MSG Networks Inc.
Q4 2016 Earnings Call Transcript

Published: 22 Aug 2016

[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 2016 Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions] Thank you. I will now turn the call over to Ari Danes, Investor Relations. Please go ahead, Sir.

[Ari Danes:]

Thanks, Christy. Good morning and welcome to MSG Networks' fiscal 2016 fourth quarter and year end conference call. The Company's President and CEO, Andrea Greenberg, will be given this morning's call with a discussion of the Company's recent highlights. This will be followed by a review of financial results by Bret Richter, the Company's EVP and Chief Financial Officer. 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

[Andrea Greenberg:]

Thank you, Ari, and the morning. 10 months ago, MSG Networks began its journey as a pure play publicly traded media company with increased flexibility to pursue its own business plan. Now as we conclude our first fiscal year, I am very pleased with what we've been able to accomplish, not only financially but also strategically and operationally, as we continue to strengthen our position as an industry leader in regional sports and entertainment programming. Financially, we delivered strong results, including fourth quarter revenues of approximately $161 million and adjusted operating cash flow of $80 million and for our full fiscal year $658 million in revenues and $297 million in AOCF. We know that the foundation of our financial performance is our highly valuable exclusive live content and with this in mind, this past year, we renewed several of our key programming agreements. As a result, all of our live professional sports content is now secured on a multiyear basis including long term agreements for all of our NHL and NBA programming, providing us with the foundation for continued success and meaningful visibility into our operating expense base for years to come. Among our fiscal 2016 accomplishments, we reached new 20-year rights agreements with the New York Knicks and New York Rangers, which were executed at the time of the spinoff as well as a new multi-year agreement with our longtime partner, the New York Red Bulls. In June, we announced a renewed and expanded long-term partnership with the Buffalo Sabres and Pegula Sports and Entertainment, enabling us to continue to serve as the television home of the Buffalo Sabres for the long-term, while providing new and compelling programming specifically for our western New York viewers. In addition to a full slate of Sabres games, we will continue to provide extensive pre- and post-game coverage and other Sabres-related programming. Our western New York programming slate will also include content dedicated to the NFL's Buffalo Bills, including the Rex Ryan Show, Bills All Access and Bills Tonight. And just last week, we completed a multi-year extension of our partnership with the New York Giants, securing our role as the official regional sports home of the Giants franchise with a full lineup of team coverage that includes preseason game replays, a postgame show, and other in-depth shoulder programming. While we believe we are second to none in our market in terms of award-winning live fall and winter sports content, our objective to maintain robust year-round programming is exemplified by our exciting summer programming lineup. The Red Bull's 21st season on MSG Networks is in full swing, with major league soccer games airing all summer long and into late October, while the WNBA's first place New York Liberty continues its regular season into mid-September. Through our live coverage of press events, we have also given our viewers a front row seat to the New York Knicks significant off-season developments, which included naming a new head coach, Jeff Hornacek, and announcing the addition of All-Star point guard, Derrick Rose, along with free agents Joakim Noah, Courtney Lee, and Brandon Jennings. We expect the excitement around these new arrivals to lead to even more interest in the team this upcoming season and look forward to delivering a robust slate of programming for Knicks fan. We also look forward to an exciting 2016/2017 season for all our NHL teams

[Bret Richter:]

