MSG Networks Inc.
Q4 2020 Earnings Call Transcript

Published: 13 Aug 2020

[Operator:]

Good morning. My name is Nicole, and I will be your conference operator today. At this time, I would like to welcome everyone to the MSG Networks Fiscal 2020 Fourth Quarter and Year Ending Earnings Conference Call. I would now like to hand the conference call over to Ari Danes, Investor Relations. Please go ahead, sir.

[Ari Danes:]

Thank you, operator. Good morning, and welcome to MSG Networks' fiscal 2020 fourth quarter and year-end 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 of 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. Please take note of the following. Today's discussion may contain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties and that actual results, developments and events may differ materially from those in the forward-looking statements as a result of various factors. These include financial community perceptions of the company and its business, operations, financial condition and the industry in which it operates, as well as the factors described in the company's filings with the Securities and Exchange Commission, including the sections entitled Risk Factors and management's discussion and analysis of financial condition and results of operations contained therein. The company disclaims any obligation to update any forward-looking statements that may be discussed during this call. Lastly, we will discuss certain non-GAAP financial measures on today's call. On Pages 5 and 6 of today's earnings release, we provide consolidated statements of operations and a reconciliation of operating income to adjusted operating income. In addition, on Page 8 of the earnings release, we provide a reconciliation of net cash provided by operating activities to free cash flow. With that, I will now turn the call over to Andrea.

[Andrea Greenberg:]

