MSG Networks Inc.
Q4 2017 Earnings Call Transcript

Published: 16 Aug 2017

[Operator:]

Good morning. My name is Kristine and I will be your conference operator today. At this time, I would like to welcome everyone to the MSG Networks' Fiscal Year 2017 Fourth Quarter and Year End Review Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. I would now like to turn the call over to Ari Danes, Investor Relations. Please go ahead, sir.

[Ari Danes:]

Thanks, Kristine. Good morning, and welcome to MSG Networks' Fiscal 2017 fourth 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, 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 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. Fiscal 2017 represented a year of notable achievement for our company, as we made meaningful progress against our key financial, operational, and strategic objectives. With regard to our financial performance, we delivered strong results for the full fiscal year, with $675 million in revenue and approximately $333 million in adjusted operating income. This robust performance reflects the strength of our highly valued exclusive live content, as well as our dedication to delivering a compelling line-up of original programming for our affiliates, advertisers, and viewers. In May, our commitment to delivering the very best in regional programming was recognized once again with 17 New York Emmy awards across several categories ranging from live event production to original programming. MSG Networks took home 14 of those Emmy's bringing its total to 140 wins over the past 10 years more than any single network or station in the region over that time. The foundation of our award winning content is our live professional sports programming, the quality and depth of which is unmatched by any other regional sports network in the country. This past fiscal year MSG and MSG+ again telecast approximately 500 live games covering the many professional sports franchises that call MSG Networks their local broadcast home. This includes our unrivaled fall and winter line-up featuring the New York Knicks, Rangers and Islanders, New Jersey Devils, and Buffalo Sabres. We are now in the midst of our summer programming catalogue highlighted by live games of the WNBA's New York Liberty and Major League Soccer's New York Red Bulls. In addition to our game coverage, this past year, we enhanced our line-up of original programming with new shows including the MSG Hockey Show, a weekly program hosted by Arda Ocal, Will Reeve, and Anson Carter, highlighting the hottest stories in Hockey, and debuting last month, people talking sports and other stuff, a late night sport show airing all summer, starring New York sports super-fan and comedian Sam Morril, along with special guests who have already included Giants player All-pro Landon Collins and Justin Pugh, New York baseball icon Darryl Strawberry and John Franco, and actor Justin Lawrence. Fiscal 2017 also marked the start of our new comprehensive programming agreement with Pegula Sports and Entertainment. In addition to our Sabres programming our Western New York viewers are also now enjoying an exciting line-up of programming dedicated to the NFL's Buffalo Bills. We also secured our role as the official regional home of the New York Giants this past year. And as part of a new multi-year partnership delivered a comprehensive slate of content specifically for Giants fans including a new official post-game show and other in-depth team related programming. Last month, we debuted a new season of Giants training camp live which will run through August featuring expert analysts to recap the day's activities, along with exclusive training camp footage and interviews with players, coaches, and reporters. In addition to enhancing our content line-up, we took specific steps in fiscal 2017 to better position our company for advertising growth in the years ahead. Those efforts included developing new sponsor opportunities through the creation of branded content initiatives, the launch of a new on air graphics package, and the introduction of a newly designed website. In June, we debuted four state-of-the-art high resolution video screens outside our street-front studios directly across from Penn Station, creating another high impact vehicle to showcase our brands, content, and partners to the more than 1 million people who pass by our studios every day. We have also made notable progress on another key strategic initiative to drive new opportunities in digital distribution. As you know, in February, we reached an agreement with the NHL that allows us to live stream our local Rangers, Islanders, Devils, and Sabres telecast. This agreement strengthened MSG GO our live streaming and on-demand product as we now have added our unmatched line-up of NHL game to our existing slate of content which includes all of our Live Next red bulls and liberty games. Subsequent to our agreement with the NHL, we completed deals for MSG GO with Verizon Fios, Service Electric, and RCN, which joined Comcast and Altice in making MSG GO available to subscribers who receive MSG Network. Furthermore, in