Hemisphere Media Group Inc (HMTV) Q4 2020 Earnings Call Transcript

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Hemisphere Media Group Inc (HMTV)
Q4 2020 Earnings Call
Mar 2, 2021, 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 Fourth Quarter and Full Year 2020 Financial Results Conference Call. My name is Jason, and I will be your operator today. A replay of the call will be available beginning at approximately 1:00 PM Eastern Time today, Tuesday, March 2, 2021 by dialing 1-800-585-8367 or from outside the United States at 416-621-4642. The conference ID for the call is 1563675.

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. I'm incredibly proud with the results we delivered for the fourth quarter and the full year. Our business performance was truly extraordinary in the face of the pandemic and macroeconomic headwinds.

For the second consecutive quarter, we delivered industry-leading revenue growth. At a time when other media companies are reporting advertising and rating declines, our business has resolutely defied this trend. Our fourth quarter was the highest quarter of TV advertising revenue in our Company's history even when excluding political. Overall in the fourth quarter, we grew net revenues by 19%, driven by an extraordinary 54% increase in advertising revenue. This outstanding topline growth drove a 20% increase in adjusted EBITDA in the quarter. As a result of our strong second half performance, we were able to largely mitigate the impact of the pandemic on our results.

In Puerto Rico, economic activity, business trends, and consumer spending built upon the momentum seen in the third quarter, as many of the pandemic-related restrictions were gradually loosened. As a result of improving consumer behavior, the overall TV ad market grew by a remarkable 44%, excluding political versus 2019. And WAPA's fourth quarter ad revenue was the highest in the history of Puerto Rico television, even when excluding political. Assuming additional federal stimulus as well as the release of billions in previously allocated federal relief fund relating to Hurricane Maria, the market should be well positioned for continued growth in 2021.

2020 marked WAPA's 11th consecutive year as the number one station in Puerto Rico. In light of the pandemic, we made the decision to reduce spending in the second quarter. But as the market recovered in the third quarter, we committed to bring our viewers continuous fresh programing and it paid off. For the full year, WAPA delivered the highest average total day rating of any TV station in Puerto Rico since Nielsen began measuring ratings in 2010. We also renewed retransmission agreements with the two large MVPDs in Puerto Rico, which became effective on January 1. These renewals will result in a substantial increase in our retransmission fees and reflect WAPA singular strength and value. WAPA's extraordinary line of news, entertainment and sports programing, leading market position and unparalleled ratings, make WAPA indispensable to distributors in Puerto Rico.

Turning to our cable channels, we experienced meaningful ratings growth across all our comps correlated U.S. cable networks and they continue to defy overall viewing trend, a reflection of the unique and relevant content offering our audiences continue to seek out. This ratings performance helped drive double-digit percentage ad revenue growth in Q4, a very strong result in the face of a challenging advertising environment.

Pasiones delivered its 16th consecutive quarter of year-over-year audience growth, growing ratings by 7% as compared to the fourth quarter of 2019. And for the fourth consecutive year, Pasiones grew its full year ratings, this year increasing by 18% over 2019. Looking ahead, we have a fantastic content lineup for 2021, including the U.S. premiere, a blockbuster Turkish drama Mother, which previously set record ratings for WAPA in Puerto Rico.

Cinelatino marked its third consecutive year of audience growth, increasing its ratings by 8% over the fourth quarter of 2019. Centroamerica TV's ratings increased by an impressive 40% over the fourth quarter of 2019, marking its ninth consecutive quarter of year-over-year growth. We are pleased to announce that Centroamerica TV has recently launched the Fanatiz, a growing over-the-top U.S. distributor, focused on sports from Latin America and Spain. Our launch speaks to the value of the channel soccer [Phonetic] programming from El Salvador, Costa Rica and Honduras.

WAPA America continues to rank among the top five-rated Spanish cable networks, growing ratings by 10% in the fourth quarter and bringing its large and loyal audience unmatched coverage of the Puerto Rico elections and the COVID-19 crisis. The channel had an outstanding year and neared its all-time record ratings, posting a robust 14% increase in total day viewership in 2020. On March 1, Television Dominicana launched on DIRECTV in Puerto Rico, giving the channel meaningful incremental distribution. TV Dominicana is now available on all major distributors in Puerto Rico.

A quick note on our subscriber numbers. We are encouraged that our subscriber losses decelerated sequentially in the fourth quarter. In addition, we are in continuous discussions with all major over-the-top distributors about launching a Spanish language package. Pantaya is a key strategic initiative for us. As the leading Spanish language subscription streaming service in the U.S., Pantaya is ideally positioned as the destination for Hispanics to enjoy blockbuster movies and premium original series that they can't find anywhere else. In 2020, Pantaya grew its subscriber base by approximately 40% and now has over 900,000 paying subscribers. Pantaya is focused on significantly growing and scaling its business and expanding its content offerings. We are confident that Pantaya can drive dynamic and sizable growth by providing the 60 million U.S. Hispanics with a service that uniquely speaks to them.

