MSG Networks Inc.
Q3 2017 Earnings Call Transcript

Published: 6 May 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 Third Quarter Earnings Conference Call. [Operator Instructions] Thank you. I would now like 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 Third 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 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, 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 from continuing operations to free cash flow. I would now like to introduce Andrea Greenberg, President and CEO of MSG Networks.

[Andrea Greenberg:]

Thank you, Ari, and good morning. Our company generated solid results for the fiscal third quarter with approximately $183 million in revenue and $88 million in adjusted operating income, and we remain on track to deliver another strong year of AOI and free cash flow for our shareholders. Our sustained performance reflects the unparalleled presence we’ve built throughout our market, thanks to our exclusive live content and critically acclaimed original programming, which continue to be a valuable differentiator for our viewers and partners. Our commitment to programming excellence was recognized once again this past February with 65 New York Emmy nominations, including 54 for MSG Network alone, more than any other television network or station for the tenth consecutive year. Our award winning content is led by our live professional sports programming. And for the 2016, ‘17 NBA and NHL regular seasons, which concluded last month, MSG and MSG Plus delivered over 400 live games of the New York Knicks, Rangers and Islanders, New Jersey Devils and Buffalo Sabres. MSG Networks also served as the local home to 5 first round playoff games between the Rangers and the Montreal Canadians. Our world-class announcers and analysts provided viewers with in-depth coverage of the team with specials such as Quest for the Cup, a one-hour playoff preview show, as well as day-of-game coverage which will continue for the entire Rangers postseason run. In addition to our team coverage, MSG and MSG Plus continued to deliver a lineup of critically acclaimed original programming, including The MSG Hockey Show, a weekly program highlighting the hottest stories in hockey; and the sixth season of Beginnings, our documentary series that chronicles how New York’s greatest athletes got their start, with recent and upcoming episodes that feature current New York Giants player, Justin Pugh, and former Giants player and Super Bowl champion, Justin Tuck. We now look forward to our summer lineup featuring our exciting slate of soccer programming. 2017 marks the 22nd season of the New York Red Bulls on MSG Networks and we, once again, serve as the exclusive local broadcast home of the Major League Soccer team. Games on MSG Networks will continue into October. We have also added live coverage of the New York Cosmos with 13 games which began last month. In addition to our soccer coverage, we welcome back the WNBA’s New York Liberty with live broadcast of regular season games beginning May 13. This past Monday marked the return of ESPN’s popular radio show, Hahn, Humpty & Canty, which has been expanded from last year’s one hour format to 2 hours and will air Monday through Friday through mid-September. Hosted by Knicks studio analyst, Alan Hahn; former Islanders goalie and Islanders analyst, Rick DiPietro; and Giants Super Bowl champ, Chris Canty, the show provides viewers with a unique take on what’s happening in New York sports. And next month, MSG Networks will debut a new half-hour program airing all summer long that will offer a lighthearted look at the confluence of sports, pop culture and social media. The strength and popularity of our content has driven new opportunities in digital distribution, including with MSG Go, our live streaming and on-demand product. In February, we announced an agreement with the NHL for the live streaming of local NHL telecasts. Since then, we have reached agreements for MSG Go with Verizon Fios, Service Electric and RCN, which have joined Comcast and Altice in making MSG Go available to subscribers who receive MSG Networks. We continue to have discussions with our other affiliates and anticipate that, over time, MSG Go will be provided by all MSG Networks distributors. We have also been actively exploring new opportunities for digital distribution with both existing affiliates and new entrants. We hope to have more to share in the coming months as we remain thoughtful about how we approach new distribution opportunities, ensuring they make both financial and strategic sense. Turning to affiliate results in our third quarter. We again delivered affiliate revenue growth, reflecting higher affiliate fees partially offset by lower subscribers. With respect to our viewing subscribers, we experienced a low single-digit percentage decrease in our fiscal third quarter as compared with the prior year period. However, for the fourth successive quarter, we saw an improvement in this year-over-year percentage rate of decline. In summary, we are pleased with both our financial results and with the important strategic progress we have made so far this year and, looking ahead, remain confident in our ability to continue to create long-term value for 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 would like to start by going through our results for the third quarter of fiscal 2017 as compared with the prior year quarter. Total revenues of $183.2 million for the third quarter increased $3.7 million or approximately 2%. This included a $3.8 million increase in affiliate revenue and a $300,000 decrease 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 and the absence of the impact of a favorable affiliate adjustment recorded in the prior year period. The decrease in advertising revenue was primarily due to a higher net increase in deferred revenue related to ratings guarantees, partially offset by increased sales from the telecast of live professional sports programming as compared with the prior year quarter. Excluding the impact of the favorable affiliate adjustment recorded in the prior year quarter, fiscal 2017 third quarter total company revenues increased $5.2 million or 3% as compared with the prior year period. Direct operating expenses of $75.7 million increased $2.4 million or 3% as compared with the prior year quarter. The increase was primarily due to higher rights fees expense, partially offset by other programming-related cost decreases. SG&A expenses of $21.9 million increased approximately $2.4 million or 12% as compared with the prior year period. The increase was primarily due to higher employee compensation and related benefits, partially offset by other net decreases. Adjusted operating income of $88 million increased $300,000 as compared with the prior year period. This increase was primarily due to the increase in revenues, partially offset by higher direct operating expenses and SG&A expenses. Excluding the impact of the favorable affiliate adjustment recorded in the prior year quarter, fiscal 2017 third quarter adjusted operating income of $88 million increased $1.8 million or 2% as compared with the prior year quarter. With respect to our balance sheet, as of March 31, 2017, total cash and cash equivalents were $176.7 million, total debt outstanding was $1.39 billion and our $250 million revolver remained undrawn at quarter’s end. We made principal payments of $68.75 million during the March quarter comprised of a mandatory quarterly amortization payment of $18.75 million in accordance with the terms of our credit agreement as well as a $50 million voluntary principal prepayment. Please note that our credit facility provides for a total of $75 million dollars in mandatory principal payments over the next 12 months. As of March 31, 2017, net debt was approximately $1.21 billion and our net leverage ratio was reduced to 3.7 times trailing 12 months adjusted operating income. Our average interest rate for the quarter was approximately 2.5%. Reported free cash flow from continuing operations for the nine months ended March 31, 2017 was $159.1 million. I will now turn the call back over to Ari.