recent weeks, we executed an agreement for MSG GO with one of our largest distributors and we expect the service will be made available to its subscribers in time for the 2017-2018 season. We expect to announce more about this arrangement shortly. We have also been exploring new opportunities for digital distribution with both existing affiliates and new entrants and are pleased to announce that we recently signed an agreement with a major OTT operator for the distribution of our networks. We look forward to sharing more as we work towards a definitive launch date with this partner. Looking ahead, we will continue to be thoughtful about how we approach these new distribution opportunities ensuring they make both financial and strategic sense. Lastly, with respect to our viewing subscribers, we experienced a low-single-digit percentage decrease in our fourth quarter as compared with the prior year period. While our fourth quarter rate of decline increased slightly compared with our fiscal third quarter, we think it is important to note that the rate of decline at the end of this fiscal year meaningfully improved compared with our rate of decline last year at this time. Furthermore, we expect that the combination of rate increases and the impact of new digital distribution agreements will drive continued affiliate revenue growth. In summary, we are pleased with both our financial results for fiscal 2017 and with the meaningful progress that we have made with respect to the company's operational and strategic objectives. As we look ahead, we remain confident in our ability to continue creating long-term value for our shareholders and to delivering unique and compelling content for the benefits of our affiliate, advertisers, and viewers. 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 today by touching on our full-year fiscal 2017 financial results before turning to our results for the fourth quarter. For fiscal 2017, total revenues were $675.4 million, an increase of 3% as compared with the prior year. This growth was primarily driven by an increase in affiliate revenue with advertising and other revenue essentially flat on a year-over-year basis. Fiscal 2017 adjusted operating income was $333.5 million as compared with $297.4 million for fiscal 2016. As a reminder, AOI for the first quarter of fiscal 2016 included certain corporate overhead expenses that did not meet the criteria for inclusion in discontinued operations. The inclusion of these costs impacts the comparability of fiscal 2017 AOI with the results of the prior fiscal year. Turning to results for our fiscal 2017 fourth quarter, total revenues of $162.9 million increased $2.4 million or approximately 1%. This included a $2.9 million increase in affiliate revenue and a $700,000 decline in advertising. 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, as well as the unfavorable impact of a $1.1 million affiliate adjustment recorded in the current year quarter. The decrease in advertising revenue was primarily due to fewer regular season professional sports telecasts as compared with the prior year quarter, partially offset by other net advertising increases. Excluding the impact of the $1.1 million affiliate adjustment, fiscal 2017 fourth quarter total company revenues increased $3.4 million or 2% as compared with the prior year period. Direct operating expenses of $65.1 million increased $2 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 increases. SG&A expenses of $19.4 million increased approximately $400,000 or 2% as compared with the prior year period. This increase was primarily due to higher employee compensation related benefits, partially offset by lower professional fees and other net decreases. Adjusted operating income of $81 million increased $1.1 million or 1.4% as compared with the prior year period. This increase was primarily due to the increase in revenues and to a lesser extent lower SG&A expenses, partially offset by higher direct operating expenses. Excluding the impact of the $1.1 million affiliate adjustment, fiscal 2017 fourth quarter adjusted operating income would have been $82 million, an increase of $2.2 million or approximately 3% as compared with the prior year quarter. With respect to our balance sheet, as of June 30, 2017, total cash and cash equivalents were $141.1 million. Total debt outstanding was $1.32 billion, and our $250 million revolver remained undrawn at quarter's end. We made principal payments of $68.75 million during the June 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. For fiscal 2017, we made aggregate principal payments of $167.5 million. Please note that our credit facility provides for a total of $75 million in mandatory principal payments over the next 12 months. As of June 30, 2017, net debt was approximately $1.18 billion and our net leverage ratio declined to 3.5 times trailing 12-months adjusted operating income. Our average interest rate for the quarter was approximately 2.8%. Reported free cash flow from continuing operations for the year ending June 30, 2017, was $192.3 million. I will now turn the call back over to Ari.