Turning to Colombia and our investment in Canal Uno, the market continues to remain challenged by the pandemic. While restrictions on business activity were lifted near the end of the year, further lockdowns were implemented in January, putting pressure on the economy. Canal Uno outperformed the overall TV market throughout 2020 and was able to successfully mitigate market declines by prudently managing and reducing costs. We believe as 2021 progresses and Colombia's COVID cases lessen, the market will be able to return to normalized advertising spending levels and consequently, Canal Uno's market share and revenue should continue to grow.

Canal Uno recently entered into a key strategic partnership with Televisa, the most important content producer in Latin America. This agreement provides Canal Uno with access to hit prime time dramas, including Televisa's number one show around the world, La Rosa de Guadalupe. On the M&A front, we continue to pursue various exciting potential strategic transactions, including opportunities that have arisen by virtue of the impact of the pandemic.

In closing, we are extremely pleased with our performance this year despite operating under terribly challenging circumstances. Our extraordinary results during the second half of the year give us tremendous momentum, and our 2021 early results have continued this impressive growth trajectory. While the environment and the world are continuously changing, our mission remains the same, to drive value across our entire platform and deliver fresh and compelling content to our unique and valuable audience.

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. We are excited to have completed a successful year for our business, which included record advertising revenue during the fourth quarter, a significant achievement given the headwinds we faced.

Net revenues for the fourth quarter were $46.9 million, an increase of 19% as compared to $39.3 million for the year-ago period. Net revenues for the full year were $151.2 million, an increase of 1% as compared to $149.4 million for the full year 2019. The increases in both periods were due to growth in advertising revenue, which was offset in part by lower affiliate revenue and other revenue.

Advertising revenue for the fourth quarter increased $9.5 million or 54% as compared to the same period in 2019. Advertising revenue for the full year grew $8.6 million or 14% with significant acceleration in the second half of the year. The increase in both periods were driven by record advertising at WAPA and continued growth at our cable networks, as well as political advertising revenue of $2.7 million and $4.3 million for the three-month and 12-month periods respectively.

Affiliate revenue for the fourth quarter decreased 1% as compared to the same period in 2019. For the 12-month period, affiliate revenue decreased $6 million or 7% as compared to 2019. The decrease in both periods were due to decline in subscribers at our U.S. and Latin American cable networks, and the full year was also impacted by unfavorable foreign currency movements.

Other revenue for the fourth quarter and full year decreased $1.7 million and $0.9 million respectively as compared to the same period in 2019, due to the timing of licensing of our content to third parties, which varies from period-to-period and the lack of theatrical releases due to the pandemic.

Operating expenses for the fourth quarter was $31.6 million, an increase of 22% as compared to $25.9 million for the same period in 2019. Operating expenses for the full year were $109.5 million, an increase of 9% as compared to $100.1 million in 2019. These amounts included a $2.8 million impairment charge related to goodwill and intangibles related to the Snap acquisition and $0.9 million of content writedowns. Without these charges, operating expenses increased 8% in the quarter and 6% for the full year. The increases were primarily due to higher news costs related to coverage of the elections, higher programming costs due to the timing of premieres and increased personnel costs, including ad sales, commissions, driven by the record level of advertising revenue. higher expenses in both periods were offset in part by lower marketing and research costs, benefits provided under the CARES Act, and lower depreciation and amortization expense. Adjusted EBITDA in the fourth quarter was $22 million, an increase of 20% as compared to $18.4 million for the year-ago period. Adjusted EBITDA for the full year was $63.6 million, a decrease of 4% as compared to $66.5 million for the year-ago period.

Turning to the balance sheet. As of December 31, we had $205 million in debt and $135 million of cash. This represents an increase in cash of nearly $43 million since the end of last year. Our gross leverage ratio improved to 3.2 times and net leverage ratio improved to 1.1 times. As we previously announced, during the fourth quarter, the Board authorized a $20 million share repurchase plan and we repurchased approximately 33,000 shares of common stock at a weighted average price of $10.59 for an aggregate of $400,000.

Capital expenditures were $400,000 in the quarter, bringing the full year capex of $24 million. Our 2020 capex was lower than previously guided due to the deferral of certain capital projects and delays as a result of the pandemic. These projects will be completed in 2021. We expect 2021 capex, net of SEC reimbursements to be approximately $5 million.

Turning to strategic investments, we invested $1.9 million in our joint ventures during the fourth quarter, bringing our full year investments to $9.4 million, down from $31.7 million in the full year 2019. The decrease was due to improved operating results at Canal Uno. We expect to fund approximately $6 million to $7 million in the Canal Uno in 2021 as we continue to progress toward breakeven. We are proud of our fourth quarter and full year performance, which is a testament to the resiliency of our business model and strong track record of execution. The first quarter is off to a strong start, continuing our momentum from the fourth quarter.

While we are optimistic for our 2021 performance, given the pandemic and uncertainty around the timing and amount of federal stimulus and approved but unreleased aid package for Puerto Rico, we are not providing guidance at this time.

