Hemisphere Media Group Inc (HMTV) Q1 2021 Earnings Call Transcript

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Hemisphere Media Group Inc (HMTV)
Q1 2021 Earnings Call
May 5, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Hemisphere Media Group Inc.'s First Quarter 2021 Financial Results Conference Call. My name is Jason, and I will be your operator today. [Operator Instructions] I will now turn the call over to Danielle O'Brien. Please go ahead.

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 meeting 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 10K 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 here in our 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-gap financial measure. A reconciliation of gap, non-gap information is included in our earnings release, which was issued earlier this morning. Management believes that this non-gap information is important to investor's understanding of our business. I'll now turn the call over to Alan.

Alan Sokol -- Chief Executive Officer

Thank you, Danielle, and good morning, everyone. We delivered yet another exceptional quarter of results. Reflect what the differentiated nature of our business and our continued strong execution, further bolstered by the overall economic recovery. Following the industry-leading performance and the third and fourth quarters of 2020, our strong momentum continued into the first quarter of 2021. We grew net revenue by 16%, led by an outstanding quarter of advertising revenue growth at 35%. This top-line growth drove a 37% increase in adjusted EBITDA in the quarter.

Beyond our exceptional results, last month, we announced the acquisition of Pantaya, which we believe will accelerate the growth profile of our business. Since we Pantaya in partnership with Lionsgate, it has quickly become the go-to Spanish language subscription streaming service, amassing approximately 900,000 subscribers. And we have just begun to scratch the surface of the addressable market. In three short years through this launch, it's become clear that Pantaya fits at the sweet spot of the large, fast growing and underserved U.S. Hispanic market. The metrics are incredibly compelling. There are 60 million Hispanics in the U.S. today, estimated to grow to 75 million by 2030. Of the 60 million, 39 million [Indecipherable] are a core target of bicultural and Spanish dominant adults, a huge subscriber acquisition opportunity. And it'll be 90% of the 39 million that are already accessing at least one streaming service, demonstrating the strong appetite for streaming. Pantaya has an unparalleled deep library of critically claimed original titles, from Pantaya's production of Pantelion as well as from world-class, third-party content producers, such as Televisa, Sony, and Lionsgate.

While some of the large general market streaming platforms offer small samplings of Spanish language content, none of them come close to competing with depth, quality, or popular appeal Pantaya's offering. And as we have previously stated, we intend to meaningfully increase investment in content. We're very excited by our upcoming content pipeline, especially as production has broadly resumed. In two weeks, we will be releasing the second season of our hit reality series, The Best Family Vacation, which was a massive success in the first season in 2019. This will be followed by very strong release schedule for the second half of the year, including season two of Pantaya's most successful series to date, [Foreign Speech]. While the business itself is incredibly exciting, there are many compelling opportunities created by the combination of Pantaya and Hemisphere, including the ability to leverage our content production capabilities, deep library promotional platforms, and distributor relationships.

We are already in negotiations with various connected TV platforms and virtual MVPDs about adding Pantaya. The goal is to attain 2.5 to three million subscribers by 2025, and we are confident we can achieve that objective. Turning to Puerto Rico. Business trends and consumer activity continue to improve. Building upon the momentum team in the second half of 2020. As many of the COVID-related restrictions that were in place had been rescinded. Employment levels have improved, new auto sales are near historical highs, cement sales are at their highest levels since 2016, and hotel booking rates are above 2019 levels, which was a record year.

The recent census reported Puerto Rico's population at 3.3 million, slightly higher than expected, and a strong indication that outward migration has abated. In April, the Biden Administration announced the release of an additional eight billion in hurricane refunding that had been previously withheld. Puerto Rico saw tens of billions in hurricane recovery funds that have yet to be dispersed, which we expect will start flowing at a faster pace. We are more optimistic about Puerto Rico's economic future than we have been in many years.

Now with our leading market position, we are well-positioned to benefit from an improved economy. We saw another outstanding quarter revenue growth at WAPA. This period represented the highest first quarter in WAPA's history in both ad revenue and market share. As a result of improved economic conditions, the overall TV ad market grew an extraordinary 35% in the first quarter. And once again, WAPA outperformed the overall market. WAPA's retransmission fee revenue also increased substantially as new renewals became effective on January 1st. At the same time, subscriber levels have remained very stable in Puerto Rico. Turning to [Indecipherable] cable channels. [Indecipherable] stayed in the challenging distribution environment. Our performance was strong and our channels continue to cement their leading positions in the marketplace.

We delivered solid advertising revenue growth across our cable networks. Additionally, we executed a renewal with Cox Communications for all our cable channels, including expanded [Indecipherable] for three of our networks, which will resolve in full national distribution of four of our five networks by July, another testament to the singular value of our channels. We are also currently in advanced discussions with a major virtual MVPD and are optimistic that we will secure distribution this year. We continue to see a contraction in U.S. subscriber levels in Q1, although at a more modest rate than the year-ago period. We are optimistic that we will be able to continue to mitigate organic subscriber declines with new virtual MVPD launches as they develop Spanish language offerings and expand [Indecipherable] with existing distributors such as Cox.

