MSG Networks Inc.
Q2 2017 Earnings Call Transcript

Published: 2 Feb 2017

[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 Second Quarter Earnings Conference Call. [Operator Instructions] After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I will now turn the call over to Ari Danes, Investor Relations. Please go ahead, sir.

[Ari Danes:]

Thanks, Christy. Good morning and welcome to MSG Networks fiscal 2017 second 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 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 Investor section of the company's corporate website. Please take note of the following

[Andrea Greenberg:]

Thank you, Ari, and good morning. We are pleased with our financial results for the fiscal second quarter with approximately $176 million in revenue and $86 million in adjusted operating income, which reflect increases of 3% and 9% respectively both is compared with the prior year period. With a successful first half of the year now behind us, we continue to believe that fiscal 2017 will be another strong year of adjusted operating income and free cash flow generation for our shareholders. Our financial performance reflects the strength of our two regional sports networks and their unrivaled lineup of exclusive live local sports contents evident in the second quarter, as both the NBA and NHL seasons were in full swing. As the exclusive home to the New York Knicks, Rangers, and Islanders, New Jersey Devils and Buffalo Sabres, MSG Networks will telecast approximately 400 live NBA and NHL games this season again with more NHL games than any other RSN in the country. In addition to our live game content, our networks continue to deliver critically acclaimed team related programming including comprehensive pre and post game coverage and coaches’ shows enabling us to capitalize on our fans desire for behind the scenes and insights into our teams. In November, we debuted the MSG Hockey Show, a weekly program where the show’s hosts Arda Ocal, Will Reeve, and Anson Carter highlight in a more casual the week’s hottest topics in hockey along with special guests who have already included Academy award winning actor, Cuba Gooding Jr., Rangers goalie Antti Raanta and celebrity chef Anne Burrell. This second quarter also marked the start of the sixth season of Beginnings, our documentary series that chronicles how New York’s greatest athletes and entertainers got their start with recent episodes featuring the Knicks Kyle O'Quinn, the Rangers Brady Skjei and the Buffalo Sabres Jack Eichel. As the official regional sports home of the New York Giants, MSG Networks recently wrapped up the first season of an expanded multiyear partnership with the popular NFL team. Our networks delivered a comprehensive slate of Giants programming, including a brand new post-game show that extended into the post season as MSG Networks covered the team’s first playoff appearance in five years. We also completed our first season of Buffalo Bills programming for our western New York viewers under our renewed and expanded partnership with Pegula Sports and Entertainment. We continue to deliver real value for and remain focused on incremental growth opportunities with new and existing advertisers. I’m particularly pleased with the progress we have made so far and the creation of branded contents and program integration for several key partners. While we continue to execute against our partnership with Anheuser-Busch, we have closed several new agreements with creation of custom content including most recently with WeatherTech, a leading automotive accessories company and CheapOAir, an award winning online discount travel agent. In the coming months, we will also upgrade the video displays outside of our street front studios with four state-of-the-art high resolution video streams creating another high impact vehicle to showcase our partners, brands, content and studios. Located in the heart of Manhattan and across Penn Station in Madison Square Garden, these displays will be seen by more than 1 million people who pass by our studios each day. We’ve also made important progress on the digital front in an area that will benefit both our advisers and affiliates. Yesterday, we announced an agreement with the NHL for the live streaming of local NHL telecast. This strengthens MSG GO, our live streaming and on demand product as we add in the coming weeks our unmatched line up of live NHL games to our existing slide of mix liberty and Red Bulls content. As we endeavor to ultimately make MSG GO available to all MSG Network subscribers, we believe MSG GO will become an increasingly compelling vehicle for our advertising partners. And with these NHL right secure, we can now stream our full slate of live professional sports product to distributors and customers. Touching on affiliates fee results in our second quarter, we again delivered affiliate revenue growth primarily driven by higher affiliate fees partially offset by lower subscribers. With respect to our viewing subscribers, we experienced a low single digit percentage decrease for our fiscal second quarter as compared with the prior year period. However, for the third successive quarter, we saw an improvement in this year-over-year percentage rate of decline. In summary, we are very pleased with our results for both the second quarter and the first six months of fiscal 2017 and look forward to a strong second half of the fiscal year as we remain committed to delivering best-in-class programming for our viewers, our partners, and our shareholders. 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. I’d like to start by highlighting that financial results for both the fiscal 2017 and fiscal 2016 second quarters reflect MSG Networks results on a standalone basis including the company’s actual corporate overhead. This represents the first quarter since the spinoff of the Madison Square Garden Company, where our reported financial quarterly results for our continuing operations are comparable in this regard to the prior year period. With that said, let's now go through our results for the second quarter of fiscal year 2017 as compared with the prior year quarter. Total revenues of $175.6 million for the second quarter increased $5.7 million or approximately 3%. This included a $4.4 million increase in affiliate revenue and a $1.3 million increase in advertising revenue. The increase in affiliate revenue was primarily due to higher affiliate rates, partially offset by the impact of a low-single-digit percentage decline in subscribers versus the prior year period. The increase in advertising revenue as compared with the prior year quarter was primarily due to higher recognition of deferred revenue relating to ratings guarantees, partially offset by other net advertising decreases. Direct operating expenses of $70.1 million decreased $1.5 million or 2% as compared with the prior year quarter. This decline was primarily due to the positive impact of the finalization of a matter related to the sale of Fuse, partially offset by an increase in rights fees expense. SG&A expenses of $23.2 million increased approximately $800,000 or 4% as compared with the prior year period. The increase was primarily due to higher employee compensation and related benefits, partially offset by lower marketing costs, commissions and other net decreases. Adjusted operating income of $85.7 million increased $7 million or 9% as compared with the prior year period. This increase was primarily due to the increase in revenues and to a lesser extent lower direct operating expenses partially offset by higher SG&A expenses. With respect to our balance sheet, as of December 31, 2016 total cash and cash equivalents were $185.1 million. Total debt outstanding was $1.46 billion, and our $250 million revolver remained undrawn at quarter's end. We made a mandatory quarterly amortization payment of $18.75 million during the December 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 December 31, 2016, net debt was approximately $1.27 billion, and our net leverage ratio was 3.8 times trailing 12-months adjusted operating income which is down from the 4.1 times we reported as of September 30, 2016. Our average interest rate for the quarter was approximately 2.3%. Reported free cash flow from continuing operations for the six months ended December 31, 2016, was $98.8 million. 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:]

