MSG Networks Inc.
Q4 2018 Earnings Call Transcript

Published: 15 Aug 2018

[Operator:]

Good morning. My name is Summer, and I’ll be your conference operator today. At this time, I would like to welcome everyone to MSG Networks’ Fiscal 2018 Fourth Quarter 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 will now turn the conference over to Ari Danes. You may begin.

[Ari Danes:]

Thanks, Summer. Good morning. And welcome to MSG Networks’ fiscal 2018 fourth quarter and year-end conference call. The company’s President and CEO, Andrea Greenberg, will begin this morning’s call with a discussion of the company’s operations. This will be followed by 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 todays earnings release, it is available in the Investors section of the company’s corporate website. Please take a 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 five and six 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 eight of the earnings release, we provide a reconciliation of net cash provided by operating activities from continuing operations to free cash flow. With that, I will now turn the call over to Andrea.

[Andrea Greenberg:]

Thank you, Ari, and good morning. Fiscal 2018 represented a year of meaningful progress as we successfully executed against the financial and strategic priorities we said at the beginning of the year. These included delivering strong revenue, adjusted operating income and free cash flow, enhancing our content from new and innovating programming with the goal of broadening our viewership and driving increased distribution of our network, particularly on digital platform. In addition to these priorities this past year, we strengthened our traditional distribution with several [ph] affiliate renewals and initiated our first share repurchase program as a standalone media company. I would now like to walk you through some of the year’s highlights. For fiscal 2018, we delivered revenue of approximately $697 million; a 3% increase compared to last year and adjusted operating income of $336 million. Our results continue to underscore the unique position we held, thanks to our exclusive lineup [ph] of content and a well earned reputation for programming excellence. This past year, our networks once again showcased approximately 500 live games, featuring professional team, including the New York Knicks; Rangers; Islanders; Liberty and Red Bull; New Jersey Devils; and the Buffalo Sabres providing fans of those teams with in-depth coverage including pre and post game shows and other team related content. We took steps to broaden our appeal particularly among younger viewers by experimenting with new content, formats and talent. Highlights include people talking sports and other stuff with a variety of sports guests and celebrity. Knicks Gaming, which continues to follow the official New York team, the NBA 2K eSports league during their inaugural season and MSG Shorts, our short form content block focused on unique and interesting stories in and around the world of sports. We are pleased with what we’ve accomplished on the programming front this past year and look forward to building on these efforts in fiscal 2019. We also believe that our valuable content along with ongoing growth opportunities positions us well to increase advertising revenue over the long term. These opportunities include our branded content initiative, where we worked with a number of our partners including Anheuser-Busch, hospital professional surgery [Indiscernible] to integrate their brands with our assets and we look forward to building on these efforts in the upcoming season. We created another growth opportunity this past year with our street front digital boards on Seventh Avenue, which established a high impact vehicle to showcase our brands, content and partners. In addition, we continue to see MSG GO, as a compelling partnership platform and ahead of the 2017, 2018 NBA and NHL season strengthened our live streaming and video-on-demand offering by achieving full distribution among our major distributor. This year we also made our content more broadly available through digital platforms, by reaching multiyear distribution agreements with two OTT providers while continuing to explore other distribution opportunity that appropriately value and package our networks. At the same time, we successfully renewed several affiliate agreements with our traditional distributors including a major partner which we believe highlights the importance of our content to the market place and the strength of our long-standing relationship. Turning to subscriber, for our fiscal fourth quarter, we had a very small year-over-year decrease in viewing subscribers. This represents a substantial improvement compared to our fiscal third quarter which had a low single digit percentage rate of decline. We have also now experienced an improvement in our annual rate declines for three consecutive fiscal years. In summary, fiscal 2018 marked a year of meaningful accomplishments. We delivered another year, of strong financial result