HEMISPHERE MEDIA GROUP, INC. OVERVIEW Our Company We are a leadingU.S. Spanish-language media company serving the fast growing and highly attractiveU.S. Hispanic and Latin American markets with broadcast and cable television networks and digital content platforms including five Spanish-language cable television networks distributed in theU.S. , two Spanish-language cable television networks distributed inLatin America , the #1-rated broadcast television network inPuerto Rico , the #3-rated broadcast television network inColombia , a Spanish-language OTT video subscription service distributed in theU.S. and a leading distributor of content to television and digital media platforms inLatin America .
Headquartered in
• Cinelatino: the leading Spanish-language cable movie network with over
20 million subscribers across the
programmed with a lineup featuring the best contemporary films and original
television series from
the strength of its programming and distribution, Cinelatino is the #2-Nielsen
rated Spanish-language cable television network in the
coverage ratings.
• WAPA: the leading broadcast television network and television content producer
in
is
entertainment programming, producing over 65 hours in the aggregate each week.
Additionally, we operate WAPA.TV, a leading news and entertainment website in
Puerto Rico , featuring content produced by WAPA.
• WAPA Deportes: Through its multicast signal, WAPA distributes WAPA Deportes, a
leading sports television network in
Baseball (MLB),
events fromPuerto Rico .
• WAPA America: a cable television network serving primarily Puerto Ricans and
other Caribbean Hispanics living in the
features news and entertainment programming produced by WAPA. WAPA America is
distributed in the
digital basic subscribers.
22
• Pasiones: a cable television network dedicated to showcasing the most popular
telenovelas and serialized dramas, distributed in the
Pasiones features top-rated telenovelas from
television network devoted to telenovelas. Pasiones has over 21 million subscribers across theU.S. andLatin America .
• Centroamerica TV: a cable television network targeting Central Americans living
in the
segment of the
popular news and entertainment fromCentral America , as well as soccer programming from the top professional soccer leagues in the region. Centroamerica TV is distributed in theU.S. to approximately 3.8 million subscribers.
• Television Dominicana: a cable television network targeting Dominicans living
in the
the most popular news and entertainment programs from the
as well as the
current and former players from MLB. Television Dominicana is distributed in
theU.S. to approximately 2.3 million subscribers.
• Canal 1: the #3-rated broadcast television network in
interest in Canal 1 in partnership with leading producers of news and
entertainment content in
renewable broadcast television concession in 2016. The partnership began
operating Canal 1 on
resulting in the extension of the concession license for an additional ten
years for no additional consideration. The concession is now due to expire on
April 30, 2037 and is renewable for an additional 20-year period.
• Pantaya: is the first-ever premium streaming destination for world-class movies
and series in Spanish offering the largest selection of current and classic
blockbusters and critically acclaimed titles from
all commercial-free. Pantaya's programming includes content from our library,
Pantelion's
Televisa's theatrical releases in
specials and concerts. We own a 25% interest in Pantaya in partnership with
Lionsgate, which service launched inAugust 2017 .
• Snap Media: a distributor of content to broadcast and cable television networks
and OTT, SVOD and AVOD platforms in
acquired a 75% interest in Snap Media, and in connection with the acquisition,
Snap Media entered into a joint venture with MarVista, an independent
entertainment studio and a shareholder of Snap Media, to produce original
movies and series. Snap Media is responsible for the distribution of content
owned and/or controlled by our Networks, as well as content to be produced by
the production joint venture between Snap Media and MarVista.
