Hemisphere Media Group, Inc.

Ladies and gentlemen, this is the operator. Your conference is scheduled to begin momentarily. Until that time, your lines will once again be placed on hold. Thank you for your patience. THE END THE END THE END THE END THE END THE END THE END Good morning, ladies and gentlemen, and welcome to the Hemisphere Media Group Incorporated's first quarter 2021 financial results conference call. My name is Jason, and I will be your operator today. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I will now turn the call over to Danielle O'Brien. Please go ahead.

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 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 release, which was issued earlier this morning. Management believes that this non-GAAP information is important to investors' understanding of our business. I'll now turn the call over to Alan.

Thank you, Danielle, and good morning, everyone. We delivered yet another exceptional quarter of results, reflective of the differentiated nature of our business and our continued strong execution, further bolstered by the overall economic recovery. Following our industry-leading performance in the third and fourth quarters of 2020, our strong momentum continued into the first quarter of 2021. We grew net revenues by 16%, led by an outstanding quarter of advertising revenue growth of 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 formed 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 since its launch, it's become clear that Pantaya sits 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 fall into our core target of bicultural and Spanish-dominant adults, a huge subscriber acquisition opportunity. And nearly 90% of these 39 million are already accessing at least one streaming service, demonstrating a strong appetite for streaming. Pantai has an unparalleled deep library of critically acclaimed original titles from Pantai's production on Pantaleon, 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 samples of Spanish-language content, none of them come close to competing with the depth, quality, or popular appeal of 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, Their Best Family Vacation, which was a massive success in its first season in 2019. This will be followed by a very strong release schedule for the second half of the year, including season two of Pantaya's most successful series to date, El Juego de las Llaves. 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 Fantaya. The goal is to attain 2.5 to 3 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 seen in the second half of 2020. as many of the COVID-related restrictions that were in place have been rescinded. Employment levels have improved. New auto sales are near historical highs. Cement sales are at their highest level 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 $8 billion in Hurricane Maria funding that had been previously withheld. Puerto Rico saw tens of billions of 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. And with our leading market position, we are well positioned to benefit from an improved economy. We saw another outstanding quarter of 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 newer news became effective on January 1st. At the same time, subscriber levels have remained very stable in Puerto Rico. Turning to our U.S. cable channels, now with data 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 of communications for all our cable channels, including expanded carriage for three of our networks, which will result 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 expanded carriage with existing distributors such as Cox. All of our cable networks continue to perform well and deliver strong viewings. Based on coverage ratings, all four of our measured 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 Pasiones is the second highest rated cable channel Monday to Friday. Turning to Colombia and our medicine at 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 is a high level of pent-up advertising demand that will be realized once case levels decline. In closing, we have 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 become the market leader in a high-growth Spanish-language subscription streaming space and have transformed the growth profile of our overall business. We are very excited about the future of Hemisphere. Thank you, everyone. I'll now turn the call over to Craig.

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 do not include Pantaya as we close the acquisition on March 31st. Net revenues for the first quarter were $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's 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 $1 million, driven primarily by the timing of the licensing of content. Operating expenses for the first quarter were $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 bed 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, performer for 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, aggregate purchase price of approximately $1.3 million. Capital expenditures were $2.4 million and a 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.

At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Stephen Cahill from Wells Fargo. Your line is open. Thanks.

Maybe first just on Pentia, 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 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 Pentaya, just wondering if you're contemplating any distribution partnerships like with telco companies or or MVPDs. Then I'll have a couple follow-ups.

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

I know there's a lot in there.