Thank you, Ari. Good morning. We appreciate everyone joining us for today's call. In March, the COVID-19 pandemic suddenly challenged us to find new ways to serve our customers and our communities, while we continue to pursue our core financial and strategic objectives in an already rapidly evolving media landscape. Despite these challenges and changes, I'm proud to say that during fiscal 2020, we were able to achieve several key goals that strengthen our company now and for the future. They include delivering substantial free cash flow, securing important distribution, continuing to grow our non-ratings-based advertising revenue and enhancing our financial flexibility through a debt refinancing. Throughout the pandemic, we've been extremely proud of our colleagues who have exemplified our strong culture and sense of purpose, as they seamlessly transition to working from home, ensuring we continue to deliver our program on all our platforms without interruption. And with the return of live sports to our networks, some of us have even returned to our offices to bring viewers live telecast, along with studio commentary from our talented team. As an organization, we have become more nimble and discovered new efficiencies. We expect these learnings will ultimately make us a stronger company. Throughout this unprecedented time, we've seen the enduring popularity of live sports, which continues to reinforce the value of our exclusive live programming to our affiliates, partners and fans. This important content, along with our position in the New York DMA, helped drive our renewals with two major affiliates this past year and four of our top five affiliates during the last three fiscal years. Right now, we see the pent-up demand for live sports on full display as professional sports leagues have started to resume play. For our company, this has meant to return of live hockey and new original hockey programming. Two of our teams, the Rangers and the Islanders, headed to Toronto for the NHL Stanley Cup Qualifiers. An MSG Network covered their return with in-depth previews of both teams match up. We also did viewed new original hockey programming to capitalize on the excitement, including around the NHL, bringing fans the latest hockey news and information and MSG Hockey IQ and NHL-themed Trivia show, testing fan's knowledge of their teams. And once the games began, we were proud to service the exclusive broadcast term in our markets for the Islanders and Rangers. This included the team's exhibition match up as well as their qualifying rounds, which also featured comprehensive pre and post-game coverage. And our viewers can continue to follow the Islanders as they compete in the first round of the Stanley Cup Playoffs, which began this week. We also wrapped up the Ranger season with an exclusive one-on-one with President, John Davidson, who shared his excitement for next season following the team winning the draft lottery. And next week, we welcome the return of Major League Soccer, as the New York Red Bulls continue their season. Our goal during this time has been to remain focused on finding ways to create new content that is accretive to our bottom line and that keeps viewers connected to the teams they love. For example, during the Rangers and Islanders Stanley Cup Qualifiers, we introduced a number of unique activations, including virtual viewing parties that enabled us to integrate live footage of fans into our broadcast, tapping into the already strong sense of community among the loyal followers of our teams. We delivered an at-home version of MSG 150, which recently included interviews with Knicks' President Leon Rose; new Devils' Coach, Lindy Ruff; and Knicks’ legend, Patrick Ewing; and introduced new Knicks' head coach, Tom Thibodeau, with a press conference and exclusive MSG Networks interview. We continue to leverage our extensive game library, creating opportunities for fans to not only relate to defining moments, but also gain new insights. For example, in May, as part of our programming block to commemorate the 50th anniversary of the Knicks 1970 Championship, we held a special virtual roundtable discussion, hosted by Mike Breen that features Knicks' legend, Willis Reed, Walt Clyde Frazier and Bill Bradley as they reflected on their championship front. Turning to advertising. With the league suspension, we had fewer live game telecasts in fiscal 2020, which negatively impacted advertising revenue. However, we remain confident in our long-term prospects and continue to believe that we have meaningful advertising upside. Demand from advertisers for live sports remains robust, which was reflected in extremely strong sales for every one of our Rangers and Islanders Qualifying Game. This strong demand has continued into the Islanders first round Playoff series. We also remain optimistic about the prospects for our non-ratings-based advertising initiatives. In fiscal 2019, we were able to double the size of our branded content business, which grew again in fiscal 2020 by a double-digit percentage. In addition, there's been strong ongoing demand from sponsors for MSG Go, our streaming app, which also saw a year-over-year double-digit percentage increase in revenue as well as robust utilization rates during the Rangers and Islanders returned to play game. As the only RSN to provide a live test module and interactive gaming on a platform, we are pleased with our ongoing improvements to the app, which are designed to increase customer engagements and enhance the value of the platform's sponsorship inventory. And we continue to see sports gaming as a unique long-term advertising and content opportunity, particularly should additional markets in our territory legalize mobile gaming. We experienced a high level of demand from our sports gaming partners during the Stanley Cup Qualifiers, including from leading brands like DraftKings and FanDuel, and we expect this momentum to continue. With regard to subscribers. As of May, MSG and MSG Plus had a combined average of approximately 6 million viewing subscribers, a year-over-year decrease of 8.9%. Our rate of subscriber decline has accelerated in recent quarters, a reflection of the changing media landscape. We also believe that our most recent monthly subscriber levels reflect COVID-19's impact on the economy. And while we expect these dynamics will continue with or not standing still, we remain focused on monetizing our existing library of content and our valuable media rights, including from new distribution opportunities. Finally, I would just point out that COVID-19 created several moving pieces across both revenues and operating expenses. The net impact of which was positive for adjusted operating income in the quarter. These results reflect a number of factors, including our analysis of our affiliate and rights agreements as well as the facts and circumstances as they exist today and our expectations for the 2020-2021 NBA and NHL seasons. As a reminder, at the time of the season suspensions, we were nearing the end of both weeks regular seasons. And we have since delivered additional game as part of the NHL's restart. We also currently expect a full slate of NBA and NHL games for the 2020-2021 season. And while these factors resulted in a net positive contribution to our fourth quarter AOI, going forward, it is difficult to predict the ultimate impact COVID-19 may have on our financial results, including with respect to subscribers, affiliate and advertising revenue and rights and other expenses. Throughout this period of uncertainty, we have been continually reminded of the strength of our employees, partners and communities and the important role that live sports plays in people's lives. I want to thank everyone, including our viewers and shareholders, for their continued support. I will now turn the call over to Bret, who will take you through our financial results.