• REMEZCLA: a digital media company targeting English-speaking and bilingual
Hispanic millennials through innovative content. On
a 25.5% interest in REMEZCLA. At
by the COVID-19 pandemic and the associated going-concern uncertainty, we have
recorded a non-cash impairment charge of
of the full carrying amount of our investment. For more information, see Note
5, "Equity Method Investments" of Notes to Condensed Consolidated Financial
Statements, included elsewhere in this Quarterly Report. Our two primary sources of revenues are advertising revenue and affiliate revenue. All of our Networks derive revenues from advertising. Advertising revenue is generated from the sale of advertising time, which is typically sold pursuant to advertising orders with advertisers providing for an agreed upon advertising commitment and price per spot. Our advertising revenue is tied to the success of our programming, including the popularity of our programming as measured by Nielsen and/or comScore. Our advertising is variable in nature and tends to reflect seasonal patterns of our advertisers' demand, which is generally greatest during the fourth quarter of each year, driven by the holiday buying season. In addition,Puerto Rico's political election cycle occurs every four years and we benefit from increased advertising sales in an election year. For example, in 2016, we experienced higher advertising sales as a result of political advertising spending during the 2016 gubernatorial elections. The next gubernatorial election inPuerto Rico is scheduled to occur onNovember 3, 2020 . All of our Networks receive fees paid by distributors, including cable, satellite and telecommunications service providers. These revenues are generally based on a per subscriber fee pursuant to multi-year contracts, commonly referred to as "affiliation agreements," which typically provide for annual rate increases. The specific affiliate revenue we earn vary from period to period, distributor to distributor and also vary among our Networks, but are generally based upon the number of each distributor's paying subscribers who receive our Networks. The terms of certain non-U.S. affiliation agreements provide for payment of a fixed contractual monthly fee. Changes in affiliate revenue are primarily derived from changes in contractual affiliation rates charged for our Networks and changes in the number of subscribers. Accordingly, we continually review the quality of our programming to ensure that it is maximizing our Networks' viewership and giving our Networks' subscribers a premium, high-value experience. The continued growth in our affiliate revenue will, to a certain extent, be dependent on the growth in subscribers of the cable, satellite and telecommunication service providers distributing our Networks, new system launches and continued carriage of our channels by our distribution partners. Our revenues also benefit from contractual rate increases stipulated in most of our affiliation agreements. 23 WAPA has been the #1-rated broadcast television network inPuerto Rico since the start of Nielsen audience measurement ten years ago and management believes it is highly valued by its viewers and cable, satellite and telecommunications service providers. WAPA is distributed by all pay-TV distributors inPuerto Rico and has been successfully growing affiliate revenue. WAPA's primetime household rating in 2019 was five times higher than the most highly rated English-languageU.S. broadcast network in theU.S. ,CBS , and higher than the combined ratings ofCBS ,NBC ,ABC ,FOX and the CW. As a result of its ratings success since the start of Nielsen audience measurement, management believes WAPA is well positioned for future growth in affiliate revenue. WAPA America, Cinelatino, Pasiones, Centroamerica TV and Television Dominicana occupy a valuable and unique position, as they are among the small group of Hispanic cable networks to have achieved broad distribution in theU.S. As a result, management believes ourU.S. cable networks are well-positioned to benefit from growth in both the growing national advertising spend targeted at the highly sought-afterU.S. Hispanic cable television audience, and growth in subscribers, as theU.S. Hispanic population continues its long-term upward trajectory. Hispanics represent over 18% of the totalU.S. population and 11% of the totalU.S. buying power, but the aggregate media spend targeted atU.S. Hispanics significantly under-indexes both of these metrics. As a result, advertisers have been allocating a higher proportion of marketing dollars to the Hispanic market, butU.S. Hispanic cable advertising still under-indexes relative to its consumption. Management expects ourU.S. networks to benefit from growth in subscribers as theU.S. Hispanic population continues its long-term growth. TheU.S. Census Bureau estimated that nearly 60 million Hispanics resided inthe United States in 2018, representing an increase of more than 24 million people between 2000 and 2018, and that number is projected to grow to 75 million by 2030.U.S. Hispanic television households grew by 31% during the period from 2010 to 2020, from 12.9 million households to 16.9 million households. Hispanic pay-TV subscribers increased 2.3% since 2010 to 11.1 million subscribers in 2020. The continued long-term growth of Hispanic television households creates a significant opportunity for all of ourU.S. cable networks. Similarly, management expects Cinelatino and Pasiones to benefit from growth inLatin America . Fueled by a sizeable and growing population, a strong macroeconomic backdrop, rising disposable incomes and investments in network infrastructure resulting in improved service and performance, pay-TV subscribers inLatin America (excludingBrazil ) grew by 17% from 2014 to 2019, and are projected to grow an additional 6.6 million from 54.8 million in 2019 to 