[Ari Danes:]

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

[Operator:]

[Operator Instructions]. Our first question comes from the line of Brandon Ross with BTIG.

[Brandon Ross:]

Hi thanks for taking the questions. Couple of topics. First, if you could let us know the viewing subs you're going to be reporting in the 10-K and then maybe help us size the exact acceleration of declines from the third quarter? And then on the Virtual MVPD deal first how come you're not able to name who the completed deal was with at this time and since we're all kind of guessing, who it may be you used the word Major, does that mean a top three or so Virtual MVPD in terms of subscriber, any clues or color there would be helpful. Thanks.

[Andrea Greenberg:]

Hi Brandon thanks for the question. On subscribers, as I mentioned earlier, our year-over-year percentage rate of decline did slightly increase as compared to the rate of decline in our fiscal third quarter. However, in our view we had -- there is a key takeaway and that takeaway is that the rate of decline for both our fourth quarter as well as the rate of decline at fiscal year-end meaningfully improved relative to where we were last year at this time. In terms of subscriber numbers that you'll see later in the K as of our most recent available monthly data which is May, the average of the combined subscribers of MSG and MSG+ is approximately 7.1 million viewing subscribers. So for fiscal 2017 this represents a decrease of about 2.5% and that's compared to a decrease of 3.2% in fiscal 2016, if you go back a year further, it's a 3.5% decrease versus the prior year. So as you can see at year-end and fourth quarter, our rate of decline has significantly improved. As far as the OTT operator, the agreement was just recently executed and we are going -- we're anticipating a consumer facing announcement that will be tied to the commercial launch date, so stay tuned that should be coming shortly. In terms of what do we mean by a major operator, it's an operator with a significant national footprint and an operator that has a fulsome commercial offering. How is that?

[Brandon Ross:]

That sounds good. Thank you.

[Operator:]

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

[Bryan Goldberg:]

Thanks. I've got two quick ones. Just to follow-up on the OTT question, I was wondering if you could talk to us about the affiliate fee and/or how you're being packaged on this major new OTT platform. Is it similar to your traditional packaging in Pay TV, if you could just kind of help us think about that? And then my second question is regarding capital allocation priorities. I mean the business continues to de-lever nicely and I was wondering, if Bret could just update us as leverage approaches, I guess three times in fiscal 2018, how are you prioritizing further debt pay down versus capital returns versus acquisitions?

[Andrea Greenberg:]

Hi, Bryan, on your OTT question, we're not going to provide specifics, but we can provide, we can tell you that the deal is at a value and for packaging that's in a manner consistent with our existing distribution.

[Bret Richter:]

Thanks, Bryan. With regards to cash allocation, I think first and foremost it's important for the business to maintain a strong and healthy balance sheet. And we've made that statement from the initiation of spend until today and we have been able to work leverage down this quarter to 3.5 times. I won't comment on I guess your projection or expectation for what it might be next year but one of the things that I think is important here is we've been able to reduce this debt through our cash flow generation and that cash flow generation accrues directly to value of our shareholders. On a go-forward basis, all opportunities are on the table by maintaining a healthy and flexible balance sheet we position ourselves to take advantage of opportunities as they're identified or arise and we will consider those opportunities as they come. But today we took an opportunity to voluntary prepay another $50 million and nudge our leverage ratio down to 3.5 times, it's been -- it allows us to reduce our interest expense and what's been the last 12 months or so, a rising interest rate environment, and we feel good about the flexibility and have gone forward to make those decisions.

[Bryan Goldberg:]

Great. Thank you very much.

[Operator:]

Our next question comes from Benjamin Swinburne with Morgan Stanley.

[Bronson Kussin:]

Good morning. This is actually Bronson Kussin out for Ben. You talked about some of the subtrends in incremental OTT distribution in your prepared remarks but I was wondering if you could provide an update on subtrends among incumbent operators in your footprint. I think Charter rolled out spectrum pricing and packaging in New York late last year which presumably has led to some higher expanded basic selling versus what legacy Time Warner Cable was doing in the market. Has that helped your distribution at all and then on the Verizon are you still seeing any benefit from the re-tiering of custom TV earlier this year or is that largely past at this point. Thanks.

[Andrea Greenberg:]

Well, we're not going to provide specific affiliate-by-affiliate guidance. But again as I said earlier we're very pleased with the trends that we're seeing. We're seeing improved rates of decline year-over-year -over-year and that's without the benefit of the incremental digital distribution that we expect to see over the coming months and hopefully over the coming years.

[Operator:]

Our next question comes from John Janedis with Jefferies.

[Mike Russo:]

Good morning. This is actually Mike Russo on for John. But let me start with affiliate growth excluding the adjustment 4Q growth appears to have decelerated versus the rest of the year. Any color you can provide on the slowdown and then how to think about the next couple of quarters.

[Bret Richter:]

Sure. I'll take that. No projection on a go-forward basis. I think the largest number that affected this quarter's growth rate was that affiliate adjustment. And as we talked about in the past these adjustments are not unusual for the business particularly as we talked about last quarter, our subscribers reported on a lag basis so we true-up from time-to-time. Most of the time these adjustments are too small to call-out, this one we determine that we should call-out as it had a slightly bigger effect on the growth rate. The biggest effect on the rate is the impact of the rate declines subscribers are now juxta-positioned against our rate. But again I think when we're looking at the change in your estimated quarterly organic growth rate the changes are pretty small. And the headline I think here is we continue to grow overall affiliate revenue in this environment on our traditional platform, and as we emerge into the OTT platform, we think there is additional opportunities to grow going forward.