Good morning. Thanks for taking the question. So, on the NHL rights deal you announced yesterday just to clarify, were you guys not able to stream NHL games on virtual MVPDs before that deal? And if so, was that an impediment to your negotiations with DTV now and if you could update on some of that situation in general? Thanks.

[Andrea Greenberg:]

Sure. Hi, Brandon, thanks for the question. First, let’s say we are thrilled that we were able to do this deal with the NHL for digital rights. It certainly opens up additional opportunities for our company including additional revenue opportunities by allowing us to add these NHL games to MSG GO which is currently distributed by Comcast [indiscernible] but also to provide digital distribution rights to virtual MVPDs who want to distribute this digitally. Adam, do you want to take the question?

[Adam Levine:]

Yes, in terms of the discussions, we don’t have anything new to report today. We have discussions ongoing with new and existing distributors including virtual MVPDs for additional distribution for MSG GO and also for our networks on their platforms, and we believe the acquisition of the digital rights from the NHL is a positive development and we’re now able to offer the full complemented games on those platforms.

[Brandon Ross:]

Great. Thank you.

[Operator:]

Your next question comes from Michael Morris with Guggenheim Securities.

[Michael Morris:]

Thank you. Good morning. My question is about the traditional subscription subscriber trend and you mentioned for several quarters now that improvement in the rate of decline. I’m hoping you can share some more details on what’s driving that improvement and the rate of decline, and maybe if you could help us understand I know that you don’t speak specific agreement per se but if you could help us understand whether it’s a phenomenon that could happen with again in the future with different distributors whether it’s kind of more broad based and subscribers are subscribing that improvement. Thanks.

[Andrea Greenberg:]

Sure. Hi, Mike. Again, as I mentioned in the prepared remarks, this is the third quarter in a row that we’ve seen an improvement in the year-over-year percentage rate of decline. There were two factors this quarter that drove that improvement. One, I think we discussed last quarter that we had added some small incremental cable distribution in Connecticut and Pennsylvania that did contribute. However, let me also say that even without that - even without those additional sub, which by the way we continue to see as Adam indicated, we are continually looking for incremental distribution. We would have seen an improvement in our year-over-year rate of decline. So when you look at that generally we think that clearly that the existing affiliate subscribers also in the aggregate are better. And that really – those really are the two components that drove this quarter’s improvement.

[Ari Danes:]

Christy, we’ll take the next caller.

[Operator:]

Your next question comes from Bryan Goldberg with Bank of America Merrill Lynch.

[Bryan Goldberg:]

Thanks. I’ve got two quick ones, actually follow ups to Mike’s and Brandon’s question. So first follow-up on Mike and it’s really a question on kitty bundle trends given Verizon’s reconfiguration of cost and TV and charters recent rebrand of Time Warner Cable to Spectrum which no longer appears to be marketing a kitty bundle. If you check their website in New York, I was just curious – if you could just update us on what you’re seeing out there in terms of how the distribution community in aggregate is being in terms of skiddy bundle marketing. Has there been any notable changes in any other direction? And then I have a follow-up.

