Guggenheim Securities, Inc. -- Analyst
Hey. Good morning, guys. Thanks for the question. I was wondering if you could talk a little bit more about what you're seeing in the advertising markets, both Puerto Rico and the U.S. You obviously noted that May was pacing sequentially worse than April. That's a bit contrary from what we've been hearing from others in television advertising. I know visibility is limited, but can you talk about any stabilization at all you're seeing as we get into mid-May and you have a look into late May? Again, just any other additional color there would be great.
Alan J. Sokol -- Director, President and Chief Executive Officer
Sure. We are seeing in Puerto Rico -- we're actually seeing erosion of advertising market in May versus April. I think that it is largely due to fatigue by advertisers. They continue to advertise into the pandemic during April, and I think that some of them have pulled back waiting for the economy to reopen. I remember Puerto Rico has been in lockdown since March 15th before any U.S. state went into lockdown. So, it's been a long time. That said, there is a relatively low number of cases there, and there is an expectation that the economy will begin to reopen in earnest by the end of May. So, we think May may be a rough month, but we're hopeful that things will start flipping once the economy reopens. That's really what the businesses are waiting for. Just to give you a sense, Puerto Rico has a 7 PM curfew right now, which is earlier than any state in the U.S. So, the Governor has taken very strict measures there. And I think that while -- hopefully that has -- that will minimize the number of illnesses and that -- at the same time, it's also adversely affecting commerce.
In the U.S., we're seeing pretty solid results relatively speaking. Our declines are much more modest than they are in Puerto Rico and modest than what other cable and broadcast networks have announced. And May to date is fairly steady with April.
Curry Baker -- Guggenheim Securities, Inc. -- Analyst
Got you. Thanks. That's helpful. And then maybe just turning on the subscribers. I know you talked about declines here in the U.S. How temporary do you think this is? And then, also maybe do you have any directional insight into the impact on subscribers from COVID-19, both at the cable networks in the U.S. and also Puerto Rico?
Alan J. Sokol -- Director, President and Chief Executive Officer
To answer your second question first, we don't yet have real insight into the impact of COVID-19. Remember, our payments and remittances are on a two-month delay typically. So, we generally don't see numbers for 60 days or so until after they actually happen. So beyond what the cable distributors have set themselves, we don't have any specific insight into actual numbers. And I'm sorry your other question was?
Curry Baker -- Guggenheim Securities, Inc. -- Analyst
Just in the U.S., the subscriber declines you saw during the quarter. How temporary do you think these are? Do you see a path returning to growth there at some point this year?
Alan J. Sokol -- Director, President and Chief Executive Officer
I think it's -- what we're seeing is a little bit schizophrenic because we're seeing some really nice strong growth among couple of the largest distributors, while at the same time we're seeing weakness among a couple of the other larger distributors. So I think if you look at it there, you look at the differences between those two sets. One set is continuing to market aggressively and continuing to price [Phonetic] appropriately, while the other set is sort of abandoned or just sort of abandoned marketing their pay TV businesses and have increased prices. So, I think that that's the bifurcation we're seeing. I think to the extent that these guys are smart and focused and realize that the Hispanic market is still so underpenetrated on pay TV relative to the overall market that the content offered on the Hispanic here is unique and singular, not really available on any form of VODS or AVOD. That I think there's still tremendous opportunity to grow that business even though it's conventional linear television. I think it's a tremendous opportunity to grow. We're seeing it in our viewership. I mean the increase in viewership numbers are tremendous, which signifies that there is real and meaningful audience out there that want this product that is hungry for it, there is nowhere else to find it. And we think that is properly marketed and priced that there still is huge runway for growth here and there should be runway for growth given the size of the market, growth of the market and its severe under-penetration relative to the size.
Curry Baker -- Guggenheim Securities, Inc. -- Analyst
Great. Thanks for the color. I appreciate the questions guys.
Operator
Your next question comes from the line of Steven Cahall with Wells Fargo. Your line is now open.
Steven Cahall -- Wells Fargo -- Analyst
Thanks. Hey guys. Good morning. Maybe first, just a follow-up on Craig's advertising questions. Maybe you can talk a little bit about what you're seeing on the U.S. cable network side. I think that's mostly direct response advertisers and are there sort of acting as you would expect in a time like this? Are there pockets of strength in there? Or is it pretty weak across the board like from verticals or different major advertisers you have?
