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Hemisphere Media Group Inc (NASDAQ:HMTV)
Q3 2020 Earnings Call
Nov 9, 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 Incorporated Third Quarter 2020 Financial Results Conference Call. My name is John, and I'll be your operator today. A replay of the call will be available beginning at approximately 1 o'clock PM Eastern Time today, Monday, November 9, 2020, by dialing (877) 497-1436 or from outside of the United States by dialing in (262) 558-6292. The conference ID for the replay is 9365609.

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

Danielle O'Brien -- 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.

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, Danielle, and good morning, everyone. I hope you and your families and colleagues are staying healthy and safe. We delivered outstanding results in the third quarter in the face of the pandemic. Overall, our net revenues increased by 4% driven by 27% growth in advertising revenue, and our adjusted EBITDA grew by 6%. Our advertising growth significantly outpaced the advertising markets in both Puerto Rico and the U.S. and is a direct result of our strong ratings, grown viewership and compelling value proposition.

In Puerto Rico, we saw a solid rebound in consumer spending and business activity and a healthier advertising environment, with the overall TV ad market up 12% versus 2019, excluding political. The advertising recovery in Puerto Rico coincided with the resumption of economic activities and strong consumer spending fueled by the government stimulus.

WAPA received the bulk of this higher spending, increasing its share of the advertising market and driving its robust year-over-year growth. WAPA was able to achieve this growth as a result of its continued dominant ratings performance, delivering the highest third quarter ratings in its history in the key advertiser demographics of adults 18 to 49 and 25 to 54. For the fourth consecutive quarter, WAPA's ratings were higher than Univision and Telemundo combined, the first time this level of sustained dominance has occurred since Nielsen commenced ratings measurement in Puerto Rico.

With the rescheduling of Puerto Rico's gubernatorial primaries from June to August, political spending was deferred from the second to third quarter. WAPA secured over $1 million of political spending in Q3, consistent with our original expectation. In the fourth quarter, we are building on our third quarter momentum and our performance to date has been tremendous. October represented the highest ad revenue month for WAPA in its history and helped to make it Hemisphere's all-time highest month in ad revenues. Even when excluding political revenue, October was among the highest ad revenue months in our history.

I'm happy to announce that we've entered into a retransmission renewal agreement with a large MVPD in Puerto Rico, effective as of January 2021. This renewal will result in a substantial increase in our retransmission fees and reflects WAPA's market strength, a unique value proposition. It's also worth noting that Puerto Rico cable subscribers saw a slight increase in Q3.

One final note on WAPA. WAPA's President, Javier Maynulet, will resign at the end of the year. Javier's wife and children live in Miami, and he has decided to relocate back to Florida to be able to spend more time with them. Javier did great work at WAPA and we wish him the best. Fortunately, we have a terrific replacement for Javier with Jorge Hidalgo. Jorge has a long and very successful track record in Spanish TV, including Executive Vice President in charge of the news and sports divisions at Telemundo, and has worked closely with WAPA's news and production teams in the recent relaunch of our signature newscast.

Turning to our cable channels. As I noted in our second quarter earnings call, we began to see a strong rebound in ad sales in July, which continued through the third quarter. Overall, we saw meaningful ad sales growth in Q3, driven by strong viewership at all of our networks. Our continued ratings growth and differentiated and valuable audiences have enabled a higher sell out and increased pricing, even in a uniquely challenging environment.

Pasiones increased its ratings by 17% versus third quarter of 2019, its 15th consecutive quarter of year-over-year growth. Cinelatino grew its ratings by 11% over 2019. And Centroamerica TV's ratings increased by an impressive 38%, its ninth consecutive quarter of year-over-year growth.

WAPA America continued as a Top 5-rated Spanish cable channel, delivering large and live audiences with its unmatched coverage of the Puerto Rico elections and the COVID-19 crisis. While our U.S. subscriber numbers declined in third quarter, we have seen a sequential improvement in subscriber losses in the past few months, particularly as it relates to one of our largest distributors. Although too soon to know if this is a long-term trend, we are encouraged by these results.