[Bret Richter:]

Thank you, Andrea. And good morning, everyone. Let's start by briefly discussing our full year fiscal 2020 financial results and then turn to results for our fourth quarter. For fiscal 2020, total revenues were $685.8 million, a decrease of approximately 5% as compared with the prior year. This decline was primarily driven by a decrease in affiliate revenue and, to a lesser extent, lower advertising revenue. Fiscal 2020 adjusted operating income was $321.4 million, which was approximately 4% lower as compared with the prior year. Our full year results were impacted by the decline in subscribers as well as by lower advertising revenue, which includes the impact of fewer live sports telecasts as a result of the suspension of the NBA and NHL 2019-2020 seasons. This was partially offset by lower direct operating expenses, also a result of the shortened NBA and NHL regular seasons. Turning to results for the fiscal 2020 fourth quarter. Total revenues of $152.1 million decreased $16.2 million or approximately 10% as compared with the prior year period. This was driven by an $8.3 million decrease in affiliate revenue, primarily reflecting the impact of the decline in subscribers and to a lesser extent, the impact of a $2 million unfavorable net affiliate adjustment, partially offset by higher affiliate rates. The $2 million unfavorable net affiliate adjustment primarily reflects accrued affiliate rebates. Advertising revenue decreased $7.2 million year-over-year due to lower sales related to live professional sports telecasts, a lower net decrease in deferred revenue related to ratings guarantees and other net advertising decreases. The decrease in sales from live professional sports telecasts was primarily due to the absence of live NBA and NHL games in the quarter as compared to 16 regular season telecasts and three playoff telecasts during the prior year period. Direct operating expenses of $46.4 million decreased $23.7 million or 34% as compared with the prior year quarter, primarily due to lower rights fees expense, a result of the impact of the shortened NBA and NHL regular seasons. SG&A expenses of $20.7 million decreased $5.7 million or 22% as compared with the prior year period. This was largely due to the absence of $3.6 million in expenses recorded in the prior year quarter that were not indicative of our core expense base, as well as a lower advertising and marketing costs and lower advertising sales commissions, partially offset by other net cost increases. Adjusted operating income of $90.5 million increased $14.1 million or 18% as compared with the prior year period, primarily due to the decrease in direct operating expenses and to a lesser extent, lower SG&A expenses, partially offset by the decrease in revenues. Reported free cash flow for the 12 months ended June 30, 2020 was approximately $207.2 million. Looking ahead to fiscal 2021. Assuming NBA and NHL play full 2020-2021 regular seasons, we would expect fiscal 2021 advertising revenue results to be positively impacted by the return to a normal level of professional sports telecasts. I would also note that the year-over-year comparability of quarterly advertising results in fiscal 2021 maybe impacted by a shift in the timing of the start of the 2021 regular seasons. In addition, advertising revenue in our seasonally quiet first quarter will benefit from the Rangers and Islanders returning to complete the 2019-2020 seasons. And as Andrea mentioned, we experienced robust demand for each team's return to play games. With respect to affiliate revenue, our current expectation is that over the next two quarters, in aggregate, we will have a similar affiliate revenue adjustment for potential affiliate rebates to what we recorded in the fiscal fourth quarter. On the expense side. While our fiscal 2021 first quarter results will reflect the modest residual impact of rights fees reductions, assuming the NBA and NHL play full 2021 regular seasons, we would expect to see higher rights fees expense and production losses on an annual basis versus fiscal 2020, as our business returns to a normalized expense run rate. Overall, our expectations are based on a variety of factors, which may change. Turning to our balance sheet. As of June 30, 2020, total cash and cash equivalents were approximately $196.8 million, while total debt outstanding was $1.09 billion and our $250 million revolver was undrawn. Our average interest rate for the quarter was approximately 2%. Net debt at quarter end decreased by approximately $65 million to $889 million, while our net leverage ratio decreased to 2.8 times trailing 12 months adjusted operating income. During the fiscal fourth quarter, we made a mandatory principal payment of $6.9 million in accordance with the terms of our credit agreement. For fiscal 2021, our credit facilities provide for $38.5 million in mandatory principal payments. With regard to share buyback authorization, we have not repurchased shares since April 1 and currently have $146 million remaining. Going forward, we will continue to maintain a disciplined and opportunistic approach to capital allocation. I will now turn the call back over to Ari.

[Ari Danes:]

Thank you, Bret. Can we open up the call for questions, please?

[Operator:]

[Operator Instructions] The first question will come from the line of John Janedis with Wolfe Research.