First of all, on Patai's strategy and our program, we don't get into specific dollar numbers, but as I said, our strategy, our core strategy is to increase materially the the programming spend of Antaia, and we're already in the process of doing that. We think that the content of Antaia historically has been great, but we also feel there's opportunity to accelerate growth in subscribers and to improve retention by increasing programming spend, and that's our intention. I also think it's important to note, as I've 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 programming costs are much more modest than those of the big general market guys, so we get 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 at Pantaya will ultimately make its way through all of our other channels and platforms. And similarly, programming that we create for our platforms, 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... to Pantaleon'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 core to our programming supply. On the distribution front, we are in discussions at various levels with a number of different telcos, VMVPDs, and connected TV producers for carriage. We think that there is a good chance that we could make a deal, a strategic deal with a telco, but it's a little early. But we are in process of 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 personal revenge with Pantaya. We are the only real player in the exclusive Spanish language premium subscription space. We think Univision's new entry in the space, Prende, is going to be a formidable player in this space. We also think that we complement each other in the sense that they are primarily a Library service focused on the television and Univision libraries. All that content is very valuable and very important and has a big audience. But we really play, we really have a different offering. We are the only ones really offering original, exclusive, premium series of movies that really can't be seen anywhere else, and we're the exclusive home to those.

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? Do you have other levers you can pull to capture incremental demand? Maybe just help us think about that opportunity.

Well, yeah, 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 of the fact that we are a must-have for advertisers in the market. So we feel the market's strong, as 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. Puerto Rico has been in a constant state of economic headwind 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 disbursement of taxes, of previously allocated hurricane relief funding and just the overall economic recovery. So we feel great about where Puerto Rico is going. Again, hard to have a long-term crystal ball, but we feel very good about it now. And the way we continue to take advantage of that is doing what we're doing, which is continue to grow our audience, continue 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 increase the amount of commercial inventory available.

Great. And then last one for Craig. Craig, you mentioned the net leverage is 2.7x. Does that include maybe some EBITDA dilution from Pentia? And as we think about leverage going forward, as you invest in Pentia, that's probably 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 you'll be generating. So how do we just maybe first think about the EBITDA trajectory of the company? Is those two things mixed? 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?

Sure. Please start with the first one. Pantaya is not included in the EBITDA on an LPM 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 pro forma effect for Pantaya. As we indicated, Pantai is going to have 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.

Great.

Your next question comes from the line of Kakan Morrow from RBC Capital Markets. Your line is open.

Great. Good morning, and thank you for taking the question. The Pampaya deal is fairly transformative, so I just wanted to I was hoping to dig in a bit deeper, maybe first on advertising. I know Kentia has a great corner of the market as a commercial free streaming destination. But now that you have full operational control, is there an appetite to maybe widen your potential target audience by introducing a lower priced ad supported tier?

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 Pattaya, 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 have in a lower-priced kind of freemium business. So it's something we're absolutely looking at going forward, although it's not in our plans for the immediate future.

Understood. Thanks. And maybe when we think about your path to growing this entire subscriber base from the 900,000 today to 2.5 to 3 million in 2025, would you expect that growth to be somewhat linear and benefit from the broader secular 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?

I think it's a little all of the above, and it's hard to know sort of how the mix shakes out. I think it's going to be function of all that, plus I think the quality and quantity of content that we are developing in the production, I think as we expand our content offering and have more frequent content releases and higher quality content releases, I think that will accelerate subscriber acquisitions and and also improve retention. So we're expecting that, you know, growth will be robust, you know, for the foreseeable future.

Understood. Thank you. 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 Pentaya's Pantaleon and benefit from merger synergies like the shared production capabilities with the rest of Hemisphere, do you expect to de-emphasize some of these great third-party programming relationships that you have and maybe focus more on the original production side?

Good questions. I think our lessons to date have been, I think that the original series 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, you know, very sparse and haphazard offering. So I think the intentional, purposeful, you know, 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 that, you know, 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 versus 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, frankly, we are expanding our third-party relationships as well. We will have some announcements coming forward in the new term about partnerships with other brand-name third-party players in Latin America and the rest of the world.

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 2.5 to 3 million subs, what do you expect the U.S. versus international mix might eventually look like?

Well, today the service is just U.S. and Puerto Rico, so when we say $2.5 million, $3 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.

Perfect. Thank you so much.

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

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

That concludes today's conference call. You may now disconnect.