Hemisphere Media Group, inc (HMTV) Q2 2021 Earnings Call Transcript

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Hemisphere Media Group, inc (HMTV)
Q2 2021 Earnings Call
Aug 9, 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 Second Quarter 2021 Financial Results Conference Call. My name is Brandy, and I will be your conference operator today. Please be advised that today's conference is being recorded.

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 announcements 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 circumstances, 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 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 included 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 -- President and Chief Executive Officer

Thank you, Danielle, and good morning, everyone. We continued to have strong momentum into the second quarter following our industry-leading results over the three previous quarters. Our growth was driven by exceptional advertising revenue results and our acquisition of Pantaya. We're very excited by our early results of Pantaya. As we announced in March, we acquired Lionsgate's stake of Pantaya, the first and leading Spanish-language subscription streaming platform, featuring the best in premium movies and series.

As of June 30, following just our first quarter after the acquisition, we reached nearly 1 million subscribers, a terrific beginning for us. With a large and untapped addressable U.S. Hispanic market, which is expected to grow to 75 million by 2030, we have just begun to scratch the surface. Our previously stated goal is to attain 2.5 million to 3 million subscribers by 2025, and we are very confident that we're going to achieve that objective.

Pantaya offers subscribers an unparalleled deep library of premium original content and adds a significant first-mover advantage in the Hispanic streaming space. Our second quarter programming of Pantaya was highlighted by the second season of our hit reality series, Derbez Family Vacation, which, during its first 30 days, was the second most watched series in Pantaya's history and helped drive a 90% increase in total hours viewed over the previous 30-day period. And as we have previously stated, we are meaningfully increasing investment in content. We've entered into a number of key talent deals and coproduction arrangements with some of the leading producers in Latin America. We are very excited about our upcoming content pipeline as our production schedule is ramping up through the balance of the year.

In September, we will be releasing Season 2 of El juego de las llaves, Pantaya's most successful series to date. Also, this past Friday, we released Peligro en tu mirada, our first movie produced by Hemisphere for Pantaya since the close of our acquisition. We're confident that this thriller with an all-star cast will be a big hit for Pantaya.

We're also making great progress in growing Pantaya's distribution. Pantaya has entered into an important distribution agreement with YouTube TV and is in advanced negotiations with several other key distribution partners.

We have begun to leverage the Hemisphere portfolio of assets to help drive growth of Pantaya through promotion, production and distribution, and we've already seen terrific results. With the support of a major promotional campaign on WAPA, since July 31st, Pantaya has been the number one entertainment app in Puerto Rico on Android ahead of Netflix, Disney+, Amazon and HBO Max, and we are strategically leveraging Hemisphere's other assets to drive further growth.

Now turning to our TV networks, we delivered an outstanding quarter of revenue growth, including an advertising revenue increase of 40% over the second quarter of 2020 as well as a 10% increase over 2019.

In Puerto Rico, economic indicators for both business trends and consumer activity remain very encouraging. In fact, the economy is stronger than it has been in many years. In addition to the significant level of federal stimulus related to COVID, Puerto Rico still have billions in hurricane recovery funds that have yet to be dispersed, and which we expect will now start flowing at a faster pace. The combined impact of these factors and improved consumer confidence should drive renewed strength in many sectors for the coming years, and we are well positioned to benefit from such growth.

Key economic metrics reinforce Puerto Rico's improving economic picture. New auto sales through June have more than doubled compared to the first half of 2020 and are up 31% from 2019. Cement sales through May were higher than the same periods in both 2018 and 2019 when the island was rebuilding following Hurricane Maria. And the tourism ministry has seen a remarkable turnaround. Airport passenger traffic during June was the highest since privatization of the airport in 2015.

We saw another outstanding quarter of revenue growth for WAPA as the network maintained its long-standing dominant position. As has been the case for every quarter since Nielsen began measuring the market, WAPA remains the number one station with at least 20 out of the top 30 shows in every key demographic category. WAPA experienced strong growth in both advertising and retransmission fee revenues.