[Ari Danes:]

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

[Operator:]

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

[Brandon Ross:]

The first one is in your press release you speak to digital rights giving you, New opportunities to distribute and monetize your content. Can you expound on what those upcoming opportunities may be? And are wireless carriers a potential opportunity? I know Verizon offers NBA League Pass for free and the NFL. Is something like that an opportunity for you guys? And I have another one after.

[Andrea Greenberg:]

Brandon, as far as digital opportunities, I think they’re multifold. First, as we’ve said in our prepared remarks, we’re -- we continue to talk to our existing affiliates and new entrants into the business, I think we call them VMVPDs, about carrying our networks and we hope to have more to say to you in the coming months. We’re in active dialogue with many of them right now. And we will hopefully conclude deals, but all deals obviously need to make financial and strategic sense for us. On the digital side also, we talked a lot about MSG Go. And we’re very excited about the prospect for MSG Go. We now have a full complement of digital rights for our NBA, NHL and other professional and nonprofessional programming. We’re expanding our distribution. We’ve added, since our last call, Verizon Fios. Apropos to your wireless carrier, Verizon Fios. We’ve added Service Electric, RCN. We are talking to all our other affiliates about adding and hopefully that will be accomplished before the beginning of the next season. And as that distribution expands, we see significantly improved take rate. We’re really pleased with what we’ve been doing from a user acceptance perspective. And as we’ve talked about in the past, that provides us with all sorts of monetization opportunities. We are inserting advertising. We can insert different advertising. We’re selling sponsorships. So we’re really, really excited about our digital distribution opportunities.

[Brandon Ross:]

And then, just following up on that one, are wireless operators an opportunity there?

[Andrea Greenberg:]

I mean, sure, we have a broad range of rights and we -- that we can exploit. Wireless is one way we can exploit them, but obviously we have to look at the offer, the pricing, the packaging before we move forward.

[Brandon Ross:]

Okay. And then, my second question. The MVPD universe has changed quite a bit since MSG spun out of MSGN. Has your opinion on whether it makes sense for a cable network to be a standalone entity changed that time? There’s obviously been some speculation in the press about you guys starting to consider selling.