Thank you, Andrea, and good morning, everyone. As a result of the accounting standards that apply to the presentation of our spinoff of the Madison Square Garden Company, our results for the fourth quarter and full fiscal year reflect a few important items, which I would like to highlight for you. Fiscal 2016 second, third, and fourth quarter results reflect MSG Networks on a standalone basis, including the Company's post spin cost structure and actual corporate overhead. However, results for the current year first quarter, as well as each quarter of the prior year include the results of the sports and entertainment businesses of the Madison Square Garden Company as discontinued operations. AOCF and operating income from continuing operations for the first quarter of the current fiscal year and each of the four quarters for the prior fiscal year, includes certain corporate overhead expenses that do not meet the criteria for inclusion in discontinued operations. MSG Networks did not incur these expenses in the Fiscal 2016 second, third, and fourth quarters, and we do not expect to incur these expenses in future periods. Please note that fiscal 2016 results include the impact of higher rights fees compared with the prior year period relating to our long-term media rights agreements with the New York Knicks and New York Rangers. Now let's go through our reported results for the fourth quarter as compared with the prior year period. Total revenues of $160.5 million for the fourth quarter increased $7.4 million or approximately 5%. This includes a $7.3 million increase in affiliate revenue principally due to higher affiliate rates and the impact of a $3.8 million unfavorable affiliate adjustment recorded in the prior year period, partially offset by a low single-digit percentage decline in subscribers as compared with the prior year period. Advertising revenue increased by $0.4 million, primarily driven by higher average per-game sales from the telecasted live professional sports programming and other net increases partially offset by the impact of fewer regular season telecasts as compared with the prior year period. Excluding the impact of the unfavorable affiliate adjustment recorded in the prior year quarter, fiscal 2016 fourth quarter total company revenues increased $3.5 million or 2%, as compared with the prior-year fourth quarter. Direct operating expenses of $63 million increased $11.2 million or 22%, as compared with the prior year quarter. The increase was primarily due to higher rights fees expense, partially offset by other programming related cost declines. The increase in rights fee expense primarily reflects $12.3 million related to the new long-term media rights agreements with the New York Knicks and Rangers. Assuming the new media rights fees with the Knicks and Rangers were in place during the fiscal 2015 fourth quarter, direct operating expenses would have represented a decline of 2% or $1.1 million. SG&A expenses of $18.9 million declined $22.8 million or 55%, primarily due to the absence of certain corporate overwrite expenses included in the results of the prior-year fourth quarter. This was partially offset by certain incremental corporate costs incurred by MSG Networks as a standalone public company. On a reported basis, AOCF of $79.8 million increased $18.7 million or 31%, as compared with the prior year period. This increase was primarily due to lower SG&A expenses and higher revenues, partially offset by higher direct operating expenses. As of June 30, 2016, total cash and cash equivalents were $119.6 million. Total debt outstanding was $1.49 billion and our $250 million revolver remained undrawn at quarter's end. We made a mandatory quarterly amortization payment of $11.25 million during the June quarter in accordance with the terms of our credit agreement. Please note that our credit facility provides for $67.5 million in mandatory principal payments during fiscal year 2017. As of June 30, 2016, net debt was approximately $1.37 billion and our net leverage ratio was 4.2 times annualized fiscal year 2016 second, third and fourth quarter AOCF. Our average interest rate for the quarter was approximately 2.3%. Reported free cash flow from continuing operations for the year ending June 30, 2016 was $178.5 million. Please note that our fourth quarter cash flow reflects the timing of certain working capital movements. In particular, we made two estimated tax payments totaling $50 million during our fourth quarter. As you know, during the fiscal year 2016 third quarter, we made a significant one-time tax payment related to certain historical activities of our former subsidiary, the Madison Square Garden Company, which limited our ability to delever during the year. Looking ahead to fiscal 2017, as Andrea noted, we expect to generate a significant amount of free cash flow. As a result, we anticipate making further progress with respect to deleveraging our balance sheet, which we highlighted as one of our initial priorities at the time of the spinoff less than one year ago. I will now turn the call back over to Ari.

[Ari Danes:]

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

[Operator:]

[Operator Instructions] Your first question comes from Brandon Ross of BTIG.

[Brandon Ross:]

Just wanted to hit a couple of topics. First, on subscribers, thanks for the additional color on the subscriber trends in the quarter. Was wondering if you could also tell us the ending subscriber number that you reported in your 10-K, and to also what the exact percentage of decline that represents? And then the second topic is -- I know you guys are pleased with the progress that you've made in the past year, but I think the media landscape has continued to change since you guys spun out MSG. Do you think it makes sense to be part of a larger media company? And also, have you had any inbound inquiries from larger media companies about a potential acquisition? Thanks.