While the U.S. continues to see organic subscriber declines, Puerto Rico has been very stable and once again had a quarter with no subscriber losses. Our audience ratings and advertising share were both outstanding in Q2. Our airing of the Miss Universe pageant on May 16 was the highest rated program in Puerto Rico in the past six years and delivered an outstanding 75% of audiences in the key demographics. These results are a testament to the single apparel of WAPA as well as the continued overall strength of broadcast television in Puerto Rico.

We are thrilled to announce that we have signed Jay Fonseca as a host and news commentator. Jay is a massively popular journalist, radio host and political analyst with a track record of very successful shows on WAPA's top competitor on the island and has face -- has over 1 million Facebook fans and 600,000 Instagram followers. We're confident that as a member of the WAPA family, Jay will further drive ratings and advertising growth.

Turning to our U.S. cable channels, our performance was strong and our channels continue to be leaders in their respective categories as we delivered solid advertising revenue growth. All four of our measured channels are among the top 15-rated Spanish cable channels in coverage ratings, with three of the four in the top 10 Monday to Friday, including Pasiones, the number two rated channel Monday to Friday.

Regarding distribution, we're excited to announce that we have reached an agreement with YouTube TV to carry three of our channels, Cinelatino, WAPA America and Pasiones, with launches expected before year-end. We're encouraged that this new launch, together with our other recent launches, will mitigate organic subscriber declines. We're also optimistic that the YouTube launch will help accelerate the time line for launches on other major virtual MVPDs.

Turning to Colombia and our investment in Canal Uno. The market remains challenged by heightened COVID cases, though at a lower rate than seen in the past several quarters. Vaccines are becoming more widely distributed and we are beginning to see a more normalized advertising activity return. Despite these challenges, Canal Uno delivered strong advertising growth in comparison to both 2020 and 2019, and we are cautiously optimistic that the remainder of the year will see a stronger overall advertising market.

In closing, we're thrilled to have continued our strong momentum in the second quarter, and we're off to a great start to the back half of the year. Pantaya is off to an exciting beginning and is very well positioned for a continued robust growth as the market leader in the Spanish language streaming space. We look forward to continuing to transform the growth profile of our business and are committed to meaningful value creation for all our stakeholders.

Thank you, everyone. 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 performance into the second quarter. Net revenues for the second quarter were $50.5 million, an increase of 45% as compared to $34.7 million for the year-ago period. Net revenues for the six months ended June 30, 2021, were $88 million, an increase of 31% as compared to $67.1 million for the same period in 2020. The increases in both periods were due to higher advertising revenue as well as growth in subscriber revenue, due in large part to the inclusion of Pantaya, which the Company acquired on March 31.

Subscriber revenue for the three- and six-month periods increased $12.9 million or 67% and $13.1 million or 33%, respectively, as compared to the prior-year periods. The increases were primarily due to the inclusion of Pantaya as well as contractual rate increases and new launches of our networks, offset in part by a decline in U.S. cable subscribers.

Advertising revenue for the three- and six-month periods increased $4.9 million or 40% and $9 million or 37%, respectively, as compared to the prior-year periods. The increases were primarily due to growth in the Puerto Rico television advertising market, coupled with an increase in WAPA's share of the market. Additionally, we saw an increase in advertising revenue at our cable networks. As compared to the second quarter of 2019, advertising revenue increased 10%.

Other revenue for the three- and six-month periods decreased $2.1 million and $1.1 million, respectively, as compared to the prior-year periods. The decreases were driven primarily by the timing of the licensing of content.

Operating expenses in the second quarter were $43.3 million, an increase of 68% as compared to $25.8 million for the comparable period. Operating expenses for the six-month period were $75.8 million, an increase of 40% as compared to $54.1 million for the comparable period. The increases were expected and were largely due to the inclusion of Pantaya. Operating expenses in the current periods were also impacted by higher sales commissions due to higher advertising revenue, increased amortization of acquisition-related intangible assets and cost incurred in connection with the Pantaya acquisition.