In addition, we continue to be in discussions with various MVPD -- vMVPDs, about launching a Spanish language package. With the proliferation of numerous AVOD platforms, we believe that we will be able to generate meaningful revenue from licensing our deep library of content. As I previously noted, we've already entered into partnerships with Amazon in Latin America and Tubi and Pluto in the U.S. and Latin America. In addition, we now have agreements with the Roku, XUMO and the Spanish-language platforms Canola [Phonetic] and VIX, while negotiating with others.

Turning to Colombia and our investment in Canal Uno. The market remains challenged by the pandemic. However, most restrictions on business activity has been lifted and economic metrics are improving, the advertising market has grown sequentially every month since May, and we are optimistic that by year-end spending will rebound to normalized levels. Canal Uno continues to outperform the overall TV market, while concurrently reducing costs to offset the revenue declines.

Pantaya continues to grow its subscriber base as the first and dominant SVOD offering dedicated to premium Spanish language movies and series. Pantaya currently has 825,000 paying subscribers. Certain of Pantaya's productions were impacted by the pandemic. However, production has largely resumed, including the next two seasons of Pantaya's blockbuster series El juego de las llaves and Season 2 Derbez Family Vacation, starring superstar Eugenio Derbez. We are very excited about and confident in the growth of Pantaya.

In addition to Pantaya, we're exploring various direct-to-consumer opportunities, leveraging our content ownership, production capabilities, and unique understanding of the U.S. Hispanic and Latin American markets. The pandemic has also created a number of intriguing potential M&A opportunities, which are directly in our wheelhouse.

In closing, we are extremely pleased with our performance under challenging conditions. We are proud of our market leadership and our ability to significantly outperform the overall ad market while closely managing our costs.

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. Net revenues in the third quarter were $37.2 million, an increase of 4% as compared to net revenues of $35.8 million for the year-ago period, due to an increase in advertising revenue offset by decreases in affiliate revenue and other revenue. Advertising revenue increased 27%, primarily due to the growth in advertising revenue across all of our networks, as well as political revenue. Excluding political, total ad revenue was up 18% over the comparable period in 2019. This increase compares very favorably to the 21% decline we experienced in the second quarter.

Affiliate revenue in the third quarter decreased 9%, due to a decline in subscribers to our U.S. cable networks and a decline in non-U.S. revenue as a result of subscriber and fee declines due in part to unfavorable foreign currency movements. Other revenue decreased 47%, driven by the timing of the licensing of content to third parties.

Net revenues for the nine-month period were $104.3 million, a decrease of 5% as compared to $110.1 million for the year-ago period. The decline was due to a 9% decrease in affiliate revenue and 2% decrease in advertising revenue, offset in part by a 23% increase in other revenue. Affiliate revenue decreased due to the decline in U.S. cable network subscribers and a decline in non-U.S. revenue. Advertising revenue decreased due to the negative impact of the Puerto Rico earthquakes in January and then the COVID-19 pandemic, which more than offset the growth in advertising revenue during the third quarter. Other revenue increased driven by the timing of the licensing of content to third parties.

Operating expenses in the third quarter were $23.8 million, a decrease of 6% as compared to $25.3 million for the year-ago period. This quarter, we operated at full production capacity, and in fact produced more news programming due to extensive political coverage. The decrease in operating expenses was primarily due to a decline in stock-based compensation and reduced marketing and research, offset in part by higher personnel expenses and an increase in the bad debt reserve. The third quarter also benefited from a higher gain from the FCC spectrum repack of $1 million as compared to $200,000 in the same period in 2019.

Operating expenses for the nine-month period were $77.9 million, an increase of 5% as compared to $74.3 million for the year-ago period. The increase was due to higher programming amortization as a result of increased content licensed to third parties and higher production expenses related to Guerreros, a daily reality show at WAPA, which commenced production in May 2019. The nine-month period also reflected a smaller gain from the FCC spectrum repack and other as compared to the year-ago period, as well as professional and advisory fees incurred in connection with pursuit of strategic transactions earlier this year. This was partially offset by cost-savings measures implemented in response to the COVID-19 pandemic, including reduced personnel expenses as well as marketing and research costs.

