MSG Networks Inc.
Q1 2017 Earnings Call Transcript

Published: 5 Nov 2016

[Operator:]

Good morning. My name is Christy, and I will be your conference operator today. At this time, I would like to welcome everyone to the MSG Networks Fiscal 2017 First Quarter Earnings Conference Call. [Operator Instructions] Thank you. I will now turn the call over to Ari Danes, Investor Relations.

[Ari Danes:]

Thanks, Christy. Good morning and welcome to MSG Networks fiscal 2017 first quarter conference call. The company's President and CEO, Andrea Greenberg, will begin this morning's call with a discussion of some of the company's recent highlights. This will be followed be 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 Investor section of the company's corporate website. Please take note of the following

[Andrea Greenberg:]

Thank you, Ari. Good morning. We are pleased with our start to fiscal 2017, as we continue to build on last year's strong financial performance with solid first quarter revenue and adjusted operating income of approximately $154 million and $79 million respectively. These results reflect our ongoing focus on operational excellence, along with the unique value we continue to provide to our advertisers and affiliates through our exclusive live local sports content. As you know, one of our key operational achievements last year was to ensure that we have long-term deals for our NBA and NHL programming. This, coupled with our strong recurring affiliate revenue base, provides us with meaningful visibility into both our revenues and operating expenses going forward. We believe our first quarter results set the stage for another solid year of adjusted operating income and free cash flow generation for our shareholders. In terms of the breadth and depth of our sports programming, MSG Networks continues to deliver an unmatched lineup of live professional sporting events, along with college sports and critically-acclaimed original programming. After a summer schedule that featured live-game coverage of the WNBA's New York Liberty and Major League Soccer's playoff bound Red Bulls, the NBA and NHL seasons are now underway. MSG Networks is offering exclusive game coverage of a revamped New York Knicks team, along with more live NHL games than any other RSN in the country. In addition to live games this season, our world-class announcers and our analysts continue the in-depth behind the scenes coverage with dedicated pre and post-game shows and additional team-related programming, including

[Bret Richter:]

Thank you Andrea and good morning everyone. Our fiscal 2017 first quarter results reflect MSG Networks on a standalone basis, including the company's post-spin cost structure and actual corporate overhead. However, due to the accounting standards that apply to the presentation of our spinoff of the Madison Square Garden Company, our financial results for the prior-year first quarter include the financial results of the sports and entertainment businesses of the Madison Square Garden Company as discontinued operations. Please also note that adjusted operating income and operating income from continuing operations for the prior-year first quarter includes certain corporate overhead expenses that did not meet the criteria for inclusion in discontinued operations. As a result, these expenses are presented in continuing operations for the fiscal 2016 first quarter. With that said, let's now go through our reported results for the first quarter of fiscal year 2017 as compared with the prior-year period. Total revenues of $153.6 million for the first quarter increased $5.4 million or approximately 4%. This includes a $5.7 million increase in affiliate revenue, principally due to higher affiliate rates, partially offset by the impact of a low-single-digit percentage decline in subscribers versus the prior-year period. Direct operating expenses of $60.9 million increased $800,000, or 1%, as compared with the prior-year quarter. The increase was primarily due to higher rights fees expense, partially offset by other programming related cost declines. SG&A expenses of $15.6 million declined $25.6 million, or 62%, primarily due the absence of certain corporate overhead expenses included in the results of the prior-year first quarter. This was partially offset by certain incremental corporate costs incurred by MSG Networks as a standalone public company. On a reported basis, adjusted operating income of $78.9 million increased $27.7 million, or 54%, as compared with the prior-year period. This increase was primarily due to lower SG&A expenses and, to a lesser extent, higher revenues, partially offset by higher direct operating expenses. I would also like to note that this quarter represents our fourth quarter as a standalone public company. And with the inclusion of our first quarter fiscal 2017 results, we can now highlight our financial performance as a standalone company for the trailing 12-month period. For the 12 months ending September 30, 2016, the company generated revenues of $663.6 million, operating income of $305.8 million, and adjusted operating income of $325.1 million. With respect to our balance sheet, as of September 30, 2016 total cash and cash equivalents were $155.5 million. Total debt outstanding was $1.48 billion, and our $250 million revolver remained undrawn at quarter's end. We made a mandatory quarterly amortization payment of $11.25 million during the September quarter in accordance with the terms of our credit agreement. Please note that our credit facility provides for a total of $75 million in mandatory principal payments over the next 12 months. As of September 30, 2016, net debt was approximately $1.32 billion, and our net leverage ratio was 4.1 times trailing 12-months adjusted operating income. Our average interest rate for the quarter was approximately 2.2%. Reported free cash flow from continuing operations for the quarter ending September 30, 2016, was $49.1 million. This amount is net of $24.5 million of tax payments, which we made during the quarter. I will now turn the call back over to Ari.