61.5 million by 2023, representing projected growth of 12%. Furthermore, as ofDecember 31, 2019 , Cinelatino and Pasiones were each distributed to only 29% and 30%, respectively, of total pay-TV subscribers throughoutLatin America (excludingBrazil ).Colombia , where we own 40% of Canal 1, the #3-rated broadcast television network, is a large and appealing market for broadcast television.Colombia had a population of 51 million as ofDecember 31, 2019 , the second largest inLatin America (excludingBrazil ). According to IBOPE, the three major broadcast networks inColombia receive a 53% share of overall viewing. These factors resulted in an annual free-to-air television advertising market of approximately$270 million for 2019 (as converted utilizing the average foreign exchange rate during the period) and the third largest Latin American television advertising market overall (excludingBrazil ). MVS, one of our stockholders, provides operational, technical and distribution services to Cinelatino pursuant to several agreements, including an agreement pursuant to which MVS provides satellite and technical support and other administrative support services, an agreement that grants MVS the non-exclusive right to distribute the Cinelatino service to third party distributors inMexico , and an agreement between Cinelatino and Dish Mexico (an affiliate of MVS), pursuant to which Dish Mexico distributes Cinelatino and pays subscriber fees to Cinelatino. COVID-19 Pandemic InMarch 2020 , theWorld Health Organization characterized the novel coronavirus ("COVID-19") a pandemic, and the President ofthe United States declared the COVID-19 outbreak a national emergency. The rapid spread of the pandemic and the continuously evolving responses to combat it have had an increasingly negative impact on the global economy. Even during these unprecedented times, we have continued the production of news and certain programming, as our viewers rely on our Networks to keep them informed. 24 The impact of COVID-19 and measures to prevent its spread are affecting our businesses in a number of ways. Beginning inMarch 2020 , the Company experienced adverse advertising revenue impacts. Operationally, all non-production and programming personnel are working remotely, and the Company has restricted business travel. If significant portions of our workforce, including key personnel, are unable to work effectively because of illness, government actions or other restrictions in connection with the COVID-19 pandemic, the impact of the pandemic on our businesses could be exacerbated. The ultimate impact of the COVID-19 pandemic, including the extent of any adverse impact on our business, results of operations and financial condition, will depend on, among other things, the duration and spread of the pandemic, the impact of governmental regulations that have been, and may continue to be, imposed in response to the pandemic, the effectiveness of actions taken to contain or mitigate the outbreak, and global economic conditions. Although the effect of the pandemic may not be fully reflected in the Company's business until future periods, the Company believes that the adverse impact of the COVID-19 pandemic could be material to its results of operations. The Company believes it has substantial liquidity to satisfy its financial commitments, including its long-term debt. Given the global nature of the COVID-19 pandemic, our investment in Canal 1, which operates inColombia , is also negatively impacted. OnMarch 17, 2020 ,Colombia's PresidentIvan Duque declared a state of emergency and onMarch 20, 2020 announced a nationwide lockdown, which has been extended and is currently in effect throughMay 11, 2020 . Commercial activities inColombia have been severely curtailed since mid-March, which has had a material adverse impact on advertising, and, accordingly, has had a material adverse impact on Canal 1's advertising revenue. It is unclear when the lockdown will be lifted or when advertising will return to pre-COVID-19 levels. Comparison of Consolidated Operating Results for the Three Months EndedMarch 31, 2020 and 2019 (Unaudited) (amounts in thousands) Three Months Ended $ Change % Change March 31, Favorable/ Favorable/ 2020 2019 (Unfavorable) (Unfavorable) Net revenues$ 32,409 $ 35,110 $ (2,701 ) 7.7 % Operating Expenses: Cost of revenues 10,967 10,214 (753 ) (7.4 )%
Selling, general and administrative 11,233 10,901
(332 ) (3.0 )%
Depreciation and amortization 3,131 4,067 936 23.0 %
Other expenses 3,021 231 (2,790 ) NM
Gain from FCC repack and other (9 ) (1,462 ) (1,453 ) NM
Total operating expenses 28,343 23,951 (4,392 ) (18.3 )%
Operating income 4,066 11,159 (7,093 ) (63.6 )%
Other expense:
Interest expense, net (2,786 ) (2,960 ) 174 5.9 %
Loss on equity method investments (7,019 ) (7,376 ) 357 4.8 %
Impairment of equity method
investment (5,479 ) - (5,479 ) NM
Total other expense (15,284 ) (10,336 ) (4,948 ) (47.9 )%
(Loss) income before income taxes (11,218 ) 823
(12,041 ) NM Income tax benefit (expense) 1,675 (2,556 ) 4,231 NM Net loss (9,543 ) (1,733 ) (7,810 ) NM Net loss attributable to non-controlling interest 115 47 68 NM Net loss available to Hemisphere Media Group, Inc.$ (9,428 ) $ (1,686 ) $ (7,742 ) NM NM = Not meaningful Net Revenues Net revenues were$32.4 million for the three months endedMarch 31, 2020 , a decrease of$2.7 million , or 8%, as compared to$35.1 million for the comparable period in 2019. The decline was due to decreases in advertising revenue and affiliate revenue. Advertising revenue decreased$1.3 million , or 10%, due to the negative impacts on thePuerto Rico television advertising market as a result of the earthquakes in January and then the COVID-19 pandemic in March. Affiliate revenue decreased$1.5 million , or 7%, due to a decline in subscribers across ourU.S. networks, the negative impact of the blackout of WAPA America on Dish until lateJanuary 2020 , and a decline in non-U.S. affiliate revenue as a result of subscriber and fee declines, and unfavorable foreign currency movements. 25
