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Hemisphere Media Group Inc (NASDAQ:HMTV)
Q2 2020 Earnings Call
Aug 10, 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. Second Quarter 2020 Financial Results Conference Call. My name is Tawanda, and I will be your operator today.

A replay of the call will be available beginning at approximately 1:00 P.M. Eastern Time today, Monday, August 10th, 2020 by dialing 855-859-2056 or from outside of the United States by dialing 404-537-3406. The conference ID for the replay is 4437288.

I will now turn the call over to Ashley Firlan. You may begin.

Ashley Firlan -- Investor Relations, Edelman Financial Communications

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 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. I hope you and your families and colleagues are continuing to stay safe and healthy during these difficult times.

Since the onset of the pandemic, we've been focused on providing our viewers with uninterrupted news and entertainment programming, while protecting the health and safety of our employees and safeguarding our financial profile through cost-reduction measures. As a result of these efforts, we are weathering the tough environment, seeing improving results and we have set ourselves up for continued success over the balance of the year.

In Puerto Rico, we endured a challenging April and May as the island was subject to a lockdown. WAPA's April gross ad revenue declined year-over-year by 24%, while May's decline was somewhat steeper. Following the partial reopening of the economy in June, results improved to an 18% decline.

Moreover, after adjusting for revenues in June 2019 from Miss Universe Puerto Rico and sports, WAPA was actually flat in June versus a year ago. This positive trend has continued and accelerated into July with revenue actually increasing from 2019 by a robust 12% excluding political and 23% including political.

The combination of federal aid and the $600 per week supplemental unemployment insurance has bolstered the Puerto Rico economy and led to improving consumer spending and a solid advertising comeback. Most consumer spending metrics have improved significantly including auto sales, which saw its best month in a decade in June. With our dominant ratings position, we are optimistic regarding sales performance for the second half of the year.

One quick note on political advertising. The Puerto Rico gubernatorial primaries were rescheduled from June 7th to yesterday August 9th. However, many polling locations failed to receive ballots yesterday and as a result a significant percentage of Puerto Ricans were unable to vote. As of this morning, it appears that voting will take place on August 16th at those locations that did not receive ballots.

Due [Technical Issues] primaries from June, we saw no political advertising revenue in the second quarter. However, we have benefited from a fairly strong political ad spend during July and the first week of August comparable to our original pre-COVID expectation for the primary [Technical Issues].

WAPA continues to see record ratings as audiences [Technical Issues] pandemic and the gubernatorial election. WAPA's Q2 ratings reached an all-time high among adults 18 to 49 breaking the record it set in the first quarter of this year and growing by an astounding 76% versus Q2 of 2019. WAPA's prime time rating among adults 18 to 49 equaled Telemundo and Univision combined.

Turning to our cable networks. All of our networks experienced terrific ratings growth in Q2 and demonstrated resilience and ad sales performance. Ad sales declined 9% in the quarter versus the second quarter of 2019 with continued improvement over the course of the quarter.

Television Dominicana actually grew by 10% in the quarter defying all market trends and affirming its importance in the market. These positive trends have continued into July with a robust 14% ad revenue growth for our US cable networks versus July 2019.

Although visibility is limited, we are optimistic that we can sustain growth over the remainder of the year. Our ad sales performance was driven by terrific audience growth at our cable networks. Three of our networks Pasiones, Cinelatino and Centroamerica TV all delivered their all-time highest quarterly ratings according to Comscore.

Our networks provided the most current and comprehensive coverage of the COVID crisis from Puerto Rico, Central America and the Dominican Republic as well as top quality compelling entertainment programming on Cinelatino and Pasiones for audiences restricted to their homes. Pasiones marked its 14th consecutive quarter of growth with a 22% increase in ratings compared to 2019. Pasiones continues to drive new audiences to its unique and compelling lineup of the best dramas from throughout the world including Turkey, India, and Brazil.

Cinelatino grew its ratings by an impressive 46% over the comparable year ago period and accounted for all of the top 20 highest rated original Spanish language films on cable according to Comscore. Centroamerica TV had outstanding growth, more than doubling its year ago audience. Centroamerica TV has now had seven consecutive quarters of year-over-year growth. These outstanding ratings were driven by strong interest in News from Central America with our highest-rated program our prime time news cast from El Salvador increasing its year-over-year ratings by 167%.

WAPA America also had an outstanding quarter nearing its all-time record ratings and growing ratings by 26% compared to the prior year. Subscriber growth remained challenged during the second quarter. The declines are primarily driven by two major distributors and we remain in discussions with them around the importance of our audience and the opportunity to grow their Hispanic basis.

We are pleased to announce that we've entered into a multiyear renewal with Verizon for all five of our cable networks and we remain encouraged that several major distributors continue to show subscriber increases giving us confidence that there remain growth opportunities.

In addition, we are optimistic that the virtual MVPDs such as YouTube and Hulu will add Spanish language program into their offerings. As I previously noted in our calls, we are beginning to generate revenue from licensing our deep and unique library of content. We believe that this will be a strong source of revenue for us as we have already seen impressive viewership of our movies and series.