[Ari Danes:]

Thank you, Bret. Christy, can we open up the call for questions?

[Operator:]

Sure. [Operator Instructions] And your first question comes from Brandon Ross of BTIG.

[Brandon Ross:]

Thanks good morning. Couple of questions. First, there appear to be a lot of virtual MVPD launches coming into the marketplace over the next couple of months. Can you tell us where you stand with DTV Now, Hulu and any others that might be coming? And then secondly, on the subscribers coming in, in Pennsylvania and Connecticut, could you quantify that for us possibly? Thanks.

[Andrea Greenberg:]

Hi, Brandon. On DirecTV Now, you know that DirecTV is a long-standing customer of ours. We are having discussions with them about DirecTV, but nothing to report at this particular juncture. DirecTV Now is interesting to us because our understanding is it replicates the packages that they offer today under their DVS offering, so we continue to have discussions with them about carriage there. As far as other virtual MVPDs, Adam, do you want to take that?

[Adam Levine:]

Yes, I would just add that we continue to explore and discuss new distribution opportunities with our existing operators and new entrants, like virtual MVPDs such as Hulu and others, that make strategic sense for our business. We are engaged in discussions with a number of these entities. They are various stages. We have nothing specific to report at this time. On cable distribution question, I'll take that one as well. I would say we are pleased to have added this small incremental cable distribution in Connecticut and Pennsylvania. We estimate the incremental viewing subs to be slightly less than 30,000 subs, which will be reflected in our fiscal second-quarter subscriber counts.

[Andrea Greenberg:]

And yeah Brandon, what’s great about that for us, albeit small, is that we are continuing to expand our footprint. So, we are now in new areas, and we're providing new viewers with our content. I think that bodes well to the value of our networks.

[Brandon Ross:]

Great. Thank you very much.

[Operator:]

Thank you. Your next question comes from Ryan Fiftal with Morgan Stanley.

[Ryan Fiftal:]

Great, good morning. Two questions, if I may. First, I wanted to ask of the affiliate to the acceleration. Adjusting for one-time items, I'm estimating that affiliate revenue decelerated about 150 or 160 basis points compared to last quarter. I would be surprised if the sub trends were enough to explain all of that acceleration. So, I was wondering if there's anything on the rate side of the equation, either - was there a renewal or a step-up in escalator or is there anything else we should be thinking about?

[Andrea Greenberg:]

Bret, you want to take that.

[Bret Richter:]

Sure. I think the headline here is we continue to grow affiliate revenue and in any given quarter, as we compare either a year-over-year or sequentially, you may see small changes in the rate of change. Virtually every quarter, we have small adjustments to affiliate revenue in the quarters where they are significant. If you look back over the last year, we've highlight them and we've discussed them. There was nothing to even highlight this quarter, but in any given quarter you may have small adjustments that affect that rate of change. I think the top line is the message that in any given quarter looking back or even looking forward, you can compare and see those small changes. Really, for this quarter, the first quarter it was business as usual, and there's nothing specific to highlight.

[Ryan Fiftal:]

Okay. Thank you. I just wanted to ask if there was any update on your discussions for the NHL streaming rights and how that could impact your digital product? Thanks.

[Andrea Greenberg:]

Continuing to talk to with the highest levels of the NHL, but there is nothing to report at this particular moment.

[Ryan Fiftal:]

Okay. Thank you.

[Operator:]

Thank you. Your next question comes from Alexia Quadrani with JPMorgan.

[Alexia Quandrani:]

Hi. Thank you. Just following up on your comments earlier about your decline in expenses in the quarter, particularly in the SG&A side. Is this due to seasonal factors or is there something more structural here? In general, do feel your organization is set up the way you want it post spin, or is there room to further rightsize your cost base?