[Andrea Greenberg:]

Okay. Adam, you want?

[Adam Levine:]

Bryan, I guess I would say we’re not going to really comment on individual operators or their marketing at any particular point in time. I think as we indicated the spectrum rebrand is relatively new and it’s new in this market. And as far as Verizon goes, I think we’ve said previously that we are generally pleased that they discontinued the prior configuration of custom TV and the newer version is more advantageous we believe for our networks. In terms of ultimately what we look at or the actual subscriber performance metrics and I think Andrea mentioned the third successive quarter that we’ve seen an improvement in the year-over-year percentage rate of decline even without the small incremental distribution that we recently in Connecticut and Pennsylvania.

[Bryan Goldberg:]

Thanks. Just a quick follow-up on NHL streaming, the new deal, I was just wondering could you share any detail around the economics of this new rights deal. I mean should we expect any – I’ve recognized it’s pretty small, but will there be any near term AOI margin impact or any sort of near term revenue benefits for us to think about.

[Andrea Greenberg:]

Well, we’re not going to disclose the specifics of the agreement but we can say that we are very comfortable with the terms; they are consistent with our goal of continued generation of significant AOI of free cash flow growth. We do believe that these rights open up additional revenue opportunities. I think both on the MSG GO distribution side and as we said now we’re able to offer virtual MPVDs of full complement of our networks. And that is viewed by us and by these MPVDs is a positive.

[Bryan Goldberg:]

Great. Thank you very much.

[Ari Danes:]

Thanks, Bryan. Christy, we’ll take the next caller.

[Operator:]

Your next question is from John Jenadis with Jefferies.

[Mike Russo:]

Thank you. This is actually Mike Russo on for John. But first I wanted to drill into operating expenses for a second. Based on our numbers ex-the one time item, direct OpEx grew slightly in the quarter but less than fiscal 1Q. Can you provide some color on what drove this deceleration and how we should think about the run rate going forward?

[Andrea Greenberg:]

Bret, do you want to?

[Bret Richter:]

Sure. Thanks, Mike. We made our comments on the call with regards to the impact that the fuse related item had on direct operating expenses this quarter and that’s an item specific to this quarter. We’re not giving go forward guidance on any specific metric. What I would say is that write these expense, did grow in this quarter but it was impacted by our expectation of and the number of exclusive games for this season and that adjustment happens from time-to-time.

[Mike Russo:]

Gotcha. And if I could just ask a follow-up here, as it relates to the quarter, can you help us better understand some of the results on the ad front? And just any color you can give us on current ratings for the Knicks and Rangers would be great. Thanks you.

[Bret Richter:]

Sure. So just to start with ratings, so with regards to ratings, on a total household basis, the Knicks ratings are slightly off from this point last season, but on pace with last season’s overall average. With regards to hockey, the Rangers and the Islanders are down, the Devils are up considerably. Not much more to comment with regards to ratings other than that. With regards to advertising revenue for the quarter, I think the principal message is the headline. The headline is advertisement revenue grew by $1.3 million. They were certainly an impact to this quarter of our recognition of deferred revenue, which I highlighted in our remarks. We had a couple of offsets; we had a little softness in direct advertising during the quarter. There was one specific advertiser that didn’t carryover from last season, which we anticipated and we are confident we are going to replace, but other than that not much to add.

[Mike Russo:]

Thank you.

[Ari Danes:]

Thanks, Mike. Christy, we will take the next caller.

[Operator:]

Your next question comes from Alexia Quandrani of JPMorgan.

[Alexia Quandrani:]

Thank you. Just two quick questions. I guess the first one is just a follow-up on the previous comments you made about acquiring the NHL streaming rights. You did mention this is obviously a positive in terms of talking to the MVPDs and such. Is there any color you can give us in terms of how much of impediment not having these rights have been previously in these conversations? I’m just trying to get a sense of how much of a game changer in those negotiations these rights maybe and then I have a quick follow-up.

[Adam Levine:]

I think I would just say we’ve had productive conversations in the past with these operators and that obviously our networks carry significant amount of NHL product and so this is a positive and it’s been viewed as such by those operators and as Andrea said, we certainly see it that way. So we think there are real opportunities.

[Alexia Quandrani:]

Okay. And then just a quick follow-up. You’ve spoken about dynamically managing your leverage in the past. Is there any update you can give us in terms of capital allocation or term loan pay down there?