All our cable networks continue to perform well and deliver strong viewing. Based on coverage ratings, all four of our major channels are among the top 15 rated Spanish cable channels, with three of the four in the top 10, Monday to Friday. We are especially proud that Pationes is the second-highest-rated cable channel Monday to Friday. Turning into Colombia and [Indecipherable] Canal Uno. The market remains challenged by the pandemic, with a significant fourth wave of cases and low rates of vaccination to date. Nonetheless, Canal Uno had a solid first quarter, with advertising revenue growth, despite widespread lockdowns in January.

We believe that there's a high level of intensive advertising demand that will be realized once case levels decline. In closing, we're thrilled to have continued our strong momentum into 2021. We continue to drive robust industry-leading growth in the face of challenging market conditions. With Pantaya, we immediately became the market leader in a high-growth Spanish language subscription streaming space, and that transformed the growth profile of our overall business. We are very excited about the future of Hemisphere. Thank you, everyone, and I'll now turn the call over to Craig.

Craig Fischer -- Chief Financial Officer

Thank you, Alan, and good morning, everyone. We are excited to have continued our strong momentum into 2021. Please note that our operating results for the first quarter did not include Pantaya as we closed the acquisition on March 31st. Net revenues for the first quarter, with 37.6 million, an increase of 16% as compared to 32.4 million for the prior-year period, with growth in all of our revenue streams. Advertising revenue for the first quarter increased 4.1 million or 35% as compared to the prior-year period, primarily due to growth in the Puerto Rico television advertising market, coupled with an increase in WAPA share of the market, as well as an increase in advertising revenue at our U.S. cable networks. Subscriber revenue for the first quarter increased 1% as compared to the prior-year period due to contractual rate increases offset by decline in subscribers to our cable networks.

Other revenue increased one million driven primarily by the timing of the licensing of content. Operating expenses for the first quarter, with 32.5 million, an increase of 15% as compared to 28.3 million for the prior-year period. The increase was primarily due to professional fees and financing costs incurred in connection with the acquisition of Pantaya. Excluding fees and expenses related to our strategic and financing activities, operating expenses increased 2% in the first quarter of 2021 due to higher programming and production costs and higher third-party agency commissions driven by an increase in advertising revenue. Offset in part by lower bad debt reserves and lower depreciation and amortization expense.

As a result of our strong top-line growth, adjusted EBITDA in the first quarter was 15.7 million, an increase of 37% as compared to 11.5 million for the prior-year period. Turning to the balance sheet. As of March 31st, we had approximately 194 million of cash, which includes the $124 million for the purchase of Pantaya paid on April 1st. And we had approximately 254 million in debt, which includes a $50 million add-on to our amended term. Our gross leverage ratio was approximately 3.8 times and net leverage ratio performance in the cash paid in the acquisition of Pantaya was 2.7 times.

During the first quarter, the company repurchased approximately 127,000 shares of Class A common stock at a weighted average price of $10.37 for an aggregate purchase price of approximately one point three million. Capital expenditures were 2.4 million in the quarter, reflecting certain projects that were deferred from 2020 and consistent with our plan for the year. We also funded 900,000 into Canal Uno as the channel prudently manages its cash flow needs. We are very excited about our strong start to the year reporting our third consecutive quarter of impressive growth and we look forward to continuing to deliver value for all of our stakeholders. 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.

Steven Cahall -- Wells Fargo -- Analyst

Maybe first, just on Pantaya, a few questions. So on the content strategy and content spend, maybe you could give us an update of what the content spend looks like today and maybe what plans are as to where you might like to take it. And I think that you that mentioned Televisa is one of your partners. I know they're also launching a service with Univision.

So just wondering if you think there's going to be a lot of competition for content or if there's sort of plenty out there for everybody. And with that competitor service, do you see that as just growing the market overall, or do you see that as more of a competitive threat? And also on Pantaya, just wondering if you're contemplating any distribution partnerships with Telco companies or MVPDs? Then I have a couple of follow-ups.

Alan Sokol -- Chief Executive Officer

Thanks. Thanks, Steve. Let me try to get to all your questions. If I miss any of them, just let me know and I'll follow up.

Steven Cahall -- Wells Fargo -- Analyst

I know there was a lot in there.

Alan Sokol -- Chief Executive Officer

First of all, on Pantaya's strategy and our progress. So, we don't get specific dollar numbers, but as I've said, our core strategy is to increase materially the program expend on Pantaya. And we're already in the process of doing that. We think that the content of Pantaya's start has been great, but we also feel this opportunity to accelerate growth in subscribers and to improve retention by increasing program expanded national retention. I also think it's important to note, as I stated before, that our programming cost model is significantly different than that of the big general market players who are in this giant programming arms race.