and further enhanced our programming while strengthening both our linear distribution and digital presence. As we look ahead to fiscal 2019, we believe that our unparalleled live sports presence in the nations largest media market will enable us to continue to generate significant 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 touching on our full year fiscal 2018 financial results before turning to our results for the fourth quarter. For fiscal 2018, total revenues were $696.7 million, an increase of 3% as compared with the prior year. This growth was primarily driven by an increase in affiliate revenue partially offset by a decrease in advertising revenue. Fiscal 2018 adjusted operating income was $336.5 million which represents a slight increase as compared with fiscal 2017. We are pleased with these financial results, particularly in light of the fact that fiscal 2018 AOI was impacted by a step up in expense related to the renewal of our rights agreement with the Buffalo Sabres, and by the decline in advertising revenue, which we primarily attribute to the performance of certain of our teams this past season. Turning to our results for the fiscal 2018 fourth quarter. Total revenues of $171.4 million increased $8.5 million or approximately 5%. This included a $9.2 million increase in affiliate revenue and a $1.2 million decline in advertising revenue. The year-over-year increase in affiliate revenue was primarily due to higher affiliate rates and to a lesser extent the favorable impact of a $1.2 million affiliate adjustment recorded in the current year period and the absence of a $1.1 million unfavorable adjustment recorded in the prior year period. The decline in advertising revenue was primarily due to lower play-off related advertising sales partially offset by a higher net decrease in deferred revenue related to ratings guarantees as well as other net advertising revenue increases. Direct operating expenses of $68.8 million increased 6% or $3.9 million as compared with the prior year quarter, due primarily to higher rights fees expense. The increase in rights fees expense mainly reflects annual contractual rate increases, the step up in expense related to the renewal of our rights agreement with the Buffalo Sabres and league fees related to streaming rights. Please note that fiscal 2019 first quarter direct operating expense will include a full quarters impact from the step up in rights fees expense related to the Sabres as compared to a partial quarters impact for the fiscal 2018 first quarter. SG&A expenses of $19.8 million increased approximately $700,000 or 4% as compared with the prior year quarter. This was primarily due to higher employee compensation-related benefits partially offset by lower advertising and marketing costs and advertising sales commissions. Excluding share-based compensation SG&A expenses were down slightly versus the prior year quarter. Adjusted operating income of $86.2 million increased $4.8 million or 6% as compared with the prior year period. This increase was primarily due to higher affiliate and other revenue partially offset by higher direct operating expenses and lower advertising revenues. Excluding the favorable impact of affiliate adjustments reported in the current and prior year periods, fourth quarter adjusted operating income would've been $85 million, an increase of $2.4 million or 3% as compared with the prior year quarter. Turning to taxes; our 35% GAAP tax rate for the quarter primarily reflects a blended federal corporate tax rate of 28% state and local income taxes and the impact of certain adjustments, some of which were necessary to reflect the impact of tax reform becoming effective at the midpoint of our fiscal year. Our fiscal 2019 GAAP tax rate will fully reflect the new federal tax rate of 21%. Reported free cash flow from continuing operations for the fiscal year ending June 30, 2018 was $206.9 million. With respect to our balance sheet, as of June 30, 2018 total cash and cash equivalent was $205.3 million. Total debt outstanding was $1.2 billion and our $250 million revolver remained undrawn at quarter’s end. As of June 30, 2018 net debt was $991 million, and net leverage ratio decline to 2.9 times, trailing 12 months adjusted operating income. Our average interest rate for the quarter was approximately 3.4%. During the fiscal fourth quarter, we made a mandatory principal payment of $18.75 million in accordance with the terms for credit agreement. Our credit facility provides for a total $75 million in mandatory principal payments over the next 12 months. In terms of the company's stock repurchase program. During the fourth quarter we repurchased approximately 713,000 shares for $13.28 million [ph] at an average price of $19.39. This amount represented approximately 1% of Class A shares outstanding. We currently have $136 million remaining under our authorization and plan to remain disciplined and opportunistic with our share repurchases. We'll continue to update you on our progress on a quarterly basis. I will now turn the call back over to Ari.

