MSG Networks Inc.
Q1 2018 Earnings Call Transcript

Published: 2 Nov 2017

[Operator:]

Good morning. My name is Crystal, and I'll be your conference operator today. At this time, I would like to welcome everyone to the MSG Networks Fiscal 2018 First Quarter Earnings Conference Call. [Operator Instructions]. I would now turn the conference over to Ari Danes, Investor Relation. Please go ahead.

[Ari Danes:]

Thanks, Crystal. Good morning, and welcome to MSG Networks' Fiscal 2018 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 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. We are pleased with our start to fiscal 2018, as we remain committed to building on last year's key financial, operational and strategic successes. This fiscal year, our priorities include delivering solid revenue, adjusted operating income and free cash flow, broadening our viewership through innovative enhancements to our programming and driving increased distribution of our networks, particularly on digital platform, an area where we have made significant progress over the past few months. We'll talk more about this shortly. With regard to our first quarter financial result, we generated approximately $157 million in revenues and $82 million in adjusted operating income, both representing increases of about 3% as compared with the prior year period. These results reflect the strength and popularity of our highly valuable networks as well as our ongoing focus on operational excellence. With annual programming that includes approximately 500 live professional sporting events and award-winning original shows, the breadth of our content is unmatched by any other regional sports network. At the heart of our live programming is our fall and winter professional sports lineup, and we are excited that the 2017-18 NBA and the NHL regular seasons are now underway. MSG and MSG+ will once again telecast more hockey than any other RSN in the country, with live games of the New York Rangers and Islanders, New Jersey Devils and Buffalo Sabres, and MSG Networks continues to serve as the local broadcast home to the New York Knicks, which has entered the season with an exciting core group of young players led by Kristaps Porzingis. The first quarter of fiscal 2018 also marked the start of the NFL season, with MSG Networks serving as the regional sports home of the New York Giants and Buffalo Bills. Original programs returning for a new season include our coaches shows, The Jeff Hornacek Experience and The AV Squad; The MSG Hockey Show, a fast-paced half-hour of opinion and conversation on all things hockey; and People Talking Sports And Other Stuff, a discussion of the latest sports topics from a fan perspective, with a variety of sports guests and celebrities. In addition, we continue to evolve our programming approach to broaden our appeal, particularly to the younger sports fan, while remaining thoughtful about how we invest in our content. This year, our viewers will see a greater emphasis on storytelling as well as shorter form content, suited for both our linear networks and our digital and social platforms. For example, we've recently debuted MSG Shorts, short-form content focused on unique and interesting stories in sports, including a new series starring popular UFC fighter, Chris Weidman, sitting down with professional athletes and celebrity friends to talk sports; sports stories of New York, short documentaries on rarely told stories in New York sports; select 30 for 30 shots from ESPN, and Sneaker Shopping, a popular series from Complex, that takes artists and athletes to the best sneaker stores in the U.S. This year, we will also continue to build on our branded content initiative, which represents another opportunity to generate incremental advertising revenue. In addition to our ongoing partnerships with companies such as Anheuser-Busch, we have already closed several new agreements for the creation of custom content. Additional partners include BMW, Montefiore Medical Center and the Hospital for Special Surgery as well as Squarespace, which as part of a larger marketing partnership with MSG and MSG Networks, was named presenting partner of our game site studio at Madison Square Garden. With 2017/'18 marking the first time we have digital rights for all of our live NBA and NHL games for the full season, we were able in recent months to make significant progress in expanding our digital presence. We recently announced that authenticated DIRECTV and Charter Spectrum subscribers now have access to MSG Go, our live streaming and video on-demand platform. By adding these 2 providers, we have achieved distribution of MSG Go with all ad major affiliates. With the most important building blocks for MSG Go now in place, we remain excited about the platform's potential advertising opportunity, and to date are seeing growing utilization and robust demand from sponsors. Our digital rights have also helped drive new distribution opportunities. On our last earnings call, we announced that we had signed an agreement with a major OTT operator. The launch date for this operator is expected to take place by mid-January. Last month, we also announced that we completed a multiyear agreement with a second OTT provider FuboTV. MSG and MSG+ are now distributed as part of Fubo's entry-level package to subscribers in our territory. These subscribers also have access to MSG Go. We are pleased with these new partnerships, and will continue to explore additional distribution opportunities that appropriately value and package our networks. Lastly, with respect to our viewing subscribers, we experienced a low single-digit percentage decrease in our first quarter as compared with the prior year period. However, this year-over-year percentage rate of decline improved as compared to the decrease in the fiscal 2017 fourth quarter. In summary, we are pleased with our start to fiscal 2018 as we look to build on last year's achievements. We have made significant strides on the digital front, both expanding the reach of MSG Go and our overall distribution with our first 2 OTT agreements. Looking ahead, we remain confident that we can continue to generate meaningful revenue and AOI and 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 today by focusing on our results for the fiscal 2018 first quarter. Total revenues of $157.5 million increased $3.9 million or approximately 3%. This included a $3.8 million increase in affiliate revenue and a $100,000 decline in advertising revenue, while other revenues increased approximately $200,000 as compared with the prior-year period. The year-over-year 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. Direct operating expenses of $63.1 million increased $2.3 million or 4% as compared with the prior year quarter, primarily due to higher rights fees expense. SG&A expenses of $15.6 million increased approximately $300,000 or 2% as compared with the prior year period. This increase was primarily due to higher employee compensation and related benefits, partially offset by lower advertising and marketing costs and professional fees. Adjusted operating income of $81.7 million increased $2.4 million or 3% as compared with the prior year period. This increase was primarily due to higher revenues, and to a lesser extent, lower SG&A expenses, excluding share-based compensation expense, partially offset by higher direct operating expenses. I would note that in the first quarter of fiscal 2018, the company adopted a new accounting standard related to the presentation of pension and postretirement benefit expenses. This standard was applied retrospectively, which for the prior year first quarter resulted in a reclassification of $420,000 from direct operating and SG&A expenses to below the operating income line. With respect to our balance sheet, as of September 30, 2017, total cash and cash equivalents were $172.9 million. Total debt outstanding was $1.3 billion, and our $250 million revolver remained undrawn at quarter's end. We made a mandatory principal payment of $18.75 million during the fiscal first 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, 2017, net debt was approximately $1.13 billion, and our net leverage ratio declined to 3.3x trailing 12 months adjusted operating income. Our average interest rate for the quarter was approximately 2.9%. Reporting free cash flow from continuing operations for the 3 months ending September 30, 2017, was $51.9 million. I will now turn the call back over to Ari.