[Mike Russo:]

Okay, thank you. And if I could just follow-up on advertising despite tougher comps, advertising came in a bit stronger than expected. Can you kind of walk us through some of the puts and takes there as it relates to the quarter?

[Bret Richter:]

Sure. So, again relatively small numbers we're talking about the change, we're talking about $700,000 year-over-year. I can't speak specifically about our performance against your specific expectations. But the biggest impact when you look at the year-over-year changes was we had fewer regular season games in the 2017 fourth quarter as compared to the 2016 fourth quarter. There was also an impact of the playoffs. The biggest impact there is the Islanders not participated in the playoffs this year and they participated last year. It was offset a little bit by the fact we had a couple of additional Ranger playoff games. They were a series of other factors that had a slight increase in revenue but didn't net too much none of which are worth calling out. But I think it was a pretty clean quarter other than the game comes to the playoffs.

[Operator:]

Our next question comes from Alexia Quandrani with JPMorgan.

[Alexia Quandrani:]

Thank you. Started to circle back to the OTT commentary but just want to make sure I understand it. Is this an existing virtual MVPD service that you're now included on that's up and running already or it's something entirely different and was it -- was your deal with them part of a renewal process for the traditional distributor.

[Andrea Greenberg:]

As I said earlier, we're going to issue a consumer facing announcement that will be tied to the commercial launch by that operator of our network and we're not going to comment further at this time.

[Operator:]

Our next question comes from David Joyce with Evercore ISI.

[David Joyce:]

Thank you. Just a couple little things. One on the affiliate adjustment, I know sometimes it's there's an addition sometimes a subtraction and I know Bret you just mentioned that the -- it's usually a lag effect on truing up the subs. But I was wondering are there any other new factors in there is it -- could there be any auditing of subscriber bases? Or could there be one-time affiliate premiums based on certain programming. And then a second question on the advertising, could you help quantify the amount of hours of original programming year-over-year even though the biggest driver was the games but you've got a lot of other programming now. And so are there -- is there an offsetting factor with, with extra program you've got on your networks. And the advertising revenue are you seeing more incremental advertisers, are you seeing current advertisers spending more. Thank you.

[Bret Richter:]

We've seen all that, Dave. I think starting first with the affiliate adjustment I don't think there's any more to add. Particularly nothing to call-out in the quarter with regards to any unusual events it's really the factors that we discussed base of subscribers, the true-ups. The -- on advertising, I mean, original programming is not a major factor relatively when you look at the quarter-over-quarter change again we're what we're slicing here is a $700,000 change year-over-year. There are numerous components of it. And as I think, I mentioned very briefly there were a lot of relatively small changes across the board that didn't amount to a number that was worth calling out, the biggest impacts were regular season and the playoffs. The third part of your question really can you repeat that third part?

[David Joyce:]

Are you seeing incremental advertisers or you seeing them your current advertisers spending more?

[Bret Richter:]

Sure, at least it’s -- we see it across the board. I think what we look at advertising, where we sit today, and on a go-forward basis, what’s we -- there are two big components that are driving it each -- each of which have an different impact on the magnitude but it starts with our exclusive live content and allows us to attract advertisers start platforms because we deliver an increasingly scarce asset which is live engaged audience from New York DNA. We've attractive demographics that we can deliver to them and that allows us to both attract new advertisers and continue to serve our existing advertisers, some incrementally, some candidly in any given period maybe built the higher or little lower than they were in a prior period. But the other thing we're doing is continually to look for new ways to generate advertising. Andrea discussed some of them in our prepared remarks, our branded content creating new opportunities for sponsorship integration, digital, or websites are increasing distribution on MSG GO and our new street-front video boards, which were just installed at the end of the quarter. So dissecting each and every advertiser is not something we're going to do on the call, but I think you see all those factors apply.

[Operator:]

Ladies and gentlemen we have reached our allotted time for questions. I'll hand the program back over to Ari for additional remarks.

[Ari Danes:]

Thank you for joining us. We look forward to speaking with you on our 2018 first quarter call. Have a good day.

[Operator:]

Ladies and gentlemen, this will conclude today's conference call. You may now disconnect your lines. Thanks.