Adjusted EBITDA in the third quarter was $16.7 million, an increase of 6% as compared to $15.7 million for the year-ago period.

Turning to the balance sheet. As of September 30, we had $205 million in debt and $118 million of cash. This represents an increase in cash of nearly $26 million since the start of the year. Our gross leverage ratio improved to 3.4 times and net leverage ratio improved to 1.5 times. Capital expenditures were $1.4 million in the quarter, bringing year-to-date capex of $2 million as compared to $4.9 million in the same period of 2019. The decrease was due to the deferral of certain capital projects, which were moved to the back end of 2020 and into 2021.

Turning to strategic investments. We invested $1.1 million in Canal Uno during the third quarter, bringing our total year-to-date investment to $7.5 million, down from the $27.4 million in the nine-month period of 2019. The decrease was primarily due to improved operating results at Canal Uno.

We are proud of our third quarter performance, which underscores our strong execution. In October, we set a Company record for monthly advertising revenue, and this positive momentum has us optimistic as we head into the remainder of the year and into 2021.

I will now open the call to your questions.

Questions and Answers:

Operator

[Operator Instructions] We have a question coming from the line of Steven Cahall from Wells Fargo.

Steven Cahall -- Wells Fargo -- Analyst

Thanks. Maybe just to start off on advertising. So it sounds like a lot of strength in the quarter. I think you probably outperformed a lot of the media market in the U.S. And so, if you could just kind of talk on a core basis, how does it seem like Q4 is pacing? Are you up both in Puerto Rico and on the U.S. cable nets? And what do you think is driving a lot of that positive momentum, because while we've seen a lot of sequential improvement in your peers, I don't think I've talked to anybody else who is actually up on a year-on-year basis right now?

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

Hi, Steve. I think that our results point to sort of the unique leadership that we have and the unique quality of our assets. We are seeing strong core growth in Puerto Rico in fourth quarter. As I mentioned, October was the best advertising revenue month in our history. That performance has continued into November to date, and we have really good visibility on November for both Puerto Rico and the U.S. So, we feel very confident in both markets. In U.S., we've had strong growth in third quarter and that momentum continued into the fourth quarter. So, we feel very positive about fourth quarter and expect to see similar kinds of growth to what we saw in the third quarter, if not potentially better great.

Steven Cahall -- Wells Fargo -- Analyst

Great. And then on the sub decline front, I mean you talked a little bit about maybe what could be driving the improvement and the potential for vMVPDs is still be ahead. But I mean, it was a pretty big improvement over your sub decline level in Q3. Are there any new deals in there? Or changes to the way your networks are distributed?

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

No, it's all organic. We -- as I've mentioned in past calls, there are two of the large distributors, and I really haven't heard other media companies talk about this in terms of breaking it down by distributor. But there are two distributors that have really adversely impacted our results. And with one of the distributors, we've seen a significant improvement in their numbers and a significant decline in the velocity of their losses, and that's largely accountable for our improved results. With our discussions with that distributor, they've expressed optimism that, that trend will continue. So, hopefully, they are correct in that and they will continue to see better, better results and lower velocity of losses, if not a turnaround over the next few months.

Steven Cahall -- Wells Fargo -- Analyst

And you mentioned the vMVPDs. I mean, we think of, that's almost 10 million subs now, and Hulu, YouTube and Sling are the big ones. Can you at least comment as to whether or not you're in conversation with, like at least the major ones or all three of those?

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

Yeah, we're in conversations with the major ones. And I think, honestly, it is a -- it's inexplicable that none of them have launched Spanish language packages, particularly given the take-up of Hispanics to digital platforms. And I think they will recognize that it's just a matter of prioritization, but we have put -- been putting significant pressure on the major ones to launch Spanish language packages and they have indicated that they are intentioning an inclination to do so. It's just a question of getting it done.

Steven Cahall -- Wells Fargo -- Analyst

Great. And then lastly, just wondering whether it's Canal Uno or anything else in the investment portfolio. Do you have a lot of cash commitment for 2021 or do you expect that to be like flat to down year-on-year? Thanks.

