MSG Networks Inc.
Q2 2021 Earnings Call Transcript

Published: 4 Feb 2021

[Operator:]

Good morning. My name is Angie, and I will be your conference operator today. At this time, I would like to welcome everyone to the MSG Networks Inc. Fiscal 2021 Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remark, there will be a question-and-answer session. Thank you. I would now like to turn the conference over to Ari Danes, Investor Relations. Please go ahead, sir.

[Ari Danes:]

Good morning, and welcome to MSG Networks Fiscal 2021 Second Quarter Conference Call. The Company's President and CEO, Andrea Greenberg, will begin this morning's call with a discussion of the Company's operations. This will be followed by a review of financial results with Bret Richter, the Company's EVP, Chief Financial Officer and Treasurer. After their prepared remarks, we will open up the call for questions. If you do not have a copy of today's earnings release, it is available in the Investors section of the Company's corporate website.

[Andrea Greenberg:]

Thank you, Ari, and good morning. Halfway through our fiscal year, we continue to face the effects of the pandemic. But with the 2020/'21 NBA and NHL seasons now underway, our schedule is once again filled with live game telecasts. And we're proud of the way our colleagues have adapted in this environment to ensure our viewers are able to watch their favorite teams. In December, we welcomed back the Knicks, the NBA's 72 game regular season, and last month, our NHL teams returned for the start of their 56-game regular season schedule. We've been very pleased so far with the reception we've seen for our NBA and NHL team, with strong viewership across all our platforms. As we continue, however, to tackle the daily challenges of producing live games in this current environment, we also remain focused on our company's longer-term strategic objectives. To that end, over the last three calendar years, we've renewed affiliations with all five of our top distributors, including our most recent agreement near the end of 2020. We believe these renewals speak to about the strength of our relationships and the value of our live sports content.

[Bret Richter:]

Thank you, Andrea, and good morning, everyone. Let's start with a discussion of our financial results for the fiscal 2021 second quarter. Total revenues of $146.2 million decreased $41.5 million or 22% as compared with the prior year period. This was driven by a $24.4 million decrease in advertising revenue, primarily due to the delayed start of the 2021 NBA and NHL seasons, which resulted in nine NBA telecasts in the fiscal 2021 second quarter compared with a regular NBA and NHL telecast schedule in the prior year period. Affiliate revenue decreased $16.1 million, primarily reflecting the impact of the 7.5% decline in subscribers; unfavorable affiliate adjustments of $4.9 million recorded in the current year quarter, primarily reflecting accruals for potential affiliate rebates; the absence of a $2.3 million favorable affiliate adjustment recorded in the prior year quarter; and the impact of the nonrenewal with Frontier. These decreases were partially offset by higher affiliate rates. As a result of the shortened 2021 NBA and NHL seasons, we currently expect to record accruals for potential affiliate fee rebates in each of the next four quarters at a similar level to the amount we recorded this quarter. Direct operating expenses of $57 million decreased $27 million or 32% as compared with the prior year quarter due to lower rights fees expense, and to a lesser extent, a decrease in other programming and production-related costs. The decline in rights fees expense in our second quarter primarily reflected the impact of the NHL shortened 2021 regular season as well as the delayed start of the 2021 NBA and NHL seasons. In addition, the decrease in programming and production-related costs on a year-over-year basis also reflected the delayed start of the seasons. We expect to have lower rights fees expense in -- for fiscal year 2021, primarily as a result of the shortened 2021 NHL season as compared with the level of fees that would be expected if our teams were playing full seasons. As a reminder, these forward expectations are based on a variety of factors, which may change. SG&A expenses of $21.7 million decreased $10.3 million or 32% as compared with the prior year period. This decrease was primarily due to lower advertising sales commissions and advertising and marketing expenses. Adjusted operating income of $73.8 million decreased $3.3 million or 4% from the prior year, primarily due to the decrease in revenues largely offset by lower direct operating expenses and a decline in SG&A expenses. Reported free cash flow for the quarter was approximately $36.2 million.

[Ari Danes:]

Thanks, Bret. We would now like to open up the call for questions.