The prior-year period reflected cost reduction as a result of the pandemic, including the postponement or cancellation of certain programming and sporting events, as well as temporary salary reductions and employee retention credits.

Adjusted EBITDA was $12.3 million for the second quarter, a decrease of 8% as compared to $13.3 million in the prior-year period. The decrease was expected as a result of the inclusion of Pantaya. Adjusted EBITDA was $28 million for the six-month period, an increase of 13% as compared to $24.8 million for the same period in 2020.

Turning to the balance sheet. As of June 30th, we had approximately $254 million in debt and $72 million of cash. Our revolver is currently undrawn. Our gross leverage ratio was approximately 3.8 turns and net leverage ratio was approximately 2.7 turns, which reflects Pantaya's operating results since the acquisition.

Capital expenditures were approximately $3 million in the first half of the year, and we funded $1.6 million into Canal Uno year-to-date as the channel prudently manages its cash flow.

We are pleased with our performance and execution for the first half of the year and are off to a strong start in the third quarter. With the growth of Pantaya and a rebounding Puerto Rico economy, we remain optimistic for the remainder of the year and beyond.

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 with Wells Fargo.

Steven Cahall -- Wells Fargo -- Analyst

Thanks. Maybe Alan, first, it took a while to get the YouTube deal done, so congratulations on that. I was just wondering if you could speak to why the digital distributors have taken a little longer to come on board with the networks. Is this just them being a little slower to aggregate content, particularly Spanish-language content? Or were there some key sticking points, like advertising loads or affiliate rates versus your other networks?

And you mentioned how this might accelerate some of the conversations with other digital distributors, so I was wondering if you could expand on that comment as well.

Alan J. Sokol -- President and Chief Executive Officer

Sure. Good morning, Steve. I think it has nothing to do really with us or with the market. I think it was just they're -- the virtue of it is just their own priorities. And obviously, we try to push Hispanic and try to push our channel as a higher priority for them. And we're finally able to break through with a lot -- it took a while, got through to YouTube TV, and we think this should hopefully open the floodgates with all the other virtual MVPDs so that they all similarly focus and realize opportunity with the Hispanic market.

Steven Cahall -- Wells Fargo -- Analyst

Yeah. And then it seems like the ad market in Puerto Rico is as strong as it's been since I followed the Company. Do you feel like we're entering a period where this is more structural and there's some legs to it? Or should we think about this as a little more cyclical, like maybe has a couple of quarters left before it goes back to more of a steady state, which was unfortunately historically sort of a state of volatility?

Alan J. Sokol -- President and Chief Executive Officer

I think we feel as good about the Puerto Rico economy as we have felt since we acquired WAPA in 2007. And I think, to a large extent, this is structural and sustainable, given the impending major infrastructure projects that will start occurring in Puerto Rico over the next 12 months. We think that will have long-term positive impacts for the island.

The economy is healthy, unemployment is down, all the metrics are very positive, so we feel very good about it. On the long run though, the health of Puerto Rico will depend on an efficient government and official way of operating the island in a way that has not been done before, but we feel good about where things are right now. We feel good for the foreseeable future.

Steven Cahall -- Wells Fargo -- Analyst

And then could you talk about the content pipeline that's upcoming at Pantaya a little bit? There is a lot of content it seems like coming in the back half of the year, from sports to movies, to lots of streaming services, sort of making up for stuff that was deferred during the pandemic. So how do you feel about kind of gross ads and churn and what that pipeline looks like for the back half of the year?

Alan J. Sokol -- President and Chief Executive Officer

Well, we're really optimistic, Steve. I mean, we are starting to ramp-up production on Pantaya and acquisitions. We have a unique set of relationships with the top producers and distributors in Latin America, which would be impossible to replicate. We have unique knowledge and experience of the Hispanic market, and the depth of content as well as our strategic advantages we use in the Hemisphere assets to help promote and otherwise drive Pantaya's growth.