Craig D. Fischer -- Chief Financial Officer

We don't have commitments per se, but the ongoing future capital requirements, we think, will be at similar levels to where we were this year, which is obviously down considerably from last year. And we're still expecting sequential improvement. A lot of it depends upon how the market recovers from the pandemic.

Steven Cahall -- Wells Fargo -- Analyst

Great, thank you.

Operator

[Operator Instructions] Next question is coming from the line of Curry Baker from Guggenheim.

Curry Baker -- Guggenheim Securities, Inc. -- Analyst

Hey, good morning. Thanks for the questions. Can you maybe give us some insight where you guys are at for political in the fourth quarter?

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

Yeah. We are -- we had a good fourth quarter in political. I would say it modestly exceeded our expectations. A lot of PAC money came into Puerto Rico and we secured a significant share of all of that money.

Curry Baker -- Guggenheim Securities, Inc. -- Analyst

Is there -- I think you said you came in about $1 million for the third quarter. Is there a number you can kind of put around that?

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

We came -- go ahead, Craig.

Craig D. Fischer -- Chief Financial Officer

It will be higher in the fourth quarter. The third quarter was more around the primaries versus the general elections here in November, which sort of tracks where we were in 2016, you would have seen an increase in [Phonetic] higher level of political spend in Q4 and we expect this year to be slightly up over '16.

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

I think we guided at the beginning of the year to $3 million -- before all the pandemic and everything, we guided to $3 million expectation of political for us, and we've somewhat exceeded that.

Curry Baker -- Guggenheim Securities, Inc. -- Analyst

Okay. No, that's helpful. On Pantaya, can you maybe talk more about kind of the addressable market there? I think you said you're at 825,000 paid subs already. Where do you think that business can maybe go over the next couple of years? And is there anything you can say just in terms of where they are in terms of profitability?

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

In terms of the growth opportunity, we think it's significant. We think that the market opportunity is multiples of where it is today. We're not in Pantaya -- for an 800,000 sub business, we think that given that there is 17 million Hispanic homes in the U.S., given that this is a unique service, given that this is the first of its kind in the U.S. and as it really has no rivals in its space, we think there is a tremendous opportunity of growth there. And we haven't given specifics on financial performance, but Pantaya is getting close to breakeven.

Curry Baker -- Guggenheim Securities, Inc. -- Analyst

Okay. And this is kind of just in line with the last part of that question. You reported loss on equity method investments dramatically improved this quarter. Is there any one-time items in there? Or is this kind of a new improved run rate just reflecting better financial operations from the various investments?

Craig D. Fischer -- Chief Financial Officer

Yeah, Curry, it's really two factors. One is certainly the improved operating results at Canal Uno, which we expected as we continued to grow our share of the market, and this is despite the negative impact of the pandemic. There is a little bit of impact from, as you referred to, sort of one-time items in the sense of foreign currency movements that contributed to the loss last quarter that flipped to again this quarter. So it's a combination of those two.

Curry Baker -- Guggenheim Securities, Inc. -- Analyst

Okay, that's helpful. And then lastly, the balance sheet seems to be in a good position. What's the priority in terms of cash? And are you guys seeing opportunities in terms of M&A and the market that you can take advantage?

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

Yeah, we are. We think the pandemic has given rise to opportunities that were not there before. Companies that have assets that are not core to their business, that they now are open to selling or disposing of because of the -- because of reprioritization of their businesses and financial pressures. So, we are seeing some intriguing and interesting opportunities that we hadn't seen before and didn't -- or actively pursuing those.

Curry Baker -- Guggenheim Securities, Inc. -- Analyst

Okay. Thanks, guys. I appreciate it.

Operator

[Operator Instructions] We have no further questions. You may continue, presenters.

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

Thank you. That'd be all for today. Appreciate it and really stay well, and talk soon.

Operator

[Operator Closing Remarks]

Duration: 22 minutes

Call participants:

Danielle O'Brien -- Investor Relations

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

Craig D. Fischer -- Chief Financial Officer

Steven Cahall -- Wells Fargo -- Analyst

Curry Baker -- Guggenheim Securities, Inc. -- Analyst

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