[Andrea Greenberg:]

Hi, Brandon. It is Andrea. On the subscriber color, as we discussed in our prepared remarks, the year-over-year percentage decrease in subscribers in the fourth quarter improved as compared to the rate of decline in 3Q. As we said, it is attributable to two specific items. First, FiOS added us to an incremental legacy package, which really helped our subscriber situation. Second, cumulatively over the past several months, certain of our affiliates saw monthly year-over-year subscriber improvements. I think it is important to point out that these subscribers that we are talking about are actual viewing subscribers of MSG Networks. As of our most recent monthly data, we had an average of the combined subscriber reach of MSG and MSG Plus at 7.24 million subscribers, viewing subscribers, actual subscribers. That represented a decrease of slightly more than 3%. I think it is about 3.2% exactly, versus the 7.48 million subscribers we reported in the prior year. If you look back, the 7.48 million subscribers at the time was down about 3.5% from the then prior year. In other words, we saw an improvement in the percentage rate of decline in fiscal 2016, and again, this is before the benefit of any of our contractual protections. On the subscriber front I'd also like to mention that we have commitments for certain small incremental cable distributions in the coming months, primarily in Connecticut and Pennsylvania, which we believe continues to highlight the value of live professional sports programming, and our focus, our continuing focus, on capitalizing on opportunistic incremental distribution opportunities. So we are very, very pleased with our performance this past year -- part one. Part two, on the standalone, our ability -- standalone, to operate as a stand-alone company, we have been in this business, and I have said this in past calls, for 30, 35 years. We were the original regional sports network. We believe in the value and appeal of live professional sports programming, and our actions this past year have really demonstrated that we believe that this business continues to be a solid business with strong revenues, strong AOCF, and very significant margins. Our content is incredibly scarce, it is viewed live, it's DVR approved. At the end of the day, we like this business and we believe that we can continue to be successful as a standalone business, generating significant value for our shareholders.

[Ari Danes:]

Thanks, Brandon. Christy, we'll take the next caller.

[Operator:]

Your next question comes from Amy Yong of Macquarie.

[Amy Yong:]

Thanks. Good morning, Andrea and Bret. First, Andrea, can you just following up on those subtrends, you had two prominent MVPD deals close this quarter, actually probably three, including FiOS, any noticeable trend that you're seeing as a result of consolidation that you can further elaborate on? And then on MSG GO, what are some of the points of consideration as you sign up other deals with MVPDs? And how are you thinking about digital outlets like Google and Amazon? And then also, on the ad monetization front, can you talk about some of the usage trends you're seeing? And then one quick question for Bret. On free cash flow, any sense of the leverage target that you are trying to hit? And given the programming visibility that you have locked up, what are some of the other priorities of cash? Thanks.

[Andrea Greenberg:]

Thanks, Amy. I'm going to turn the question over to Adam Levine, who is our EVP of Distribution, to address the first part of the question, and then Bret will take the second.

[Adam Levine:]

Hello, Amy. So, I think the first question was consolidation; we've got Time Warner, obviously, a large presence in our market. We have been affiliated with Time Warner and Charter in this market for many years. Charter is relatively small in our market. I would say we are very comfortable with the terms of our agreements post merger there. We don't have the sort of rate harmonization concerns that we have heard others talk about in the marketplace. In terms of other consolidation, I think the recent deals, AT&T had sold their systems to Frontier before that acquisition so that was irrelevant to our Business. And then I think part of your question related to OTT and virtual MVPD opportunities. And I would just say there that we continue to explore and discuss all new distribution opportunities, both with our existing operators and new entrants, such as virtual MVPDs. We're always looking at things that make strategic sense for the Business. We are engaged in discussions with a number of entities in that regard. Those discussions are at various stages, but we don't have anything specific or new to share at this point.

[Bret Richter:]

Thanks, Amy. I will take the leverage and the capital allocation questions. So, with regards to leverage and a leverage target, I'd say two principal points. First, as I think I mentioned in the prepared remarks, we made a priority at the time of the spin to initially allocate capital towards deleveraging. We have done a little bit of that through this year. But as you are aware we have significant other non-operational draws on our cash, including $190 million of tax payments in the last couple of quarters a significant portion of which related to our former subsidiaries. When we think about leverage targets, it is more of a dynamic management of our target. There is a lot of factors that go into that, including the rate environment held up to the Business, whatnot. So we will do that dynamically. And as we move forward into this year, as we lap the discontinued operations, next quarter we will be in a position to highlight our true last 12 months performance as a stand-alone company. We will have step ups in our amortization payments with $67.5 million due this year. We will start to, and continue to, really turn and think and work to how we allocate the balance of our capital. The management team has a lot of experience with regards to capital allocation, both at this Company with our former sports and entertainment subsidiary, and other companies. We have used broadly at these other companies virtually all of the capital allocation mechanics that can be implemented from managing leverage, shareholder return, making investments, and we will do that dynamically moving forward. But there is no specific target that we would highlight with regards to a leverage multiple to take the Company to. Although we are going to stand by our intent initially towards managing that down while we consider other alternatives.