[Se Kim:]

Hi. This is Se filling in for John. I had two questions. You renewed two deals last year, and there continues to be pressure on the bundle. Can you talk about the potential to be re-tiered? And whether you see this as a risk going forward?

[Andrea Greenberg:]

Adam, do you want to take that one?

[Adam Levine:]

Sure. So – yes, I mean, as you point out, we've successfully renewed two deals in the past fiscal year. We have a long track record of successfully renewing our affiliate agreements. We've successfully renewed four of our top five distributors over the past three fiscal years. We're comfortable with the terms of the renewals, including packaging and other protections. And we've indicated ensure continued expanded basic distribution for our networks. We think that our track record reflects the long-term mutually beneficial relationships we've built with our major affiliates and the importance and unique and well-established value of our content, particularly in this highly competitive New York DMA. Ultimately, we believe this is all going to continue to serve us well in future renewals, where we would expect to continue to see appropriate protections and fair value for our networks consistent with our history. I'd also point out that there have been some well-publicized recent renewals from other artisans around the country with major distributors, including new launches of new artisans where status quo packaging has been highlighted.

[Se Kim:]

Great, thanks. And I guess one more on the expense side. To what extent, are there permanent cost reductions that you've either executed on since the start of COVID or potentially planning on as you finalize budgets for the rest of the year?

[Andrea Greenberg:]

Well, we've not announced any plans for layoffs or furloughs. With respect to other cost reduction measures, we're always looking for additional opportunities to operate more efficiently. And as I indicated in our prepared remarks, during our recent period of displacement tied to the COVID, we've certainly identified a number of ways to work smarter. And we're going to upside those going forward to make us a stronger company.

[Se Kim:]

Great. Thank you.

[Operator:]

Our next question will come from the line of Paul Golding with Macquarie Capital.

[Paul Golding:]

Thanks so much for taking my question. I guess, I was hoping to see if there was some color you might be able to provide on the virtual MVPD front, whether there's been any progress there or any news you can talk to around conversations, increase in distribution? Thanks so much.

[Andrea Greenberg:]

Adam?

[Adam Levine:]

Yes, sure. I’ll take this one. So on the virtual MVPD side, we're pleased that our networks were included in the launch of the new AT&T TV service this past fiscal year. That's a service, obviously, AT&T has invested in, and they're optimistic about. And of course, we're continuing to pursue incremental distribution opportunities. We're not going to get into specifics about the nature or details about any discussions. But I would also just say on the virtual MVPD front, it's an evolving but small segment of the pay television universe. And frankly, with – when coupled with broadband, the price point of some of these offerings has been driven up to be comparable to or in some instances greater than the pricing that you see from traditional distributors and with substantially fewer channels. So we believe the value proposition for some of these guys has become questionable. And – but that being said, of course, we're focusing on all opportunities for incremental distribution for our content.

[Paul Golding:]

Thanks.

[Operator:]

The next question will come from the line of Alexia Quadrani with JPMorgan.

[Alexia Quadrani:]

Thank you very much. Just two questions. First, just following-up on your commentary about your different start dates potentially for the 2021 NBA season. Would did December start to that season, create an impact or shift to your distribution revenue or the cost in general? If you can maybe elaborate on that a little bit? I know you touched on the advertising side. And then my second question is, I'm not sure how much comment, but some recent press reports about the Devils were looking to buy sports New York. I'm curious if you see any risk to Devils renewal with MSG Networks on that will comes out in a few years?

[Bret Richter:]

Hi Alexia, so – it’s Bret. I’ll take the first one. I think – so we did highlight that there are certainly – certain aspects of our financial results that are directly tied to the timing of the games, advertising, production costs and some of those will shift. And with regards to our overall contracts, our distributors and rights for that matter are two things. One, in recording our financials for this quarter, that's essentially what we assumed, which is a late calendar year start for the seasons and the contracts of various provisions that relate to various circumstances. And certainly, our financials reflect whatever those circumstances are in the – analysis at the time. But again, in looking forward, we've essentially assumed that late season start.