The following table presents estimated subscriber information:
Subscribers (a)
(amounts in thousands)
March 31, 2020 December 31, 2019 March 31, 2019
U.S. Cable Networks:
WAPA America (b) 4,038 4,140 4,381
Cinelatino 4,196 4,364 4,608
Pasiones 4,490 4,626 4,272
Centroamerica TV 3,759 3,976 4,239
Television Dominicana 2,281 2,345 2,370
Total 18,764 19,451 19,870
Latin America Cable Networks:
Cinelatino 16,043 16,132 17,174
Pasiones 16,598 16,763 16,170
Total 32,641 32,895 33,344
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(a) Amounts presented are based on most recent remittances received from our
Distributors as of the respective dates shown above, which are typically two
months prior to the dates shown above.
(b) Excludes digital basic subscribers.
Operating Expenses Cost of Revenues: Cost of revenues consists primarily of programming and production costs, programming amortization and distribution costs. Cost of revenues for the three months endedMarch 31, 2020 , were$11.0 million , an increase of$0.8 million , or 7%, compared to$10.2 million for the comparable period in 2019, due to the production of Guerreros, a daily reality show at WAPA, which was not produced in the first quarter of 2019, and the write-off of sports rights fees due to the postponement or cancellation of certain sporting events due to the COVID-19 pandemic. Selling, General and Administrative: Selling, general and administrative expenses consist principally of promotion, marketing and research, stock-based compensation, employee costs, occupancy costs and other general administrative costs. Selling, general, and administrative expenses for the three months endedMarch 31, 2020 , were$11.2 million , an increase of$0.3 million , or 3%, compared to$10.9 million for the comparable period in 2019, due to bad debt reserves of$0.5 million given the increased risk of collections stemming from the negative impacts of the COVID-19 pandemic and higher stock-based compensation of$0.4 million , offset in part by lower personnel expenses. Depreciation and Amortization: Depreciation and amortization expense consists of depreciation of fixed assets and amortization of intangibles. Depreciation and amortization for the three months endedMarch 31, 2020 , was$3.1 million , a decrease of$0.9 million , or 23%, compared to$4.1 million for the comparable period in 2019, due to certain intangible assets that were fully amortized as of the first quarter of 2019, which were offset in part by additional intangibles recognized from finalization of the Snap Media acquisition in the fourth quarter of 2019. Other Expenses: Other expenses include legal, financial advisory and other fees incurred in connection with acquisitions and corporate finance activities, including debt and equity financings. Other expenses for the three months endedMarch 31, 2020 , were$3.0 million , an increase of$2.8 million , compared to$0.2 million in the comparable period in 2019, due to the pursuit of strategic transactions. Gain from FCC repack and other: Gain from FCC spectrum repack and other primarily reflects reimbursements we have received from the FCC for equipment we have purchased as a result of the FCC mandated spectrum repack, and gain or loss from the sale of assets. For the three months endedMarch 31, 2020 , gain from FCC spectrum repack and other decreased$1.5 million due to the timing of reimbursements received from the FCC for equipment purchases required as a result of the FCC mandated spectrum repack. Other Expenses
Interest Expense, net: Interest expense for the three months ended
26 Loss on Equity Method Investments: Loss on equity method investments for the three months endedMarch 31, 2020 , was$7.0 million , an improvement of$0.4 million , compared to$7.4 million for the comparable period in 2019. The improvement was due to lower share of losses at Canal 1 as a result of better operating performance, and lower share of losses at Pantaya due to the Company not recording its respective share of the losses for the three months endedMarch 31, 2020 , as the inception to date losses exceed our funding commitment. For more information, see Note 5, "Equity Method Investments" of Notes to Condensed Consolidated Financial Statements, included elsewhere in this Quarterly Report. Impairment ofEquity Method Investment : AtMarch 31, 2020 , we deemed our investment in REMEZCLA to be impaired given the uncertainty caused by the COVID-19 pandemic and the associated going-concern risks. As a result, we have recorded a non-cash impairment charge of$5.5 million reflecting the write-off of the full valuation of our investment in REMEZCLA. For more information, see Note 5, "Equity Method Investments" of Notes to Condensed Consolidated Financial Statements, included elsewhere in this Quarterly Report. Income Tax Expense Income tax benefit for the three months endedMarch 31, 2020 , was$1.7 million as compared to income tax expense of$2.6 million for the comparable period in 2019. The income tax benefit in the current year period was due to loss before income taxes. For more information, see Note 6, "Income Taxes" of Notes to Condensed Consolidated Financial Statements, included elsewhere in this Quarterly Report. Net Loss
Net loss for the three months ended
Net Loss Attributable to Non-controlling Interest
Net loss attributable to non-controlling interest, related to the 25% interest
in Snap Media held by minority shareholders, was
Net Loss Available to
Net loss available toHemisphere Media Group, Inc. for the three months endedMarch 31, 2020 , was$9.4 million as compared to$1.7 million for the comparable period in 2019.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet financing arrangements.