[Ari Danes:]

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

[Operator:]

Thank you. [Operator Instructions] And your first question comes from Bryan Goldberg of Bank of America.

[Bryan Goldberg:]

Thanks. I've a question on subscriber trends. It sounds like you had a nice improvement there relative to the low single digit loss rate you've been reporting over the last handful of years or so. And I was hoping maybe you could provide a little color as to what the drivers of the improvement were? How much is coming from new distribution relationship versus any notable shifts in activity at your traditional distributors? And then, if it's possible, would you be able to provide us with your year-end viewing sub number. I believe that's usually in the 10-K? Thank you.

[Andrea Greenberg:]

Sure. Hi, Bryan. Well, there were a variety of factors that drove the year-over-year improvement. As we've said, we saw a very small decline in viewing subs in our fiscal fourth quarter. The factors included both of the items you mentioned. The impact of our new OTT agreement and stronger underperformance by some of our traditional affiliates, so both factors contributed to the improvements. That said, as you know there are ebbs and flows with respect to our viewing subscribers. And to this point I'd noticed – I would note that from a recent available month of data we saw an uptick in the percentage rate of decline from the fourth quarter resulting in a combined average of MSG and MSG+ subscribers of about 7 million which is down about 1.2% versus the same month in the prior year. Even given that still we've seen an improvement in the rate of viewing subscribers decline now for three consecutive years. And if you go back to the subs that we reported in our fiscal 2015 10-K, we have seen minus 3.5% decline in the subsequent year or minus 3.2% decline than a minus 2.5% decline and for the same period this year we've seen a minus 1.2% declines. So I hope that gives you some additional color.

[Bryan Goldberg:]

That's very helpful. Thank you.

[Operator:]

Your next question comes from Brandon Ross of BTIG.

[Brandon Ross:]

Good morning. Thanks for taking the questions. I actually have two. First the Fox RSNs are now in the marketplace. If some thing piecemeal became available especially the YES Network, would guys be interested in taking a look at that? And in general do you think it make sense for somebody to consolidate the RSNs in the New York market? And then I have a follow-up. Thank you.

[Andrea Greenberg:]

Okay. Well, first let me say that we're quite pleased with what we've been able to accomplish in the last three years as a standalone company. And we feel that we're positioned for a long term success here as a standalone company. That said, as you might expect we're closely monitoring the changes in the RSN landscape and we would always consider opportunities that if we feel they make strategic and financial sense for us. Beyond that…

[Brandon Ross:]

Buyers and sellers?

[Andrea Greenberg:]

We're not going to comment on hypothetical, but we certainly look at all opportunities that make sense for our business and our shareholders.

[Brandon Ross:]

Okay. And just to confirm the sub trends you report are view subscribers. So there's no help from minimum guarantees at wired MPPDs or DIRECTV NOW, correct?

[Adam Levine:]

I guess, I'll jump in their Brandon. It's Adam. I think what – I'm not sure what you mean by no help, but I think what we've said is the OTT deals that we had were contributed and that the protections that we have in our contracts are part of what the contributed viewing numbers that we report in general. So the viewing subs are the viewing subs and they reflect the sub numbers as reported to us by our affiliates.

[Brandon Ross:]

Got it. Thank you.

[Operator:]

Your next question comes from John Janedis of Jefferies.

[John Janedis:]

Thanks. I just had one. I was wondering, have you begun to see any incremental advertising by either eSports or gambling houses ahead of the upcoming NBA and NHL seasons. And how significant of a bucket could this be or is it too early to tell until I guess Sports betting is legalized in New York?

[Andrea Greenberg:]

Well, it is still very early, but we are already seeing strong demand from the segment of the marketplace not just for traditional media buys but also for more creative integrations. So there's lots of activity in this space. And we're pretty excited about it. We believe that it will service as a catalyst to drive increase add revenue for both Casinos and sports book. And those two categories have historically represented are fairly small percentage of our advertising on our network, so, more to come. I mean we do operate New Jersey. So that I think makes us appealing to sports books in advance of legalization in New York or Connecticut.