[Ari Danes:]

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

[Operator:]

[Operator Instructions]. And our first question comes the line of Bryan Goldberg with Bank of America.

[Bryan Goldberg:]

I've got a quick question on subscriber trends and then a follow up. I think you mentioned another quarter of sequential improvement in sub declines, which is counterintuitive to what was observed so far from a number of distributors and Discovery. So I was wondering if you'd get us your latest read in terms of what's going on in the New York market and your packaging in general? Why you think your trends are getting better versus the industry?

[Andrea Greenberg:]

Thanks for the question. Well, as you know, we're a regional service and we're in a unique and a very competitive market here. So our subscriber trends may not necessarily track the national subscriber trend for any given operator, and we've seen that in the past. In terms of general subscriber trends in our market, while we're not going to discuss the specifics, you're right in noting that this is -- the year-over-year percentage rate of decline, that improved relative to last quarter. And for additional color, you know, I think it's important to note that this past quarter's percentage rate of decline was the lowest percentage rate of decline we've had in several years -- actually in over 3 years, and that's before we, hopefully, see the improvement from our recent OTT deal. So it -- hopefully, that provides you some additional color.

[Bryan Goldberg:]

Yes. And actually, I wanted to follow-up on the OTT deals. In addition to the 2 deals that you've announced, I was just wondering, what you can tell us about the state of negotiations with other VMVP services out there, and how would you characterize the appetite from streaming platforms for live sports content?

[Andrea Greenberg:]

I'm going to let Adam answer that one.

[Adam Levine:]

Yes. So I think, in a relatively short period of time that we've had the digital distribution rights to our whole complement of games, I think we're really pleased to have expanded the distribution of MSG Go to include all of our major distributors, but also to have signed agreements with 2 OTT providers. So I think, certainly, we're seeing real interest in the content. I think as far as additional opportunities, we're continuing to pursue those opportunities. As Andrea said, where it makes sense for our business, we're making sure that they appropriately valued the content, and we're in a number of discussions on that regard. Currently, we don't have anything specific to announce in this call, but it's something we continue to pursue.

[Operator:]

Your next question comes the line of Ben Swinburne with Morgan Stanley.