[Operator:]

Our first question comes from the line of Michael Morris with Guggenheim.

[Michael Morris:]

I have two questions. One on affiliates, and then one on the announcement of this free-to-play gaming app. So first on affiliate fees, you mentioned price increases being one of the positive factors in the quarter. Bret, maybe could you talk at all about sort of the relative rate of price increases that you're seeing? There's just a number of sort of puts and takes in the quarter, and you guys did a good job of enumerating them. But it's still kind of hard to see the detail. And I guess maybe there's some concern that your rate of affiliate growth of pricing in particular is slowing sequentially. So I'd appreciate if you could talk to sort of what that pacing looks like. And then on the free-to-play gaming app, I guess there's a couple of questions there. One would be, is this kind of like a step along the way? What's the potential revenue impact of this in particular? Does it have sponsorships? And how do you see that possibly playing out? But also, is it a step toward a broader potential gaming business? And if I could, can you share anything about the engagement with the existing products that you have out there interactively? Like what percentage of your users are engaging with those? Appreciate it.

[Andrea Greenberg:]

Bret, I'll take the second one first.

[Bret Richter:]

Okay. Go ahead.

[Andrea Greenberg:]

Okay. Our -- the app announcement this morning, this is the first step in what we expect to be several new and expanded sports gaming initiatives for our company. Just to remind you that we've been at the forefront of integrating these interactive games into our mobile platform for the last several years.

[Bret Richter:]

With regards to affiliate revenue, and thanks for the question. I think several times over the last few years, we've been asked to dissect the quarterly trend, and I want to reiterate a handful of things we've said. I think first and foremost, though, we did highlight what we thought were the primary items that needed to be pulled out for the quarter. But we've noted that our affiliate contracts have a variety of economic provisions that can impact the quarterly trends. When the adjustments are significant, like certain of them were this quarter, we call them out. But of course, there are other items that could affect that trend. And importantly, and if you go back over the last several years, they can impact that trend in sort of both directions. So while I don't think there's anything to further pull out this quarter, what I think is more important is that we sort of widen the lens and not use a single quarter as a pull-forward point, given that we've seen it move in kind of both ways. And with regards to the specific request in terms of isolating rate for the quarter, unfortunately, we're not going to do that today.

[Operator:]

Your next question comes from the line of Alexia Quadrani with JP Morgan.

[Alexia Quadrani:]

Andrea, just a follow-up on your comments. Can you maybe talk about how aggressive you're allowed to be with integrating the free-to-play app and some of its offers into your actual live game coverage? Maybe speak a little bit to what's allowed by the leagues and how that might change.

[Andrea Greenberg:]

Sure. We have no restrictions in our agreements in terms of what we name given day courts or what we name our channels. So we certainly have the rights to do that. And we will explore all opportunities to integrate sports gaming and interactive games into our networks and into our sites and apps. So we're going to take a look back. We think that there's tremendous potential as New York and Connecticut come online. And hopefully, they will come online sometime next season. We obviously don't control that. But we are seeing great success just now from New Jersey, having legalized mobile gaming. We've got some very significant advertisers and FanDuel, DraftKings and bet365, where we're looking at ways to program our network to optimize viewership and integration. We're looking at ways to create features. I mean we've been doing it. We're continuing to do it, features within our games and outside of our games, leading up to our games. As we've talked about, we were the first to integrate interactive gaming into MSG Go with free-to-play games. We'll continue to see how that evolves as New York and Connecticut, hopefully, legalize sports mobile gaming. So I think we've got lots of opportunities. All of them are on the table and all of them are being considered as we move forward.

[Operator:]

Your next question comes from the line of John Janedis with Wolfe Research.

[John Janedis:]

These are popular topics. So maybe I'll ask some follow-ups. Andrea, just back to the app, can you just dig a little more deeper into the rationale behind launching the app versus integrating it into the go app? And then you talked about, call it, this broadly being the first step. Over the long term, can you talk about your appetite, if there is one to pursue a gaming license?