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash Our principal sources of cash are cash on hand and cash flows from operating activities. AtMarch 31, 2020 , we had$95.0 million of cash on hand. Our primary uses of cash include the production and acquisition of programming, operational costs, personnel costs, equipment purchases, principal and interest payments on our outstanding debt and income tax payments, and cash may be used to fund investments, acquisitions and repurchases of common stock. Management believes cash on hand and cash flow from operations will be sufficient to meet our current contractual financial obligations and to fund anticipated working capital and capital expenditure requirements for existing operations. Our current financial obligations include maturities of debt, operating lease obligations and other commitments from the ordinary course of business that require cash payments to vendors and suppliers. Cash Flows Three Months Ended March 31, Amounts in thousands: 2020 2019 Cash provided by (used in): Operating activities$ 10,181 $ 8,022 Investing activities (6,789 ) (15,248 ) Financing activities (534 ) (1,047 )
Net increase (decrease) in cash
27
Comparison for the Three Months Ended
Operating Activities Cash provided by operating activities was primarily driven by our net loss, adjusted for non-cash items and changes in working capital. Non-cash items consist primarily of depreciation of property and equipment, amortization of intangibles, programming amortization, amortization of deferred financing costs, stock-based compensation expense, loss on equity method investments, impairment of equity method investments, amortization of operating lease right-of-use assets, and provision for bad debts. Net cash provided by operating activities for the three months endedMarch 31, 2020 was$10.2 million , an increase of$2.2 million , as compared to$8.0 million in the prior year period, due to increases in non-cash items of$6.6 million and net working capital of$3.4 million , offset in part by an increase in net loss of$7.8 million . The increase in non-cash items is due to a$5.5 million impairment of equity method investment related to REMEZCLA, a decrease in reimbursements received from the FCC in connection with the spectrum repack of$1.5 million , and increases in the bad debt provision of$0.5 million and stock-based compensation of$0.4 million , offset in part by decreases in depreciation and amortization of$0.9 million and loss on equity method investments of$0.4 million . The increase in net working capital is due to an increase in other accrued expenses of$8.0 million related to the timing of payments for accrued agency commissions and transaction expenses, an increase in programming rights payable of$0.9 million , and decreases in prepaid and other assets of$0.6 million and net due to/from related parties of$0.4 million , offset in part by an increase in accounts receivable of$3.5 million , and decreases in other liabilities of$1.5 million , income taxes payable of$1.2 million , and accounts payable of$0.6 million .
For more information, see Note 5, "Equity Method Investments" of Notes to Condensed Consolidated Financial Statements, included elsewhere in this Quarterly Report.
Investing Activities Net cash used in investing activities for the three months endedMarch 31, 2020 , was$6.8 million , a decrease of$8.5 million as compared to$15.2 million in the prior year period. The decrease is due to a decline in funding of equity investments of$7.3 million and a decrease in capital expenditures of$2.6 million , offset in part by a decline in proceeds received from the FCC related to the spectrum repack of$1.5 million . Financing Activities Net cash used in financing activities for the three months endedMarch 31, 2020 , was$0.5 million , a decrease of$0.5 million as compared to$1.0 million in the prior year period. The decrease is due to the prior period repurchases of our Class A common stock of$0.5 million .
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