[Bret Richter:]

Sure. I’ll take that, Alexia. With regards to the expenses in the quarter, as you compare them to the fourth quarter, the single largest impact is seasonality, particularly if you looking at SG&A, it's a reduction in commissions related to ad sales. The first quarter is our lowest quarter with regards to advertising sales, given that the timing of our NBA and our NHL products. With regards to looking at expenses more broadly, and again, nothing is specific to highlight for the quarter beyond that. We are very expense conscious; we try to run the business efficiently. We have that mindset top to bottom, and we're always looking at ways to improve the business. That said, we will invest in business to the extent that we can yield long-term improvement, long-term growth, but overall, the business is dynamic on its edge. I don't think any business is ever static, but we’re happy with where we are.

[Alexia Quandrani:]

Thank you.

[Operator:]

Thank you. Your next question comes from John Janedis with Jefferies.

[John Jenadis:]

Thank you. As you know, the NFL has dealt with its own ratings issues the season. I wanted to ask you, to what extent do think the viewing habits for sports have changed? And I'm not sure if there's a read through to the NBA or NHL, but how would you characterize the early ratings for the Knicks and Rangers thus far? Thanks.

[Andrea Greenberg:]

Hi, John. I cannot speak specifically to the NHL, but as I'm sure you’ve seen, there are certainly examples of other sports performing very well on a national basis, in fact, baseball, which has seen its strongest World Series ratings in over a decade. I think there are opposite examples as well. In terms of our local market, I can say, well, it is still very, very early for us. We're very early in the season. We've seen so far some strong ratings numbers from our teams, and we're pretty optimistic about this upcoming season. Specifically, I can give a couple of examples, again, very early in the NBA season, but our first two Knicks' telecasts on MSG Networks were up significantly versus our first two games last year, actually over 40% on a total household basis. When you looked at the environment, the environment was very similar. We were up against World Series at that point in time. The key demo ratings for the first game on MSG Network was very strong on an absolute basis, and it was actually a demo rating that we hadn’t seen until mid-January last season. So, we think all of this bodes very, very well for us.

[John Jenadis:]

Great. Thanks, Andrea.

[Operator:]

Thank you. Next question comes from Vasily Karasyov with CLSA.

[Vasily Karasyov:]

Good morning. My question is, maybe a little delayed, but still. In June you re-signed your agreement - renewed the agreement with Buffalo Sabres, can you please give us an idea of how much of a step-up, if any, we should expect in the cost and what the timing and cadence of that would be?

[Bret Richter:]

Sure. We’re not going to be specific with the contractual terms. What I can tell you is that the renewal certainly captured some of the principal economic elements of the last year of our prior agreement, which was this year, so we'd expect the real economics to kick in next year. And the most important aspect of this agreement from our perspective is it fortifies our long-term relationship with the Sabres and its ownership. We're thrilled with the partnership that we’ve formed. As Andrea said in her remarks, we're excited about expanded presence and new programming we've been able to offer our Western New York viewers. We think the economics of the agreement are consistent with our business plan and our goals to deliver strong financial performance to this company.

[Vasily Karasyov:]

When you say next year, can I just ask a clarifying question? Are you saying next - your fiscal year, next hockey season or next calendar year?

[Bret Richter:]

The fiscal year and the season, which are the same, not next calendar year.

[Vasily Karasyov:]

Okay. Thank you very much.

[Ari Danes:]

Christy, we have time for one last caller.

[Operator:]

Your today’s final question comes from David Joyce with Evercore ISI.

[David Joyce:]

Thank you. A couple of questions. One on the subscriber side, how close are we to reaching the minimums with your various carriers? Secondly, I was wondering, granted that you’ve been expanding some of your geographic coverage to Western New York, would there be any logic or would there be any synergy realization in forming partnerships with other are RSNs? Thank you.

[Andrea Greenberg:]

Hi David. On your first question, we're not going to comment on the specifics of our affiliate agreements, but we are pleased, for the second successive quarter in a row, to see improvement in our year-over-year percentage rate of decline in viewing subscribers. As far as RSN partnerships, we're not going to comment on hypotheticals. We feel very, very strongly about our business as it is, as we’re operating it today, but we’ll always look at opportunities to increase shareholder value.

[Operator:]

Thank you. With that, I’ll hand the floor back over to Ari Danes for any additional or closing remarks.

[Ari Danes:]

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

[Andrea Greenberg:]

Thanks, everyone.

[Operator:]

Thank you. This does conclude today's conference call. You may now disconnect.