We continue to see solid revenue from our partnership with Amazon in Latin America, and we have recently entered into agreements with both Pluto and Tubi and are negotiating with other platforms as well. In Colombia, Canal Uno continues to grow its audience with total day ratings increasing by 13% compared to the prior year. However, while Canal Uno has significantly outperformed the overall TV ad market, ad sales have been adversely affected by the restrictions imposed as a result of the pandemic.

Like all Latin American countries, Colombia has been hit hard by COVID-19 and the number of cases in the country has continued to accelerate. The government has been aggressive in attempting to limit the spread, but there is not a lot of visibility on the trajectory of cases. Canal Uno has taken actions to greatly reduce programming and administrative costs which have thus far offset revenue declines.

Pantaya continues to demonstrate growth and now has 800,000 paying subscribers. As audiences continue to spend much of their time at home, streaming has become a dominant source of viewing and the service has a wealth of content in the pipeline for the remainder of the year.

Movies and series produced by Hemisphere accounted for a majority of Pantaya's most-viewed programs in the second quarter. The success of our content on Pantaya reaffirms our expanded production strategy benefiting Pantaya while driving additional value for Hemisphere. We are honored that Pantaya has received seven nominations for Imagen Awards recognizing excellence by Latinos in movies and TV.

Regarding M&A, during the quarter we were heavily focused on managing our costs and maximizing revenue. However, we anticipate that attractive opportunities in the US and Latin America may arise over the coming months. With our strong balance sheet and available cash, we are well-positioned to take advantage of these opportunities.

In conclusion, we continue to monitor the impact of the pandemic across all of the geographies we serve. We are focused on responsibly managing costs while producing critical news and compelling entertainment content for our audiences. Although the environment is still too uncertain to provide guidance at this point, we remain optimistic regarding continued positive trends.

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 liquidity position. We ended the quarter with $105 million of cash an increase of $10 million from the prior quarter. We had $206 million in debt as of June 30th. As mentioned on our prior earnings call, we have no near-term maturities or maintenance covenants.

We remain focused on optimizing our costs. In the quarter, we lowered our SG&A through reductions in personnel costs and marketing and research. To preserve liquidity, we renegotiated certain programming agreements to defer payments into the second half of 2020 and into 2021. Additionally, pursuant to the CARES Act, we participated in the employer payroll tax deferral which defers the payment of payroll taxes until 2021 and 2022 and we claimed employee retention credits during the quarter.

Moving to our results, net revenues in the second quarter were $34.7 million, a decrease of 11% as compared to net revenues of $39.1 million for the year ago period. Net revenues for the six months ended June 30th, 2020 were $67.1 million a decrease of 10% as compared to $74.3 million for the year ago period.

These declines were due to decreases in advertising and affiliate revenues which were offset in part by increases in other revenue primarily from licensing of our content. Advertising revenue for the three-month period decreased $3.3 million or 21% from the six month period -- and for the six month period decreased $4.7 million or 16% over the comparable periods in 2019. These decreases were primarily due to the negative impact of the pandemic on advertising and the timing or cancellation of Miss Universe Puerto Rico and certain sporting events which were produced and televised in the second quarter of 2019, but not in the second quarter of 2020.

Pro forma for these events advertising revenues were down low single-digits in June showing an improved trend relative to April and May. We did not have any political revenue in the second quarter due to the postponement of the Puerto Rican gubernatorial primaries from June to August. We did see strong political advertising revenue in July and August to date. Affiliate revenues for the three and six month periods decreased $2.3 million or 11% and $3.8 million or 9% respectively over the comparable periods in 2019.

These decreases were due to a decline in subscribers across all of our networks in the US and Latin America and the impact of unfavorable foreign currency movements. Other revenue for the three and six months ended June 30, 2020 increased $1.2 million or 61% and $1.3 million or 52% respectively over the comparable periods in 2019 due primarily to the licensing of content to third parties.

As we noted before, licensing revenue can be uneven given the timing and availability of titles. Operating expenses in the second quarter were $25.8 million an increase of 3% as compared to $25.1 million for the comparable period. Operating expenses for the six month period were $54.1 million an increase of 10% as compared to $49 million for the comparable period. Cost savings measures implemented in response to the pandemic which resulted in reductions in SG&A were more than offset by higher cost of revenues increased stock based compensation and bad debt reserves.

Cost of revenue increased due to ongoing investment in programming specifically as a result of the cost of content acquired for license to third parties and the production of Guerreros, WAPA's successful daily reality show which began production in May 2019. These increases were partially offset by the timing or cancellation of Miss Universe Puerto Rico and certain sporting events.

Operating expenses for the six month period also increased due to higher non-operating expenses including professional and advisory fees incurred in connection with our pursuit of strategic transactions in the first quarter of this year a decline in reimbursements received from the FCC for equipment purchases required in connection with the spectrum repack and a loss on the disposal of assets no longer utilized in the operations of our business.

