Hemisphere Media Group, inc (HMTV) Q3 2021 Earnings Call Transcript

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Hemisphere Media Group, inc (HMTV)
Q3 2021 Earnings Call
Nov 5, 2021, 11:00 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 Third Quarter 2021 Financial Results Conference Call. My name is Stephanie, and I will be your conference operator today.

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 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 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 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 Sokol -- Chief Executive Officer

Thank you, Danielle. Good morning, everyone. This was another strong quarter for our business, building on an exceptional first half of the year. The third quarter saw growth in subscriber fees as well as advertising revenues, excluding political. Our ad revenue performance is especially impressive given that in Q3 of 2020, we delivered industry-leading ad revenue growth in the midst of the pandemic. Our ad revenue results this quarter represented a tremendous 24% increase over Q3 of 2019. Pantaya, our market-leading Spanish-language subscription streaming platform, continues to perform very well as we expected when we acquired the business on March 31. Pantaya is a top 15 grossing entertainment app on both iPhone and Android and a clear leader in the Spanish language space. We hit one million subscribers in the third quarter, a major milestone and are confident in our goal of 2.5 to three million subs by the end of 2025. As we previously indicated, we are increasing investment in both programming and marketing to drive subscriber growth and retention. In 2021, we premiered seven original series. This will increase to 19 original series in 2022, many of which are currently in production or post production.

During the quarter, we also entered several major coproduction agreements with some of the leading and most prolific producers in Latin America including Fremantle and Fabula that produces upon the upcoming original series, Senorita 89 and Traziende Films, the producer of Netflix's first original Spanish language series, Club de Cuervos. Our third quarter program of Pantaya was highlighted by the release in September of Season two of El juego de las llaves, one of Pantaya's most successful series to date. In fact, in September the second highest number of unique viewers in Pantaya's history and set a record for viewing of TV series in a single month. We also released the first movie we produced by Hemisphere for Pantaya since the close of our acquisition, Peligro en tu mirada, which was the most highly viewed program on the service in August. Importantly, Pantaya launched on YouTube TV in September, expanding Pantaya's reach to the millions of YouTube TV subscribers, and we are in advanced negotiations with several other key distribution partners. We have had great success leveraging WAPA's massive audience base to create awareness of Pantaya and exposed Puerto Ricans to Pantaya's offering. As a result, from June one through October 31, Pantaya was the #1 most downloaded entertainment app in Puerto Rico in Android, ahead of Netflix, Disney+, Hulu and HBO Max. In fact, during this 5-month period, Pantaya grew its total download by 65%.

Turning to our networks. We delivered a strong quarter of revenue growth, especially impressive given our updated performance in Q3 of 2020. In the third quarter of this year, we grew ad revenues by 24% over Q3 of 2019. We also grew subscriber fees year-over-year, driven by strong retransmission growth in Puerto Rico, which has defied U.S. trends with minimal subscriber declines. Puerto Rico continued its strong economic recovery with both business trends and consumer activity remaining robust. The island has made tremendous progress on the vaccination front. In fact, Puerto Rico has the highest vaccination rate in the U.S., which has facilitated a return to normalized commercial activity and strong growth in the advertising market. Most key economic metrics are trending very positively. The tourism and hospitality sector in Puerto Rico has seen tremendous growth. In August, occupancy rate exceeded the comparable period in 2019 for the fourth consecutive month. Year-to-date, airport passenger traffic has more than doubled compared to last year and has now exceeded 2019 levels. Auto sales were up 66% compared to the first nine months of 2020 and 32% compared to 2019 and year-to-date cement sales through August were higher than the level of sales seen through the same periods in 2018 and 2019 when the island was rebuilding following the 2017 hurricanes. The Puerto Rico economy should continue to benefit from the tens of billions of dollars in federal hurricane recovery funds that have yet to be dispersed.