[Andrea Greenberg:]

Sure. Well, we really believe in the value of our programming and the ability of our team to drive value for shareholders here as a standalone company. The goal of our separation from the MSG -- from The Madison Square Garden Company was so that we could separately exploit our own business plan, and we’re doing that. I think we are unique. We offer live sports programming. It’s different from other categories of programming. When viewers want to watch us, there’s only one way to watch us, and that’s live and that’s a scarce and valuable asset that we provide our affiliates. So we think we’re well-positioned for future success.

[Operator:]

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

[Bryan Goldberg:]

I had a question on advertising. I know it’s a small part of your business, but was wondering if you could share some more color on what drove the decline in the quarter. For example, how much was ratings across which teams? Is there anything structural going on we should think about? And then, if there’s any other pieces driving the decline you could share, that would be great.

[Andrea Greenberg:]

Sure. Bret, do you want to?

[Bret Richter:]

Sure, Bryan. Let me see if I can add some color. So there were several moving parts in the quarter. We benefited from higher per game advertising sales for live sports telecasts and we believe this reflects the continued strong demand from advertisers for our content. On the other hand, the mix of games relative to last year changed. We had 5 fewer Knicks telecasts. We had some additional NHL telecasts that partially offset that, but the fewer Knicks games this year versus last year was definitely a factor. But you mentioned it, most notably, ratings were a factor. Lower ratings in the quarter resulted in a higher net increase in our deferred revenue, given our ratings guarantees, so that netted against some of the success we had with the per-game sales. There were also some really modest changes in our other advertising revenues, but the game count, the per game sales and the ratings are really the drivers.

[Andrea Greenberg:]

And let me say that the on-court performance this year of the Knicks most certainly had an impact on our overall ratings. We do believe that, as the team improves, that we have significant ratings and revenue upsides going forward.

[Bryan Goldberg:]

That’s helpful. And I actually had one follow-up on MSG Go. Having just activated the service for Fios, RCN and Service Electric, I think you just mentioned better take rates of the service. But I was wondering is there any other, if there’s any other color you could share in terms of how consumption on this platform has actually trended over the last few months? How should we be thinking about the ramp there? And then, what else can you do as an organization aside from activating other affiliates to drive more usage on that platform?

[Andrea Greenberg:]

Sure. A couple of things. The take rates have been up significantly. And I can tell you, for the months, I’m just looking at some stats, for the months of April through, March through April when we added NHL and increased our distribution, the number of unique users was up by over 200%. So we are very, very optimistic that, particularly in this market where you have high commutation, that MSG Go will provide us with incremental subscribers, incremental viewership. You may also notice, if you’ve ever used the app, that we’ve recently added a title sponsor. So we have, Lexus is our main sponsor. So sponsorship opportunities, as the take rate increases, as the distribution increases, will be something that we will be exploiting. So we’re really excited about MSG Go and incremental viewership and monetization opportunities going forward.

[Operator:]

Your next question is from Alexia Quadrani with JP Morgan.

[David Karnovsky:]

This is David Karnovsky on for Alexia. Just a question on affiliate sales. The revenue you booked for the March quarter, is that based on subs through March 31? Or is that on a lag basis?

[Andrea Greenberg:]

That’s on a lag basis, a 30-day lag.

[David Karnovsky:]

30-day lag?

[Andrea Greenberg:]

Yes.

[David Karnovsky:]

Okay. And then, just separately, on the $50 million prepayment of your term loan in the quarter, just wondering what the rationale was behind that and whether we can expect you to further prepay any other term loan in future quarters?

[Bret Richter:]

Sure, David. I’m not going to make a forward-looking statement, but the voluntary prepayment was consistent with our stated goal of deleveraging the balance sheet. As of the end of March, we’ve got leverage down about 3.7x. We took a little more than a turn since the spin-off. And we’re going to continue to manage the balance sheet, to manage interest expense by reducing our outstanding debt. I mean, part of that is through our mandatory prepayments. As I mentioned we have $75 million in the next year. One of the things that we could point to as the next step down on our credit facility in terms of picking up another 1/4 point of interest expense to 3.5 times, so that’s a number we watch. But more importantly, we’re managing a number of factors, including the company’s overall financial flexibility, our -- the covenants under the credit facility have a formula about how much of our cash in our balance sheet we could actually use in our net debt calculation. By paying $50 million, we utilized more of the cash in our balance sheet efficiently. And going forward, all opportunities are within the spectrum of analysis. This, as we mentioned on prior calls, this management team, at this company and others have employed numerous financial strategies. And as we see opportunities to manage the liquidity of the business for the benefit of shareholders, they get due consideration.