[Adam Levine:]

And I can take the Devils question. So we're not going to obviously comment on the yes and why portion. But I could say we're proud to have – to be the exclusive local media partner for the Devils. We have a strong relationship with them that dates back to decades of the 1980s. We've renewed our agreement with them many times. And we have several years remaining on our current deal.

[Alexia Quadrani:]

Okay. Thank you very much.

[Ari Danes:]

Nicole, we have time for one last caller.

[Operator:]

The next question will comes from the line of Michael Morris with Guggenheim.

[Michael Morris:]

Thanks, good morning. couple for me. The first is just on streaming. And many networks have seen an increase in consumption on the streaming side versus the linear side. I know it's a little challenging for you in the quarter given the disruption in the games, but I'm curious if you can talk about any trends that you're seeing in streaming consumption? Also, Andrea, you mentioned – you're not standing still, you're looking at new distribution opportunities. Can you expand at all on what some of those may be? And then just finally, Bret, maybe to put a little bit of a finer point on it. With expense – with respect to the operating expenses in the fiscal fourth quarter and kind of the reduction there due to the – for games, is some of that just permanently gone? With some of your peers, we have just seen some timing and sort of all of the costs expected to come back. But given the mix, you're not returning to the bubble. If some of that costs just become permanent savings? And then I appreciate the guidance you gave us going forward. Thanks.

[Andrea Greenberg:]

I'll take the MSG Go question, Mike, to start. MSG Go usage during the qualifying round was in an all-time high for both the Islanders and the Rangers. There is some interesting stats. We had the most unique viewers for a single game. We had the most minute streamed first single game. Our audience engagement has been awfully high. And all in all, we're immensely pleased with the utilization of MSG Go. Customers, advertisers, they like the product. We continue to make enhancements as we've talked about in past quarters. This past fiscal, we enhanced the signal quality of the stream. We added new additional features, and we're finding that those interactive features are really driving engagement and length of tune. We've seen, as I mentioned in our prepared remarks, an increase in the demand for advertising. So all in all, MSG Go, is certainly one of our shining stars.

[Michael Morris:]

And sorry, just before the – yes, go ahead. Sorry.

[Andrea Greenberg:]

Sure. Go ahead, sorry.

[Michael Morris:]

I just wanted to make sure I was differentiating between the strength of Go, which – that's great detail. And then what – any of the new distribution may be, whether it was kind of Go specific or other new opportunities you may have been going? I apologize.

[Andrea Greenberg:]

Sure. Adam, do you want to talk about that?

[Adam Levine:]

Yes, sure. On new distribution opportunities, I think there's just a variety of things that we're considering and having discussions about. Obviously, there's just incremental distribution with virtual distributors. There are some traditional opportunities as well that we're looking at, MSG Go enhancements, things that we're looking at there, and also just opportunities with our content library and with our games that we consider in all respects as far as how to best monetize our valuable rights. So all those things on the table. We always look – and we'll always look at things that make strategic and financial sense for the business.

[Bret Richter:]

And Mike, I'll take the cost question. So with regards to our financials in the quarter, a lot goes into determining the financials for the quarter. As you can imagine, every one of our contracts is different. There are guidelines that sort of impacts how we recognize certain expenses. There are different time period considerations or contracts, calendar year seasons, otherwise. But to the extent, if you look at direct expenses, to the extent costs are tied to the season and the teams are no longer playing, we essentially know what we need to know to make those estimates. We have one team that's continuing to play in the playoffs. And obviously, it's next year with whole season, we'd expect the contracts to kick in and the costs come back. With regards to other costs, production and production-related costs to the extent the games didn't get played, those are obviously permanent savings. But again, when in a full season, we'd expect those costs to come back. So in summary, to the extent they're tied to the season and the season is complete, those are permanent costs savings.

[Michael Morris:]

Great. Thank you guys. I appreciate it.

[Operator:]

And with that, I'll hand the conference back over for closing remarks.

[Ari Danes:]

Thanks, Nicole, and thank you all for joining us. We look forward to speaking with you on our next earnings call. Have a great day.

[Operator:]

This does conclude today’s conference call. We thank you for your participation and ask that you please disconnect your lines.