[John Janedis:]

Helpful. Thank you.

[Operator:]

Your next question comes from Michael Morris of Guggenheim Securities.

[Curry Baker:]

Thanks for the question. This is Curry Baker on for Mike. On the OTT front, you're currently on DIRECTV NOW and FuboTV, and there's obviously additional opportunity if you can get other large OTT platforms, carriage on YouTube, Hulu, Sling, et cetera. What's the biggest obstacle that you're encountering on getting additional carriage on the other OTT platforms? Is it price, MFNs, tiering? And can you say if you're in active conversations with any of the other players? Thanks.

[Adam Levine:]

So, I would say, we're pleased with the progress we made in the digital distribution this past fiscal year, the first full year where we had digital rights for all of our professional games. We're pleased to launch on the two platforms that you mentioned, Andrea noted they contributed the year-over-year improvement in our subscribers for the fourth quarter. As far as incremental opportunities we're focused on all those opportunities to increase distribution for our networks in our content. In the ordinary course of business we're talking to everyone. I'm not going to get into details about where are those conversations are. I think on the last call somebody ask about whether there obstacles? I wouldn't describe anything in particular as an obstacle. These are conversations we're having and exploring and we're always open to new distribution that properly value our networks.

[Curry Baker:]

Okay. Thanks.

[Operator:]

Your next question comes from Vasily Karasyov of Cannonball Research.

[Vasily Karasyov:]

All right, good morning. My question is about the capital structure going forward, now that you are sort done deleveraging from when you became a standalone company given the business model and sort of the steady growth, not a ton of volatility where the tax rate is. Can you tell us the puts and takes that go into your thinking about, A, free cash flow generation going forward. B, the use of that free cash flow, and C, the comfort level with the net of gross leverage, whatever is more convenient for you? Thank you.

[Bret Richter:]

Sure. Thank you. I'll take that. I think, the nature of question highlights the fact that this is a complex equation that we're constantly evaluating as a management team on an ongoing basis. I think the last part of your question is probably the easiest to answer and we were comfortable with the level of leverage that we have. It doesn't mean that at in any point in time we might not take a view to ratchet that up or ratchet that down based on the liquidity, the business, and the NAVs and the market and almost a numerable other factors. This is constant evaluation process for us and we look at all the elements that we spoke to particularly the free cash flow. The expectations of that free flow from the business and external factors like interest rates and the tax rate. The free cash flow of the business is really strong producing over $200 million a cash this year. I think that's notable and its only been two quarters since we put in place the additional tool in our tool box with the ability to buy stock back in the marketplace and we executed on that program in the fourth quarter. So, I think we take a broad view. We're going to be opportunistic over time with regards to the use of our authorization. We tend to use it. There maybe – there will be additional capital dedicated to paying down our debt. We have 75 million a mandatory prepayments due in the next 12 months. So I'm not sure how much more detail I can lay out the equation other than the fact we're actively managing it.

[Vasily Karasyov:]

All right. Thank you very much.

[Ari Danes:]

Summer, we have time to one last.

[Operator:]

Okay. Your final question comes from Alexia Quadrani of JPMorgan.

[Unidentified Analyst:]

Thank you. This is David on for Alexia. Just with regards to distribution on virtual MVPDs, can you maybe talk about any impact to churn you're seeing on those platforms now that NBA and NHL seasons have ended? And in DIRECTV NOW specifically, are you seeing any subs move to lower tiers given we're in the off-season?

[Bret Richter:]

So, it's early with regard to our OTT distribution, but it's not something I can really get into too specific way and its not something I'd say, we have a lot of visibility into with our OTT distributors, but we're please with the agreements we have in the OTT space. They contributed to our year-over-year improvement in subscribers for the quarter and we look forward to participating and the expected growth in that sector.

[Unidentified Analyst:]

Okay. Thank you.

[Operator:]

Okay. And I'll now turn the call back to Ari Danes.

[Ari Danes:]

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

[Operator:]

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