[Bret Richter:]

Thanks, Alexia. No specific update with regards to level of leverage or allocation to capital. We are very comfortable with our level of leverage, nice to see it tick down under four times. We’ve allocated and – about little over $90 million since the spin-off, we repaid that and we will consider alternatives on a go-forward basis, but there is no specific update at this time.

[Alexia Quandrani:]

Thank you.

[Ari Danes:]

Christy, we will take the next caller.

[Operator:]

Your next question is from Tim Nolan with Macquarie.

[Tim Nolan:]

Thanks. Basically most of questions have already been answered, but just one remaining one, which is why would your marketing costs have been down in the quarter? I’m just wondering if there is something related. You mentioned some exclusive gains, I’d assume that would have boosted your marketing cost. Can you just let us know what’s going on there and what was big about that [ph] trend? Thanks.

[Bret Richter:]

Thanks, Tim, I will take that one. There is really nothing to highlight there. I think in the context of the overall company, we are talking about relatively small number.

[Tim Nolan:]

Yeah.

[Bret Richter:]

But when we look at the variance quarter-to-quarter and the size of that variance, we are highlighting the big components and marketing was an offset, but against a pretty small variance.

[Tim Nolan:]

And then just a quick follow on the cost side as well, I know you addressed sort of onetime-ish item on operating expenses in the quarter, which you should be thinking about that in fact as a onetime-ish item, is it possible to size that as in what would your earnings will like without that?

[Bret Richter:]

Sure. We are not going to give a specific dollar amount to that item and considerate us [ph] with the third-party. It is unique to the quarter. It relates to contingent liability that we were holding that related to the sale of Fuse, we recently had a favorable outcome related to the matter and allowed us to release the accrual, it’s really discreet and – but not much more to add there.

[Tim Nolan:]

Okay. So nothing like this to think about for the next couple of quarters?

[Bret Richter:]

No, not with regard to that item, no.

[Tim Nolan:]

All right. Thanks.

[Ari Danes:]

Thanks, Tim. We will take the next caller, Christy.

[Operator:]

Your next question comes from Ryan Fiftal with Morgan Stanley.

[Ryan Fiftal:]

Great, thank you. On the advertising side, have there been any fundamental changes to your sales process or how you go after things post the separation from MSG? And also could you talk about anything you are doing on the organizational side to – I think you talked about going after new advertisers, maybe new ad categories that sort of thing? Thank you.

[Andrea Greenberg:]

Well, I think on your first question, we have entered into an exclusive agency arrangement with MSG to continue to sell our advertising; we are thrilled with that arrangement. We believe it benefits us in a whole host of ways that are unique to us and to the Garden by allowing us to participate in multi-year, multi-element deals. We also think it’s a good thing for the advertisers, because the advertisers have a built-in television activation platform. On the new advertising categories, I had said before and we’ve been capitalizing on our extensive production capability and creative mindset here by entering into new branded content arrangements with some – several key advertisers, some of them are multi-element advertisers, some of them are unique to MSG Networks. This quarter we highlighted deals with WeatherTech and CheapOAir where we are actually producing custom content for them that will appear not only on our air, but also on their own unique platforms and we think that that’s a model that we will continue and that will help us with our goal to grow our advertising revenue.

[Ari Danes:]

Thanks, Ryan. Christy, we have time for one last caller.

[Operator:]

Sure. Your final question comes from David Joyce with Evercore ISI.

[David Joyce:]

Thank you. Two questions. First on the affiliate fee revenue, can you help us understand why the growth there decelerated from the prior quarter? You’ve been having that incremental distribution in your footprints?

[Bret Richter:]

Sure. Thanks, David. With regards to the sequential impact, maybe just take you back to our last quarter call, I think on our last quarter call, we were asked similar question about why the rate increased in, what we focused on there is that in any given quarter we may have small adjustments. If they are big enough to call out, we call them out, if not, they are just part of the mix. I think what’s important here is that we continue to show year-over-year growth and growth in the quarter, but we are not going to break down specifically. And this quarter was a pretty clean quarter and there is nothing specific to highlight.

[David Joyce:]

Okay. And then on the MSGGo product, are there any usage metrics you could provide for us? Thanks.

[Andrea Greenberg:]

Well, on MSGGo, we are not going to provide specific numbers, but I can say that we are very pleased with the response so far. We have continued to see increased take rates and now that we are really able to offer a full complement of professional sports programming, we look forward to not only increase distribution with our existing partners, but also increase take rates.

[Ari Danes:]

Christy, is that our last call?

[Operator:]

Yes, that was the final question.

[Ari Danes:]

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

[Andrea Greenberg:]

Thank you all.

[Operator:]

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