[Benjamin Swinburne:]

From the outside it certainly seems like -- I've noted the market's focused on this, that the landscape has changed a lot today in television from 5, 6 years ago, and you've had some really nice long-term agreements in place with distributors that I think are coming up for renewal over the next couple of years. So since you talk to your distributors on a much more regular basis than we do about their view of affiliate revenues and programming costs and packaging, can you help us -- can you share your thoughts on how you think, if at all, the landscape has changed as you go into another round of renewals, revisiting contracts that may, in some cases, be 5, 6 plus years old? And particularly if you have any comment on pricing or packaging and minimums, any color you can give us on how you think the landscape may or may not have shifted today versus when you did these contracts years ago, I think would be helpful color for the market.

[Adam Levine:]

This is Adam. I'll jump in on this one as well. I think couple of things, one is, I think there's real opportunity for us. Like I think, going back to the prior question on digital distribution, I think as far as the market changing, I think that's an opportunity, and one that we've just recently jumped into. So I think that we're excited about the opportunities there, both on the authenticated platform but also on the OTT space. As far as renewals, we're not going to comment on specifics regarding our agreements and when they come up, but I think we've said previously that our agreements are typically multiple years. We generally stagger the expirations. Our renewables come up from time to time in the ordinary course of our business, and we -- as you pointed out, we are in frequent commutation with these distributors, and we have long-standing positive relationships with them that -- with lots of touch points. And I think evidence of that are the recent agreements we've reached with them on MSG Go, now fully distributed among our major distributors. We also have several of our largest affiliates who are significant advertisers on the networks. So I think that all of that sort of underscores the strength -- not only the strength of the relationships, but I think the value proposition that they see in our programming and the networks. And I guess, on the topic of protections, I think it goes back to the value proposition and the appeal that our programming has. I think -- we think live sports is different, live local sports is different, and because of that, we've been able to achieve broad distribution in the region and with a variety of protections in our past and in our current affiliation agreements. And the negotiations for these protections have been part of our agreements for years. And we expect that to continue. I don't see much changing in that regard. And just on the topic of renewals, generally we're confident in our continued ability to renew the agreements as they come up, and we expect to generate continued affiliate revenue growth going forward. I would also just note that we would expect the renewal agreement to contain appropriate protections as has been consistent with our history.

[Operator:]

Our next question comes the line of Brandon Ross with BTIG.

[Brandon Ross:]

Two questions, if I may. First, stock is down significantly over the past couple of weeks, and you're delevering pretty quickly. And also from the last answer there, it sounds like you're pretty confident around your renewals. Putting that together, is your outlook on capital returns changed at all? Do you think a near-term buyback makes sense here with the weakness? And then I have a followup.

[Andrea Greenberg:]

All right, Bret, you're going to...

[Bret Richter:]

Yes. Thanks, Brandon. This is Bret. I'll take that. So we're, obviously, conscious of the trading value of the stock, and that's a factor in all financial strategy considerations. We don't have anything due to announce today. What I would say is that, any financial strategy -- in any financial strategy we would implement on a go-forward basis is based on a number of factors, almost innumerable factors, and certainly, on the back of the business which we've talked about, and on the back of a healthy balance sheet. I think you appropriately highlight that in the 2 years since the spin, we've made a lot of progress on the balance sheet. We've taken leverage down on both a gross basis and on a multiple basis, down just under 3.5x. We've been able to consistently produce cash, we've been growing AOI. And as we progress forward, every one of those factors, including the markets, would be things that we factor in, in financial strategy. So to say whether or not our thoughts on potential strategies changes, it's -- again, it's a dynamic decision process. So as the factors change, our thoughts evolve.

[Brandon Ross:]

All right. And then, a second question, I guess for Andrea. Do you believe your status as an independent network is hurting your ability to get better terms in this -- in these upcoming -- in this renewal cycle? And how more broadly do you think about being an independent network in this changing landscape network, for instance?

[Andrea Greenberg:]

That's an interesting question. When we think about ourselves, we've actually been, what you might call, an independent network for over 7 years now. And because we truly believe in the power of live sports programming, and we believe our affiliates value live local sports programming, as Adam said, you could actually argue that we're at an advantage, not a disadvantage, as a standalone company. Our relationships with our distributors go back many years. As Adam said, we're in constant communication with them. We're constantly dialoguing about different ways we can work together. And as Adam pointed out, MSG Go was recently launched by all our major affiliates. Many of them are major season-long advertisers of ours. So we feel pretty comfortable just where we are.