[Operator:]

Your next question comes from Benjamin Swinburne with Morgan Stanley.

[Bronson Kussin:]

It’s actually Bronson Kussin on for Ben. You mentioned the improvement in the sub-trends in the prepared remarks, but I was wondering if you could provide any more details on that improvement. Is that lower adoption of skinny bundles? Or is -- a greater benefit maybe from minimum guarantees? And then, a connected question, have you seen the acceleration, the divergence between viewing and paying subs? Thanks.

[Andrea Greenberg:]

Without getting into specifics, what we have said is that this is the fourth quarter in a row that we’ve seen an improvement in the year-over-year percentage rate of decline in our viewing subscribers. I think it’s important to note that these are actual viewing subscribers. These are subscribers before the benefit of any of our contractual minimum protections. And for additional color, I can also tell you that the percentage decline is significantly improved relative to where we were in 3Q -- in Q3 a year ago. So I hope that helps.

[Operator:]

Your next question comes from David Joyce with Evercore ISI.

[David Joyce:]

So obviously from where we sit, we have imperfect knowledge on when your affiliate contracts come due and we could estimate when they come due, but you could always negotiate ahead of time. But given the concerns over the carriage minimums and cord-cutting, but offset by these new ancillary services you’re offering, how should we think about how you’re discussing your value proposition with the distributors? Is there anything incremental that you’re working on collaboratively with them?

[Andrea Greenberg:]

Well, the value proposition, I think, we continue to reinforce. We have a unique and what I consider and our distributors consider a compelling product with live professional sports in this market. We have these rights locked up for the long term. We have a broad spectrum of rights. So we’re always talking to our affiliates about things that drive value in their bundle, new product offerings and the like.

[David Joyce:]

Do they express concern of the viewership levels, new versus the subscriber base? And are there other areas where you could look for more distribution like the sports only over the top services?

[Andrea Greenberg:]

Well, we -- as we’ve said, we have great relationships with our affiliate partners. We always talk about things that makes sense for all of us. We continue to show affiliate revenue growth. And we continue to iterate with them. We feel quite comfortable with the terms of our affiliation agreements. We have long standing relationships with them, consider them our long term partners and feel pretty good about being able to continue to [Indiscernible]

[Operator:]

Your final question comes from John Janedis with Jefferies.

[Mike Russo:]

This is actually Mike Russo on for John. Just first, can you talk a little bit about the impact of the Rangers’ first round playoff series, particularly on advertising in 4Q? And to what extent has this helped to clean up any inventory issues you may have had coming out of 3Q?

[Andrea Greenberg:]

Go ahead, Bret.

[Bret Richter:]

Mike, I’ll take that. We’re not ready to report Q4 yet. And the impact of the Rangers’ playoffs and the associated advertising will impact that quarter, but what I can tell you is that we have strong advertiser demand. And there was a lot of excitement around the series. And as the Rangers progressed, the excitement continues. We were impacted by lower ratings as compared to last season. And as you may know, starting this year, our first round playoff games were not exclusive to MSG Networks. But while this had an impact on ratings, I note that we -- the vast majority of the viewers of the playoffs watched the games on our networks. And we think it’s a testament to the affinity of our local viewers and our viewers have the local coverage and, in particular, our announcers and talent.We’ll talk more specifically about the dollars and cents when we report Q4.

[Mike Russo:]

Got you. And then, just as a really quick follow up. I was wondering if you could provide us with an update on what percentage of your footprint is up for renewal in this calendar year?

[Andrea Greenberg:]

Right. We haven’t provided specifics in that regard, but we -- but what we can tell you is that our affiliate agreements are typically for multiple years. They have staggered expirations. They have built in escalators. So there is a cycle.

[Operator:]

I will now turn the call back over to Ari Danes for any additional or closing remarks.

[Ari Danes:]

Thanks for joining us. We look forward to speaking with you on our year-end conference call. Have a good day.

[Andrea Greenberg:]

Thanks, everyone.

[Operator:]

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