We kind of swim in a different lane where our program costs are much more modest than those with a big general market head, so we got a lot more bang for our buck. We also have the advantage of being able to use our entire ecosystem for all of our programs so all the programs that's not Pantaya will ultimately make its way through all of our other channels and platforms. And similarly, [Indecipherable] that we create for our platform, much of that will make its way through Pantaya as well.

So, we've created the virtual cycle of using Pantaya and our existing channels and platforms. Relating to Televisa, we have a great relationship with Televisa. We have a multi-year agreement in place with Televisa, which actually is very mutually beneficial because not only do we have access to Televisa's theatrical films, but Televisa also has access to Pantelion's production for their own theatrical use in Mexico. So, it's a mutually beneficial arrangement that I know Televisa values very much, and we have a multi-year contract. So, we don't expect any interruption in that.

We also have, as I've noted exclusive output arrangements with the most important and most prolific film producers in Mexico, which is [Indecipherable] our programming supply. On the distribution front, we are in discussions at various levels with a number of different telcos, MVPDs, and connected TV producers. For carriage, we think that there is a good chance that we could make a strategic deal with a telco, but it's a little early. But we are in process working those and that's a priority for us. And I think it's also important to note that generally, just, generally speaking, we have a big first-mover advantage with Pantaya. We are the only real player in the exclusive Spanish language premium subscription space.

We think Univision's new entrance with Prende is going to be a formidable player in this space, but we also think that we complement each other in the sense that they are primarily a library service focused on the Televisa and Univision libraries. All that content is very valuable and very important and has a big audience, but we really have a different offering. We are the only ones really offering original, exclusive premium series and movies that really can't be seen anywhere else. And we're the exclusive home to those.

Steven Cahall -- Wells Fargo -- Analyst

Great. And then just on the Puerto Rico side, I mean, it's an amazing level of ad growth that you're seeing. I think your share on WAPA is already really high. So I'm just wondering with the economy there being as strong as it's been, at least since I've followed the stock, how do you keep capturing more ad revenue? Can CPMs keep going higher? Or do you have other levers you can pull to capture incremental demand? Maybe just help us think about that opportunity.

Alan Sokol -- Chief Executive Officer

Well, the market, especially for the last three quarters, has been as good as any other market in the world, I think. And we have not only captured our share of that growth, but we have captured a disproportional share of that growth because of our positioning in the market, because the fact that we are a must-have for advertisers in the market.

So, we feel the market's strong as it's been, honestly, since we acquired this business in 2007. We feel more positive about the outlook for Puerto Rico than we have felt in a very long time now that Puerto Rico has been in a constant state of economic headwinds since we acquired the business. And this is the first time we really feel some sense of tailwind at our backs between the government stimulus, between the dispersment of a previously allocated hurricane relief funding, and just the overall economic recovery.

So we feel great about where Puerto Rico's going. Again, hard to have a long-term crystal ball, but we feel very good about now. And the way we continue to take advantage of that is doing what we're doing, which is continuing to grow our audience, continuing to deliver great product for our viewers and for our advertisers, be creative in the way we can provide advertising and services for our clients. We have a great digital platform that is growing at a very strong rate. We have a great sports channel that is growing well, and we still have the ability on our main channel to grow rates and to grow, increase the amount of commercial inventory available.

Steven Cahall -- Wells Fargo -- Analyst

Great. And then last one for Craig. Craig, you mentioned the net leverage is 2.7 X. Does that include maybe some EBITDA dilution from Pantaya? And as we think about leverage going forward, as you invest in Pantaya, that's definitely a bit of a drag, but you've got some organic EBITDA growth in the rest of the business and a little bit of cash should be generating. So how do we just maybe first think about the EBITDA trajectory of the company as those two things mix? And also, will you use your excess cash flow for debt reduction? Or could we see a combination of debt reduction and some more share buybacks?

Craig Fischer -- Chief Financial Officer

Sure. We can start with the first one. Pantaya is not included in the EBITDA on an LTM basis for the calculation. The adjustment we made was to the cash balance since the cash was still sitting in our balance sheet of March 31st. So that's the performance effect for Pantaya.

As we indicated, Pantaya's going to be a bit of an EBITDA drag here. So naturally, the leverage will go up, but you are correct that we'll still see growth in organic business and free cash flow generation. I think the primary allocation of our capital going forward will be to invest in our business. We've talked a lot about investment in content at Pantaya. And that content, by the way, will serve not just Pantaya, but across all of our platforms.

As we noted, we put a share buyback plan in place in November that was active here in the first quarter, but as we regularly do, we will continue to evaluate our capital allocation plans with our board going forward.