The economy is performing at its highest level in many years, and the dispersion of these federal funds should fuel continued consumer spending and growing economic activity for the coming years. WAPA had another outstanding quarter with ratings and market share holding strong. The channel maintained its #1 position in the market, reflecting the extraordinary quality and innovation of our programming. I am very proud to announce that WAPA has been nominated for a prestigious international Emmy Award, the first Puerto Rican TV station to ever be nominated. Additionally, WAPA has been nominated from 14 regional Emmy awards, a record for any TV station in Puerto Rico. We truly have an amazing team that produces nearly 70 hours a week of the highest quality news, information and entertainment programming, ensuring WAPA's unparalleled rating success and status as the network of choice. This quarter, WAPA aired at least 20 of the top 30 rated shows in every key demographic category. In fact, WAPA was the only broadcaster on the island to increase its viewership between Q2 and Q3 this year. WAPA outdelivered its two broadcast competitors combined in adults 25 to 54 on a total day basis. Last quarter, we announced that Jay Fonseca, a star journalist, radio host and political analyst joined the WAPA family. This quarter, Jay launched daily afternoon show and weekly prime-time show, both of which have been major successes from both a ratings and advertising standpoint. Turning to our U.S. cable channels. Our performance was solid, and our channels continue to be leaders in their respective categories. All of our measured channels continue to be ranked among the top 15 rated Spanish cable channels with three in the top 10 Monday to Friday.

And Pasiones was the #1 rated Spanish cable channel in prime time, Monday to Friday based on coverage trainings. While cord cutting trends continue to impact our cable networks, we are mitigating these losses with new launches and expanded coverage agreements. three of our channels will be launched on YouTube TV later this year or early next, which should provide a new platform for growth. We are also optimistic on securing launches of other virtual MVPD platforms, which have lagged in their inclusion of Spanish language program. Turning to Colombia and our and our investment in Canal Uno, the economy is improving and COVID cases are declining. Importantly, vaccines are becoming more widely distributed and the country is beginning to see more normalized business advertising activity. Canal Uno has seen an uptick in ratings, which should translate into improved market share, and we are optimistic that the remainder of the year will see a stronger overall advertising market. In closing, we have continued our solid momentum into the second half of the year. Pantaya has an exciting future and with an incredibly compelling content pipeline for next year, we are well positioned as the clear market leader. We are transforming the business and building on the strong performance we have delivered through difficult market environments. We are confident that over time, our continued execution and enhanced investment in Pantaya will unlock value and minimize the dislocation in our current market value.

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 half of the year. Our results were particularly impressive as we faced comps over our industry-leading results in the third quarter of 2020. As we noted on the prior year's third quarter earnings call, we achieved significant revenue growth primarily as a result of a strong Puerto Rico advertising market that was bolstered by COVID-related stimulus as well as WAPA's dominant performance. Net revenues for the third quarter were $50.8 million, an increase of 37% as compared to $37.2 million for the same period in 2020. Excluding Pantaya, our net revenues increased even in comparison to our strong results in the prior year period, which benefited from political advertising revenue. Subscriber revenue increased $13.4 million or 70%, primarily due to the inclusion of Pantaya as well as contractual rate increases and new launches of our cable networks, offset in part by a decline in U.S. cable subscribers. Excluding Pantaya, subscriber revenue increased, driven by growth in our retransmission fees. Advertising revenue decreased $400,000 or 2% due to political advertising revenue in the prior year period. Excluding political, advertising revenue increased 6%. Net revenues for the 9-month period were $138.8 million, an increase of 33% as compared to $104.3 million for the same period in 2020. Subscriber revenue increased $26.4 million or 45%, primarily due to the inclusion of Pantaya as well as contractual rate increases and new launches of our cable networks, offset in part by a decline in U.S. cable subscribers.

Advertising revenue increased $8.6 million or 21%, primarily due to growth in the Puerto Rico television advertising market, offset in part by political advertising revenue in the prior year period. Turning to expenses. Cost of revenues for the 3-month period increased $5 million or 46%, and for the 9-month period, increased $8.1 million or 23%, primarily due to the inclusion of Pantaya. SG&A expenses for the 3-month period increased $20.3 million and for the 9-month period increased $35.2 million, primarily due to the inclusion of Pantaya. In the quarter, marketing expenses were elevated due in part to the promotion of Season two of our hit series, El juego de las llaves and the marketing of one theatrically released film. Going forward, marketing spend will be tied to the launch of content on Pantaya so marketing costs may vary from quarter-to-quarter. The increases in both periods were also due to higher stock-based compensation and to cost reductions implemented in the prior year period as a result of the pandemic, including the cancellation or postponement of certain programming and sporting events, voluntary salary reductions and employee retention. Adjusted EBITDA was $5.3 million for the third quarter as compared to $16.7 million in the prior year period. Adjusted EBITDA was $33.3 million for the 9-month period as compared to $41.5 million for the same period in 2020. The decreases were due to the inclusion of Pantaya, which is in growth and investment mode. Turning to the balance sheet. As of September 30, we had approximately $253 million in debt and $55 million of cash.