[Andrea Greenberg:]

Sure. Well, we already have a Pick 'Em app integrated into -- a Pick 'Em Game integrated into our app. So we're actually building on that by creating a stand-alone Pick 'Em Game -- free-to-play Pick 'Em Game outside of the app. And the hope is and my expectation is that, that will allow us to reach and recruit folks that may not be interacting with us on linear television or on the app. We've seen, as I indicated before, that it increases that -- having this interactivity increases tune in, it increases length of tune or minutes watched. And this just allows us to reach folks who aren't already coming to us. And as far as -- I think, again, I can reiterate that we're looking at all different opportunities to integrate our sports betting partners into not only our linear network, but into all of our sites and apps. And there are a whole host of things that we've started to execute against and we'll certainly look to expand to the extent that they make sense, that's programming, interactivity, gaming rights to the extent that makes sense. So everything is on the table as we move forward.

[John Janedis:]

Okay. And maybe, Bret, just back to the 7.5% subscriber attrition, did that reflect any changes to tiering with any distributor? And did the deal you referenced include any carriage changes? And I guess, understanding there's a lag on remittances, do you have any kind of view you can share in terms of a high-level look on a go-forward basis?

[Bret Richter:]

I'm going to let Adam respond to the contract questions. But I would say one thing, the 7.5% subscriber decline did reflect, as we did see, as Andrea noted, some improvement over the last several months of the underlying trend.

[Adam Levine:]

Yes. And I'd just jump in and say, no, there's no impact from any change in carriage terms. And with respect to the terms and the renewals, those -- we're comfortable with those terms and those packaging and other protections we have ensure that we have continued wide distribution of our networks.

[Operator:]

Your next question comes from the line of Ben Swinburne with Morgan Stanley.

[Ben Swinburne:]

Andrea, could you tell us a little bit about what you're seeing in terms of engagement or viewing on the go app now versus kind of pre-COVID? I know it's early in the season or seasons. But just whether you're seeing a change in behavior? And if you're planning more programming for that app, I think there's -- I've noticed a lot more kind of shoulder programming on MSG Networks and whether you guys are thinking about programming for the app, more specifically? And then, Bret, just going back, it's a clarification of your prepared remarks, trying to get at the net impact of the smaller NHL season on your AOI this year, which I know you're probably not going to give us. But you were very clear on the revenue impact. I think you said around $5 million of accruals in the quarter, four more of those. On the rights fee side, though, are you expecting additional rights fee reductions from the NHL through the rest of the fiscal year? Or I don't think you were specific there. And I apologize if you were and I missed it.

[Andrea Greenberg:]

Bret, I'll take that. I'll take the first part, the MSG Go. We've seen -- pardon me?

[Bret Richter:]

Yes. Go ahead.

[Andrea Greenberg:]

We've seen considerable increases on MSG Go across both average viewers and minutes watched, the season so far. So on average, we're up about 65% in viewers, and we're up about 83% in minutes watched. And if you sort of look at the individual teams, we've got, for example, the Rangers, the audience is more than doubled on MSG Go. So we're up over 100% viewers, and we're up over 125% in minutes watched. And what I've said in the past is that we see a strong correlation between MSG Go utilization and our linear ratings. And so far, that's bearing out this season. Our overall, just generally on our linear ratings this year, our hockey ratings at this point in the season, they're the highest they've been in close to a decade. So when you add that to these all-time highs of unique viewers, the length of tune on MSG Go, where we're seeing an incredible appetite so far this season for our hockey product. And the Knicks also continue to drive a strong audience. They're up over 50% in viewers and 70% in average minutes watched on MSG Go and bettings are also very strong and up versus season-to-date last year. So, so far, all good.

[Bret Richter:]

And then, Ben, with regards to rights, let me see if I give a little color. But first and foremost, of course, all these comments are based on the facts and circumstances at the time that we make these estimates and, of course, the facts and circumstances had been evolving throughout the last 12 months. We do expect further rights rebates in the third and fourth quarter as compared to a normal season. But also keep in mind that last year's period, particularly fourth quarter, was impacted by the early parts of the pandemic. And there are, of course, other factors, too, in terms of -- besides just game counts like to the extent the rate increases and contracts. So there are a lot of moving parts. But compared to normal, yes, we'd expect further in the third quarter.