[Operator:]

Your next question comes in the line of Michael Morris with Guggenheim.

[Michael Morris:]

Two questions. First, you mentioned a major OTT operator launch date in mid-January, and I was wondering if you could share why there's a delay there? Right now it would seem that a partner would want the live sporting events that, that you're already airing here in November. And a second, just following up on the capital return question. Bret, could you talk at all about a philosophy of a dividend -- a regular dividend payment as you think about capital return? We frequently talk about a stock buyback, but you've, obviously, pretty steady free cash flow, good visibility into your costs. And I wonder if you could talk about how you would view that?

[Andrea Greenberg:]

I guess, on the OTT front, the agreement that we did with that operator provided for a timeframe for the launch. So this is consistent with the timeframe.

[Adam Levine:]

It's just no later than that time.

[Andrea Greenberg:]

Right. So we anticipate a consumer-facing announcement closer to the launch date, which'll be no later than January. So stay tuned.

[Bret Richter:]

Thanks, Mike. With regards specifically to dividends, I think the way to answer that question is, I'll be cautious, in this forum or any forum, to speak about any particular mechanism of return to capital or capital allocation in isolation. I think it's sort of unfortunate and the rest of this management team is fortunate that even in relatively recent period of time, we've deployed most of these, if not virtually all of these strategies, whether it's capital returns through dividends, regular dividends, onetime dividends, stock buybacks, other financial strategies, spinoffs. We look at the spectrum of alternatives, we consider their appropriateness, that includes leverage, and make decisions at the time. To get sort of stuck in a box that we believe X or Y, is something that I feel cautious to talk about.

[Operator:]

Our next question comes from the line of John Janedis from Jefferies.

[John Janedis:]

I wanted to ask a little bit more about the digital strategy. You have 2 distribution agreements you talked to in place, but how should we think about the opportunity to expand the sub base? And then, in terms of MSG Go, what is the incremental revenue opportunity or potential going forward? Or asked differently, over time, should there be a visible revenue impact from Go?

[Andrea Greenberg:]

I'll talk the second one, and then, Adam, you want to take the first one?

[Adam Levine:]

Yes. I mean -- I think, we're always looking at incremental distribution opportunities in the digital and traditional space, be there is that there's a risk evaluation on networks in both on the economics and on the carriage and distribution front. So that's something we're always looking at, and we're in constant discussions towards that end.

[Andrea Greenberg:]

And with MSG Go, I mean this is the first season that we have carriage by all our major distributors and have full complement of digital NBA and NHL rights. Anecdotally, so far this season, we've seen significantly increased download activity and significantly increased utilization, even though it's very early in the season. MSG Go -- we're selling MSG Go as a separate entity. So there is incremental advertising potential for this product, and we're seeing extremely strong demand from advertisers for it.

[John Janedis:]

Okay. And then, maybe I guess, mid-summer related, can you talk about your role in MSG sponsorship deal with Squarespace? What is the benefit to you? And is there a future opportunity for you to add advertising partners?

[Andrea Greenberg:]

Yes. Well, we're always adding advertising partners. I think we've talked in the past about how we -- and we believe the Gartner benefited from having combined a sales force. We're able to use media assets to activate larger partnerships with major sponsors, who are sponsors of our teams and our buildings. Squarespace is just one example of that. So from our perspective, Squarespace is going to be going to be integrated on air through branded content. They are a sponsor of our MSG game site studio. They have significant presence on our new state-of-the-art digital board. So we're actually engaging with Squarespace in nontraditional ways, and that, I believe, a huge opportunity for us in the future.

[Operator:]

Your next question comes from the line of David Joyce with Evercore.

[David Joyce:]

Just a little bit more on the advertising side. How should we think about how much incremental inventory that you might be able to monetize on your telecasts or on the mobile or internet presence? Or is it mostly a kind of a pricing strategy with these incremental partners from here? And related to that, could you discuss your view on the advertising versus viewership parity versus your peers? How do you picture yourself to advertisers?