Our revolver is currently undrawn. Our gross and net leverage ratios were approximately 4.6 and 3.6 times, respectively, which includes Pantaya's operating results since the acquisition. Capital expenditures were approximately $300,000 in the quarter, bringing capex to $3.2 million for the year. We also funded $2.9 million in the Canal Uno in the quarter, bringing our total year-to-date funding to $4.5 million. Our capital allocation priorities, as we progress the remainder of the year and into 2022, are investing in our business and funding Pantaya's growth, particularly through the investment in the production of original content. We are pleased with our third quarter performance and are on track to finish the year strongly. Pantaya's future is promising. And together with the ongoing rebound in Puerto Rico, we look forward to continuing to create value for our shareholders.

We'll now open the call to your questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Steven Cahall with Wells Fargo.

Steven Cahall -- Wells Fargo -- Analyst

Thanks. Good morning, Craig and Alan, maybe you can start by framing some of those investments that you've talked about for Pantaya, especially as we think about moving into 2022. Any ideas on what content spend might look like or subscriber acquisition costs that you want to lean into. And we've seen some of your peers take up distribution partnerships with telco and cable companies. So also just curious how those might factor into your Pantaya strategy.

Alan Sokol -- Chief Executive Officer

Well, as you heard from me, our intent, which is consistent with -- our intent all along has been to increase investment in programming. We're growing from seven original series this year to 22 next year, and we expect that to deliver a significant return on investment. It's important to know -- to remember that our costs of production are significantly lower than the cost that Netflix or Disney or Hulu have in their production. We're spending a tiny fraction on a per hour basis of what they spend. So we get a lot more bank for the box with our production.

And so although our costs are going to increase vis-a-vis historical, there's still going to be, I think, a relatively low level in comparison to our peers. And the question was on -- I'm sorry, distribution. So we're in active conversations with a variety of variety of big telcos and other potential bulk distributors, and we've gotten very good response. They see the opportunity, they see our unique appeal for the Hispanic market. And we feel very optimistic about the opportunity to strike a deal there.

Steven Cahall -- Wells Fargo -- Analyst

Great. And then just on Puerto Rico, that ad market, as you've talked about, seems as strong as it's been in the last many years. Do you sense any weakening caused by supply chain that's clearly been a trend supposed to look out to Q4. So just curious, any comments there.

Alan Sokol -- Chief Executive Officer

Yes. I mean we've been listening to some of the other calls we've heard that sort of as a theme. We are seeing that to a small extent, but our fourth quarter, we feel very optimistic about. We'll see how December goes, but I mean we're hearing that some of the big retailers are having some issues on supply chain and have cut back on some of their advertising spend as a result. Auto has cut back on its advertising and notwithstanding that, we're still seeing pretty strong levels of advertising across the board.

Steven Cahall -- Wells Fargo -- Analyst

Great. And then any color on the improvement in domestic cable sub declines that you saw in the quarter? Was it particularly weighted to satellite or cable or VMVPDs, I guess not so much since you're just launching on those, but yes, any sense of what improved.

Alan Sokol -- Chief Executive Officer

Yes. I would say there's been no real notable changes in how the distribution of losses and gains among the MVPDs. We're still seeing gains with certain MVPDs. We're seeing pretty material losses with others. And that trend has continued overall, although the cadence has improved somewhat.

Steven Cahall -- Wells Fargo -- Analyst

Great. And then last one for me. There's been some reports of industry consolidation. Just wondering how you think about industry consolidation and any opportunity that might offer you?

Alan Sokol -- Chief Executive Officer

Well, clearly, Steve, we don't comment on rumors. But to the extent that great opportunities are out there, we obviously will consider those, but we feel very good about our ability to operate this business independently because we are in our own swim way. We are in a different niche, and we feel great about our leadership position within our space.

Steven Cahall -- Wells Fargo -- Analyst

Great, thank you.

Alan Sokol -- Chief Executive Officer

Thank you.

Operator

Thank you. I would like to turn it back over to management.

Alan Sokol -- Chief Executive Officer

Well, that's it, then I will wish everybody a happy weekend, and talk to you soon. Thank you.

Operator

[Operator Closing Remarks]

Duration: 18 minutes

Call participants:

Danielle O'Brien -- Investor Relations

Alan Sokol -- Chief Executive Officer

Craig Fischer -- Chief Financial Officer

Steven Cahall -- Wells Fargo -- Analyst

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