[Operator:]

Your next question comes from the line of Brandon Ross with LightShed Partners.

[Brandon Ross:]

So I guess, on their call last quarter, Sinclair said that they're going to take their RSNs direct-to-consumer at some point soon. Do you see a near-term path for that for MSGN? Maybe if you could walk us through what your decision-making process looks like on that front? And does potential of mobile sports betting in New York change that equation for you?

[Adam Levine:]

Brandon, it's Adam. So I'll jump, yes, I'll take this. So yes, we -- I think we commented on direct-to-consumer last quarter as well, saw what Sinclair had said. For us, we see the media landscape continuing to evolve. We're continuing to monitor developments and consumer behavior. Of course, we believe live local professional sports rights are unique and highly valuable asset, and there are always going to be new and innovative potential incremental offerings. That allow us to maximize the value of the rights. We said before, we have the flexibility to do a direct-to-consumer offering, if that's what we think ultimately makes sense. I don't think we have anything to announce now about the time line for whether we will or won't offer such a product. It's an intriguing option for us down the road. It's something we'll continue to evaluate. But that's, I think, as much as we're going to say about it at this point in time.

[Brandon Ross:]

Okay. And then on the free-to-play games, how specifically can you monetize those? Or is it not even about monetization?

[Andrea Greenberg:]

Well, first, as we've said, we've seen how this interactivity increases frequency and length of tune generally on our linear networks and on MSG Go. So that in and of itself is something that we're looking to achieve. In terms of monetization opportunities, I think there are several. It's a little too early to provide specifics. We haven't yet launched the app. We hope to do that before the end of third quarter. But clearly, sponsorship is a significant opportunity for us. There are other data and insight marketing opportunities for us. There are models where partners will pay affiliate fees. So there are several ways that we can look to monetize this new app. But primarily, we're looking really to provide -- to create a database to better understand consumer behavior and to use that to improve our products.

[Operator:]

Your final question comes from the line of Bernie McTernan with Rosenblatt.

[Bernard McTernan:]

Just sticking on the free-to-play game, what is the level of investment that you'd be comfortable with or necessary to launch this? And then to kind of follow-up on Brandon's question, I think, do you think this product will -- or this game will be able to generate profits on a stand-alone basis? And then just to follow up on Ben's question, not sure if you're willing to go there, but is the NFL -- sorry, NHL shortened season a net positive or negative to adjusted operating income this year?

[Andrea Greenberg:]

I think on the BOOM app question, as I said, we've done the investment to launch the app. The app will launch in third quarter. We're not going to get into the specific -- the specifics of our investment. We do think, again, that the app can be monetized in a whole variety of ways, as we said, including sponsorship and database marketing, including length of tune -- what we can see from increased length of tune and frequency of tune. So we're excited. We're excited to see where it goes. And as we've also said, it's a building block to what we think will be more integrated offerings.

[Bret Richter:]

Should I take the piece on the impact of the season?

[Andrea Greenberg:]

Sure. Sure, sure, sorry.

[Bret Richter:]

Sure. No. So, right, there's a lot that goes into this, of course. I think we're -- in terms of giving guidance for the balance of the year, either overall or from any -- or any significant contributor to our P&L, I know we're not going to provide that forward-looking guidance. But you can pretty much look back over the last several quarters where we've seen the impacts throughout the P&L with regards to the change in seasons and see the net impact on AOI. Of course, the scheduling effects rights, it affects affiliate revenue, it affects a number of games, it affects our advertising revenue. The change in the seasons has changed the way we could do certain games, particularly road games and we've seen some production savings. We've, of course, taken on some incremental costs with regards to protocols and procedures for the protection of our employees. But looking backwards, there's a picture of the overall relationship. Looking forward, it's potential and it's not likely that the facts and circumstances will continue to evolve.

[Operator:]

At this time, I would like to turn the floor back to Ari Danes for any additional or closing remarks.

[Ari Danes:]

Thank you all for joining us. We look forward to speaking with you on our next earnings call. Have a good day.

[Operator:]

Thank you for participating in today's conference call. You may now disconnect your lines at this time.