[Andrea Greenberg:]

Thanks, David. Well, as I just said, we're continually adding inventory to our telecast and our digital properties. But from our perspective, it's the right kind of inventory. It balances the viewer experience with sponsor integration. When you think of our -- a traditional advertising, when you think about spot inventory, our spot inventory is determined primarily by the live game experience and by our leagues. And we have a fairly traditional commercial format in our live games and in nonlive game inventory. But the opportunity is for these new types of sponsor integration for branded content, for separate and distinct advertising partners for products like MSG Go on our website and our branded content opportunity. So we're doing some interesting things with that. We're actually taking our traditional tune in inventory -- our promotional inventory, and we're creating stories that are attached to sponsors that also promote our telecasts and our networks. So we're being very thoughtful, we're being, I think, quite creative in the way that we're expanding our inventory. On your second point -- yes, we're also -- actually Adam just reminded me, we're also experimenting with different kinds of broadcast. So for example -- I believe it's November 13, we're doing an alternative Knicks broadcast on one of our second channels with DraftKings. And it'll have specific fantasy commentary, distinct and apart from our traditional -- our more traditional broadcast. And that provides -- that allows us to experiment, it allows us, we believe, to attract incremental viewers, and it also allows us to attract incremental advertisers. So we'll be doing more and more of that. In terms of the way we sell versus the way other people sell, it's really what I just talked about in the context of the Squarespace deal. I think we are unique in that we are able to, and benefited from, our representation by MSG. And we continue to exploit the relationship to our mutual benefit.

[Operator:]

Our next question comes the line of Alexia Quadrani with JPMorgan.

[David Karnovsky:]

David Karnovsky on for Alexia. SG&A cost were up only marginally in the quarter. Any outlook on what you expect for the rest of the year? And then separately, can you say whether direct OpEx included any impact from your Buffalo Sabers renewal? Or that only start in the current quarter with this season?

[Bret Richter:]

Sure, I'll take that. With regards to an outlook, we're not going to give any targets, near or long-term, for any of our financial line items, but what I will say is, there's such seasonality in the business, which I'm sure you're aware of, particularly in our fiscal first quarter, with very limited NBA and NHL product, we have some preseason games in September, but in the absence of the regular season and the playoffs, there's certainly expenses, particularly relating to ad sales, marketing, that follow in line with the ebbs and flows of the volume of the season. So that's always a factor. I think when you look at this quarter in particular, I mean change is really small. I mean, talking about a few hundred thousand dollars, and we're not going to dissect that, certainly not on a go-forward basis. But I'd also just add that, we're very expense conscious. We run the business, we believe, very efficiently. We're making the appropriate decisions to make sure the business gets the funding it needs, but we're also very conscious about maintaining expenses on an appropriate level. Specifically with regards to the Sabers, yes, it did impact the quarter. But we only saw the 1-month impact, as it was commensurate with the start of the season.

[Operator:]

Our final question comes from the line of David Miller with Loop Capital Markets.

[David Miller:]

Andrea, I'm just curious, the mid-January launch of the new over-the-top agreement. Whoever the platform is, was that the one that you thought was going to get announced prior to the NBA and NHL seasons? Or is it the FuboTV deal? I'm more -- just curious of your thoughts there? And then Bret, just outstanding free cash flow generation in the quarter. Was very pleased to see that. You're approaching what we in the media sector sort of consider capital efficiency, which is sort of net debt-to-EBITDA or net debt-to-AOI of like 2 to 2x, do you agree with that ratio in terms of a goal of true capital efficiency? Just your thoughts there would be welcome.

[Andrea Greenberg:]

David, on the OTT question, Fubo has already launched. They launched in October.

[David Miller:]

Right, we know that. But like...

[Andrea Greenberg:]

So someone other than Fubo.

[David Miller:]

But that wasn't my question though. The question was, whoever the someone else is, was that the one would thought would launch prior to the season? Or did something get delayed? Was the negotiation more complicated? Was it a situation of dotting the Is, crossing the Ts? Did that delayed or...

[Andrea Greenberg:]

No. This launch was contemplated by the terms of the agreement we reached, and we never announced the launch date.

[Bret Richter:]

Okay. So I just think -- I'll take the other half of that question, and thanks for the question and the comments. We're conscious certainly about the decline in our leverage and whatnot, but I'm -- and maybe it's me, but thinking about capital allocation and thinking about financial strategy, I'm always cautious about taking one stake, putting it into the ground and making it an immovable stake. So a concept that 2 or 2.5x ratio is the point of capital efficiency for the industry, it's an interesting point. It's a consideration. We certainly look at our peers. We look at the leverage they have on our balance sheet, but we'll highlight that we're not like 2 to 2.5x yet, but to view that as almost a fact is not the way we'd approach it.

[Ari Danes:]

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

[Operator:]

This concludes today's conference call. You may now disconnect.