Operator

Your next question comes from the line of Kutgun Maral from RBC Capital Markets.

Kutgun Maral -- RBC Capital Markets -- Analyst

Great. Good morning and thank you for taking the question. The Pantaya deal is fairly transformative so I was hoping to dig in a bit deeper. Maybe first on advertising. I know Pantaya has a great corner of the market as a commercial-free stream that's [Indecipherable]. But now that you have full operational control, is there an appetite to maybe widen your potential target audience by introducing a lower price ad-supported tier?

Alan Sokol -- Chief Executive Officer

Hey, Kutgun. This is Alan. It is absolutely something that we are looking at. Going forward right now, our focus is on growing the core premium business. But we have had a really surprising number of inbound inquiries from major advertisers about wanting to advertise on Pantaya. So that's really opened their eyes up to the opportunity. Plus we know the size of our audience and the potentially larger size, which you could add in a lower price freemium business. So it's something we're absolutely looking at going forward, although it's not in our plans for the immediate future.

Kutgun Maral -- RBC Capital Markets -- Analyst

Understood. And maybe when we think about your path to growing the Pantaya subscriber base from the 900,000 today to 2.5 million to three million in 2025, would you expect that growth to be somewhat linear and benefit from the broader [Indecipherable] trends that we're all seeing in the marketplace? Or would you expect some of the distribution agreements that you're currently working on to maybe accelerate growth in the back half of this year?

Alan Sokol -- Chief Executive Officer

I think it's a little all of the above and it's hard to know sort of how the mix shaked out. I think it's going to be [Indecipherable] of that. Plus, I think that the quality and quantity of content that we are developing in a production, I think as we expand our content offering and have more frequent content releases and our higher quality content releases, I think that will accelerate subscriber acquisition and also improve retention.

So, we're expecting that growth will be robust for the foreseeable future.

Kutgun Maral -- RBC Capital Markets -- Analyst

Understood. And just, sorry, two more on Pantaya. Maybe just on the content side. I know with Steve, you talked about ramping programming investments. I guess I'm curious on how you're thinking about the evolution of your actual programming slate in terms of, do you expect to invest more in TV versus film? Or even across the two, are there any specific genres of focus and maybe just over the long run as you build out Pantaya as Pantelion and benefit from merger synergies, like the shared production capabilities with the rest of Hemisphere, do you expect to deemphasize some of these great third-party programming relationships that you have and maybe focus more on the original production side?

Alan Sokol -- Chief Executive Officer

Good questions. I think our lessons to date have been, I think that the original theory that we have produced have driven the greatest subscriber acquisition and retention. And really they're really not widely available elsewhere in the market. Certainly not anywhere on free or paid TV. Some of the general market players have some small number of premium Spanish language series as I'm sure you know, but it's really very sparse and haphazard offering.

So I think the intentional purposeful offering of a clear series strategy with continuous series drops and predictable series drops I think is core to our strategy of growing the business. We are going to continue to be in the big feature business because we also feel like that gives us a unique advantage in the marketplace and is the core of our relationships and our strategic ventures with our Mexican partners. And it's high-profile and gives us a lot of sizzle and the ability to generate pops in subscribers.

So we think that that's a valuable piece of the business as well. And in terms of using the Hemisphere assets for third party, I think it's both. We don't look at it as either or. We think having access and leveraging the Hemisphere platforms, Hemisphere production infrastructure capabilities just gives us another very significant source of content and new production in addition to what we have.

And well, frankly, we are expanding our third-party relationships as well. We will have some announcements coming forward in the near term about partnerships with other brand-named, third-party players in Latin America and the rest of the world.

Kutgun Maral -- RBC Capital Markets -- Analyst

That's perfect, thanks Alan. And maybe, sorry, just one last one. I'm not sure if you'd be willing to share this, but as you do grow the service from two and a half to three million subs, what do you expect the U.S. versus international mix might eventually look like?

Alan Sokol -- Chief Executive Officer

Well, today the service is just U.S. and Puerto Rico. So when we say 2 and a half to three million, that's just U.S. and Puerto Rico. We obviously are considering expanding into Latin America, but that would be a completely incremental subscriber opportunity to what we have today.

Kutgun Maral -- RBC Capital Markets -- Analyst

Perfect. Thank you so much.

Operator

That concludes our Q&A. I now turn it back over to Mr. Sokol for closing remarks.

Alan Sokol -- Chief Executive Officer

No further remarks. Thank you, everybody, for joining, and have a nice day.

Operator

[Operator Closing Remarks]

Duration: 26 minutes

Call participants:

Danielle O'Brien -- Investor Relations

Alan Sokol -- Chief Executive Officer

Craig Fischer -- Chief Financial Officer

Steven Cahall -- Wells Fargo -- Analyst

Kutgun Maral -- RBC Capital Markets -- Analyst

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