We'll now open the call to your questions.

Questions and Answers:

Operator

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

Steven Cahall -- Wells Fargo -- Analyst

Thanks. So, some really great results in Puerto Rico in the quarter. I guess maybe first off, could you help us maybe break that down between what was your delivery growth and what was your pricing growth? I guess it was strong on both fronts, but just trying to get kind of a relative sense of, yeah, how much was delivery versus the pricing impact?

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

It was really a combination of both Steve. The -- we -- For much of the fourth quarter we were completely sold out. We tried to minimize displacement from political, there was a little bit of displacement our results would have even been better. We could not accommodate all of the advertising demand on our air without having excess amount of commercial clutter. But there was also some solid pricing growth as a result of the high demand for inventory.

Steven Cahall -- Wells Fargo -- Analyst

Great. And then maybe on the subscription side. I guess, first on the sub declines, I think those were down less than 1% sequentially in Q4. With the better part of Q1 over, is the sense that, that trend can continue for for the U.S. cable networks? And then I know you got a couple of retran deals done in Puerto Rico. So I was just wondering if you could give us an outlook for 2021, either on total Company affiliate or retrans growth?

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

We did enter into retrans deals, as I said, with the the largest distributors in Puerto Rico, which make up the vast majority of subscribers in Puerto Rico, and that will translate into a very meaningful dollar growth for next year, with our revenue growth for us for next year. In terms of velocity of subscriber losses, we are optimistic that the decreased velocity of losses will continue into the first quarter and through the year, but a little too early for us to really jump to any conclusions. As you know, we see results generally on a two-month lag. So, we don't see them in real-time and hard to know in real-time how the distributors are doing other than what we've seen on a 60-day delay.

Steven Cahall -- Wells Fargo -- Analyst

And maybe last one from me, which is a bit off the wall. There is a white hot SPAC market out there, you clearly understand the SPAC market as well as anybody. Do you see this as a particularly opportunistic time to look at either capital raises or mergers? And you probably got more cash on the balance sheet then you typically do. So with that buyback authorization, how do you also think about putting some of that to work?

Craig D. Fischer -- Chief Financial Officer

Yeah, our capital allocation policy continues to prioritize disciplined strategic M&A. We have built a significant cash balance this year and we think we have ample liquidity along with borrowing capacity to pursue the transactions that are in our pipeline. As you know that we implemented the share buyback plan in November. We believe our stock is cheap, particularly given the performance of our business, and we'll continue to evaluate with the Board the best use of our capital to create shareholder value.

Steven Cahall -- Wells Fargo -- Analyst

Great, thank you.

Operator

Your next question comes from the line of Curry Baker from Guggenheim Securities. Your line is open.

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

Hey, good morning, guys. Thanks for the questions. Maybe can we start with Pantaya. Obviously, you guys saw a nice growth there in 2020. Can you maybe talk to what you guys see as the TAM or the opportunity there over the next one, two, three years? Do you have any funding commitments there, or any expected funding commitments there this year? And can you speak to whether that business is breakeven profitable? Any color there would be great.

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

Good morning, Curry. This is Alan. We are big fans and believers in Pantaya. And you know, in contrast to some of the big general market services that have launched or about to launch, Pantaya has been around for three years now. So we have really -- we have a lot of data and a strong track record and a strong track record of growth, and we have proof-of-performance for three years. So, we feel very good about the growth trajectory. And we think, frankly we can accelerate that growth trajectory going forward as per reduction returns to normalcy following the end of COVID. And we're big believers that with 60 million Hispanics in the U.S. and being the leading service for those -- for that audience and really being unique in terms of the quality and type of content that we provide that nobody else in the market is providing, we think the very singular sort of service that can really drive a substantial growth going forward.

And we don't have contractual funding obligations per se. We are in constant dialog with our partner at Lionsgate and with the management team on their funding needs and the timing of that funding.

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

Okay. Can you guys comment on just the profitability? Or where you guys are at?

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

We have not commented specifically on the profitability, but we believe that Pantaya is worthy of additional investment to drive growth, and so we're more focused right now on the growth opportunities than on profitability. I think that Pantaya could be profitable if we wanted it to be profitable today, but I think the question is you continue to invest to drive further growth, and I think that is our perspective at right now.

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

Okay. I know you guys just spoke to the two renewals that were completed in Puerto Rico on the retrans side. Are there any other renewals up end of this year or throughout this year on the cable side or in Puerto Rico that which we were up?

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

Listen, we don't comment on individual deals and renewals and our terms are typically staggered. But there is to the extent that if there are already significant renewals, we will certainly disclose them and announce them to you guys. But right now, we feel very good about where we sit in terms of our existing deals and any upcoming renewals.

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

Okay. I think that's all I've got. Thanks, guys.

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

Thank you.

Operator

That concludes Q&A. I would now turn the call back over to Alan Sokol for closing remarks.

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

Nothing more from my side. And thank you everybody for joining and continued good health to everybody on the phone.

Operator

[Operator Closing Remarks]

Duration: 25 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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