So that -- we feel great about the confluence of those different facts that will help drive accelerated growth at Pantaya. And we also just swim in a different lane. Nobody has the singular focus on Spanish-language premium content that we do, and nobody has the depth of content that we do in the market.

Steven Cahall -- Wells Fargo -- Analyst

And then lastly, I got to throw this one out. A couple of weeks ago, press reported that you might be exploring a sale of the company. I was wondering if you could make any commentary around that or talk about your view on what the backdrop is for industry consolidation at the moment.

Alan J. Sokol -- President and Chief Executive Officer

Well, on the first question, Steve, we don't comment on market rumors or speculation. And in terms of consolidation, I think it's -- obviously, we've seen consolidation. We feel very good about where we are as an independent company. Although we're not a large company within our space, we are a major company and we feel very good about our leverage and our ability to continue to grow in this environment.

Steven Cahall -- Wells Fargo -- Analyst

Great. Thank you.

Operator

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

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

Hey. Good morning, guys. I was wondering if you could maybe to start out with, could you provide a little more color just how the advertising market for your U.S. cable networks is pacing and then maybe some color as well just on audience performance and metrics there?

Alan J. Sokol -- President and Chief Executive Officer

Sure. We had a good quarter in the U.S. We feel very good about our U.S. business. Yeah, our numbers were up significantly over 2020 and were up over 2019 as well. And I think for both Puerto Rico and the U.S. being up over 2019 puts us in a somewhat unique position vis-a-vis our peer group of media companies, all of which were, to my knowledge, below their 2019 levels. And I'm sorry, your second question, Curry?

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

Just the ratings and audience metrics, any additional color you could share there?

Alan J. Sokol -- President and Chief Executive Officer

No, we're not -- our networks are not Nielsen rated. We have ComScore ratings, and they provide limited amounts of insight into ratings. But as I noted, all four of our -- all four of our rated networks are top 15. Pantaya is the number two network. So we feel great about our leadership position in the spaces that we occupy.

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

Okay. And then on the subscriber front at the U.S. cable networks, can you give us any indication of what you're seeing kind of trends sequentially getting better, just any incremental color there?

Alan J. Sokol -- President and Chief Executive Officer

Yeah. Listen, I think our second quarter results this year were better than they were a year ago in terms of subscriber losses. So that's a positive. I think second quarter tends to be a difficult quarter for the industry. And we're also feeling great that our recent launches, expansions of coverage and continued conversations about future launches will go a long way toward mitigating any future organic subscriber declines.

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

Okay. And then is there any way you guys can help us think about kind of the path or metrics to profitability at Pantaya, kind of what that roadmap looks like at a high level?

Alan J. Sokol -- President and Chief Executive Officer

Yeah. I think, look, what I can say is that at our stated goal of 2.5 million to 3 million subscribers by 2025, we will be very profitable. Our model is different than that of the big channel market guys who are not spending millions of dollars an hour on programming.

As I said before, our entire programming and production budget is a couple of episodes of The Mandalorian. So we produce at a much lower price point -- at a much more cost-effective price point. And our audience doesn't come to us to watch massive special effects, they come to us to watch content that is hopefully relevant, they can't find anywhere else, that speaks to them, that it's of a premium nature that you can't find on broadcast television.

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

Okay. Thanks. That's all I've got, guys.

Alan J. Sokol -- President and Chief Executive Officer

Thank you.

Operator

Thank you. I will now turn the call back over to Mr. Alan Sokol for closing remarks.

Alan J. Sokol -- President and Chief Executive Officer

Nothing further. I appreciate everybody's attendance, and have a good day.

Operator

[Operator Closing Remarks]

Duration: 21 minutes

Call participants:

Danielle O'Brien -- Investor Relations

Alan J. Sokol -- President and Chief Executive Officer

Craig Fischer -- Chief Financial Officer

Steven Cahall -- Wells Fargo -- Analyst

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

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