Alan J. Sokol -- Director, President and Chief Executive Officer
Hi, Steve. Nice to talk to you. We're seeing certain categories are performing very well in direct response as people are home and looking for certain types of products, household products, wellness products are performing extremely well on direct response. And as a result, we've seen good growth. We've also seen some general market advertisers dip their toes into Spanish-language during this time. With pricing being down and inventory being more available, I think that's been a smart and forward-Looking move on their part. And we've seen some traction there. Obviously, there are certain categories that are soft or have gone on hiatus during this time. And also, there is -- some of the direct response advertisers have had issues with call centers and staffing call centers during this time because of the pandemic and that's affected their business as well. But on balance, it's been pretty stable and resilient relative to what we've seen and heard about versus on the broadcast and cable side for English language networks.
Steven Cahall -- Wells Fargo -- Analyst
Okay, thanks. And then on WAPA in Puerto, are you still paying first sports rights and are you having any discussions with your sports counterparties about what those payments may look like as those seasons are a little bit influx.
Craig D. Fischer -- Chief Financial Officer
Yeah. Look, subject to confidentiality on some of these agreements to get into specific details, but in some cases, we have force majeure clauses or clauses that require content to be provided. So in those cases, we have not been making payments. And all our partners historically had been great partners with us in the past and we expect that to continue going forward. So right now, we are -- we feel we're pretty well protected on our obligations.
Steven Cahall -- Wells Fargo -- Analyst
Great. And then, maybe I missed this in the comments, but did you give an outlook for what you think you'll be investing in your JVs this year? And I'm guessing that's an area of cash expense that you might be looking to manage a little bit.
Craig D. Fischer -- Chief Financial Officer
Yeah, we didn't get into specific guidance. I did mention what we did in the quarter, which was about $6.4 million. The guidance I did give is, Pantaya, as you know we fulfilled our obligation here in the first quarter and we'll evaluate plans to fund further in the future. On Canal Uno, we took advantage of the favorable exchange rate earlier in the quarter and pre-funded through next quarter. So, that's -- the number is higher than it was in Q4, but you got to look at in terms of funding a longer period of time and we expect the second half of the year on Canal Uno to be similar to the first half in terms of funding cash.
Steven Cahall -- Wells Fargo -- Analyst
Yeah. Okay, very helpful. And then, I mean, maybe just a big picture question, I mean you guys have dealt with more you're kind of fair share of crises [Phonetic] than a lot of public companies have over the last few years. What did you kind of learn from, whether it was the hurricane or the fiscal situation in Puerto Rico that you feel like puts you in a little better position to maybe deal with what you're going through now.
Alan J. Sokol -- Director, President and Chief Executive Officer
Well, I think we've learned how to be agile. I mean I think that that's really helped. We have a playbook that we've developed from these unfortunate past crises that we've had to confront. So we know how to manage our staff. Our staff is used to dealing with these crises. Our staff is used to having short-term furloughs and layoffs and having cutbacks in their pay, because it has happened before. Our production teams know how to produce in crisis and they know how to step up when there is a crisis. So this is not the first time, it's not their first rodeo in doing this. And our sales teams, very importantly, know how to react and price and be flexible and be creative in coming up with sales strategies and sales programs with clients and with agencies to create win-win situations in these difficult times.
Steven Cahall -- Wells Fargo -- Analyst
And then, maybe just a last one on M&A. You mentioned maybe having some potential opportunities. I imagine there is a lot of distress in the market. So, are you able to use the balance sheet and push the gas a little bit here and find some opportunities that might not have come together or better prices than before the crisis started?
Alan J. Sokol -- Director, President and Chief Executive Officer
I think that those opportunities will arise and surface over the next few months. I think there's going to be a number of interesting opportunities that come up for companies that are not necessarily well capitalized and that are distressed. And I think we're in a really great position to take advantage of those opportunities when they come up. And so, yeah, I think that -- although at this moment, it's not our priorities -- our priority is really managing our business and mitigating the revenue declines and working at our best way going forward. I think that over time over the next few months, I think we will start seeing some really interesting and potentially appealing strategic opportunities at attractive valuations.
Steven Cahall -- Wells Fargo -- Analyst
Great. Thank you.
Operator
[Operator Closing Remarks]
Duration: 30 minutes
Call participants:
Ashley Firlan -- 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 -- Analyst