Adjusted EBITDA in the second quarter was $13.3 million a decrease of 24% as compared to $17.5 million for the comparable period. Adjusted EBITDA for the six month period was $24.8 million a decrease of 23% as compared to $32.4 million for the comparable period. Our gross leverage ratio was approximately 3.5 times and net leverage ratio was approximately 1.7 times consistent with the prior quarter. Capital expenditures were $300,000 in the quarter. This is compared to $1.4 million in Q2 2019. As a reminder, we have reprioritized our capital plans for the year and have deferred certain capital projects to the second half of 2020 and into 2021.

Turning to strategic investments, as noted on our last call, we elected to take advantage of the favorable exchange rate in the first quarter and prefunding Canal Uno through the second quarter. Therefore, there is no funding in the current period. We believe our business has been operating well in a difficult environment. We maintained a strong financial position and we are pleased with the positive indicators we have seen in July and on into August. We look forward to updating you on our progress.

We'll now open the call to your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions]. Our first question comes from the line of Steven Cahall with Wells Fargo. Your line is open.

Steven Cahall -- Wells Fargo -- Analyst

Thanks. Good morning. So maybe first at this point could you say whether or not you think Q3 ad sales will be up maybe with and without political? And could you give us a sense of maybe how cable network ad sales have been trending? It sounded like most of the positive commentary was on WAPA Puerto Rico. So just trying to understand what the cable dynamic is as well.

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

Good morning, Steve. Yes, listen there's not a lot of visibility in the market as you know. Ad sales are being strictly bought on a scatter basis and the decisions are being made on kind of a weekly or even a daily basis sometimes. But what we've seen so far as indicated by the numbers that I gave you is very positive. We had a very strong July, August is off to a good start, so we feel good about where things are today. And to the extent we have visibility it's positive. On the US side, as I -- also as I mentioned, we had a really strong July, up 14% versus a year ago and we are optimistic that we can sustain those numbers going forward for the balance of the quarter.

Steven Cahall -- Wells Fargo -- Analyst

Great. And then on the sub declines I mean it sounds like a really wide dispersion of trends there. I think if I heard things correctly you said that you're up at some distributors. And then I guess the numbers would imply you're down pretty heavily at some other distributors. So maybe if we step back from it, I mean do you think that the Spanish language pay TV base is it growing or shrinking at this point? And then how do you think about sort of getting your sub decline to track more consistently with kind of what you think the overall base is doing?

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

Well, I just think our subscriber base is different. We're focused on the Hispanic subscribers, which are a subset of the overall subscriber base. But they have a different demographic profile, different socioeconomic profile. And they are treated differently by distributors, most importantly.

So the distributors that have priced appropriately and have marketed toward Hispanics continue to see solid performance. The ones that I would say have abandoned the Hispanic market, either by failing to market to them, or by pricing in a discriminatory way against Hispanics, by which I mean that they are -- that in order to subscribe to the Hispanic package you have to buy through an English package, and then pay a premium, to subscribe to your channels, unfortunately the two subscribers -- the two distributors that have really performed poorly, engage in that sort of pricing behavior, which we feel is bad business.

And also just bad policy in discriminating against the market that can least afford those heavy prices. So we think if that can be corrected, we feel that they can reverse their trends as well.

Steven Cahall -- Wells Fargo -- Analyst

Got it, Alan, and then, Craig, maybe just you'd $105 million in cash on the balance sheet. Do you have any major either minority investments, or programming or capex that comes up in the back half of the year that you think, changes free cash flow or the cash profile of the business? And then, also you took some cost out of looks like on SG&A. So any guidance or outlook on what SG&A might look like going forward, after those initiatives?

Craig D. Fischer -- Chief Financial Officer

Sure. As I noted, we deferred some of the capital projects into the second half of the year. We're still anticipating around $5 million or so, in total capex for the year. So it will pick up here in Q3 and Q4. About half of that though still remains around the FCC spectrum repack. So we would anticipate reimbursement from that, although the timing of that sometimes lags a quarter.

But look, we feel good about the cash flow generation in the quarter. And we anticipate -- you know, we anticipate continue to generate free cash here in the second half of the year. We will -- as I noted about -- I think you asked about the minority investments. We had funded Canal Uno. We pre-funded Canal Uno through second quarter. I think the funding in the second half of the year will be similar to the funding we made in Q1 which was about $5 million.

So they've done a good job of managing their costs there as well, reducing the funding requirement. So we feel good that we'll end the year with more cash than we have right now and continue to build on that base. On the SG&A, we continue to manage costs closely. Some of the cost savings were variable in nature. So as we've seen sort of the rebound in revenue here in July, some of those cost -- the variable costs will return.

We've -- but we'll continue to keep an eye on management -- cost management particularly as it -- the health issue changes over time between now and the end of the year. And so we have the ability to control cost effectively through the balance of the year. So I think what we -- the savings we've seen in the quarter, a good chunk of that will continue on just the variable cost of that will probably come back in a little bit.

Steven Cahall -- Wells Fargo -- Analyst

Great. Thank you.

Operator

[Operator Closing Remarks].

Duration: 22 minutes

Call participants:

Ashley Firlan -- Investor Relations, Edelman Financial Communications

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

Craig D. Fischer -- Chief Financial Officer

Steven Cahall -- Wells Fargo -- Analyst

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