[Ari Danes:]

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

[Operator:]

Your next question comes from David Joyce of Evercore ISI.

[David Joyce:]

Thank you. In thinking about your growth opportunities with things such as MSG GO, can you talk some more about the usage there and whether there's been any positive movement or flow-through yet from improved measurement of multi-screen viewing as it pertains to your advertising revenue?

[Andrea Greenberg:]

Sure, well MSG GO, we were pleased last quarter to have launched Comcast along with Altice and as we go into this upcoming season, we hope to be announcing new distribution. Again, we are pretty new with MSG GO so the usage numbers are building and we expect that they'll build as we go into the beginning of the NHL and NBA seasons, as we program live Knicks and have more of our Emmy award winning video on-demand content available. MSG GO is an opportunity for us to grow advertising and to integrate new brands. And to that end, we actually hope to be announcing some new brands of entertainment opportunities in the upcoming months with major sponsors of ours that will bring custom content to MSG GO. And I think as we think of growth, David, something else that I had mentioned in our prepared remarks, we are about to launch a new, revamped website. And when we designed our website, we really designed it with the viewer and the advertiser in mind, and it provides for some real enhanced sponsor integration opportunities. And as that rolls out, that is currently scheduled to launch in the beginning of October, we will be able to monetize that in a new and increasing fashion. We are very excited about those two opportunities.

[David Joyce:]

Thanks. And if I could tag onto that with the personnel changes at some of the teams, have you seen any accelerated advertiser interest? Any acceleration in, I guess upfront ad deals?

[Bret Richter:]

Sure, David. I will take that. It is still early, but we are very excited about the upcoming season. As Andrea highlighted, we saw our per-game sales improve in the fourth quarter and on a year-over-year basis. We grew revenue despite having fewer games, and we want to build on that momentum. Importantly, live sports content is highly desired by our advertisers, as is our demographic, and we take that and we continue to benefit from our partnership with the Madison Square Garden Company to package our inventory in multiyear, multi-element deals and capitalize on this excitement. The buzz related to the Knicks, as you highlighted, particularly strong. It is too early to comment on potential advertising sales impact, but excitement generally generates demand, and we are seeing some new advertising interest. So overall, we expect that excitement and improved team performance would translate to advertising sales gains, but we will see.

[Ari Danes:]

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

[Operator:]

Your next question is from John Janedis of Jefferies.

[John Janedis:]

Thank you. You've done a good job on managing other programming costs, and I wanted to ask to what extent the direct OpEx management is sustainable or if there are expenses coming in this year that we should be thinking about?

[Andrea Greenberg:]

Well, as we said in our prepared remarks, and this is, I think, important for us to note, all of our NBA and NHL live event programming is secured for the long term. What that does is that gives us visibility into our expense base for many, many, many years to come. In terms of incremental programming, all new programming expense will be opportunistic, and generally offset by revenue, which it will be accretive to the bottom line. We are going to be very, very disciplined, as we have been, in new programming opportunities. And, more importantly, I think we are comfortable that our current programming economics are consistent with our overall goal of meaningful AOCF and cash flow generation. I think the developments this past year are all positive and give us real long-term visibility in how we should grow our Business.

[John Janedis:]

Okay. Thanks. And maybe separately, then, based on your comments related to FiOS and I guess what I'd called future opportunities with affiliates, is the interpretation that the current subscriber level in terms of improvement or potentially further improvement is sustainable?

[Andrea Greenberg:]

Well, we are not going to comment on future subscriber opportunities, other than to say that we do expect continued affiliate revenue growth going forward, and we are always looking for incremental distribution opportunities that make sense for our Business.

[John Janedis:]

Thank you.

[Operator:]

Thank you. Your next question is from David Miller of Loop Capital Markets.

[David Miller:]

Hey guys. I'm going to ask a question that I asked your previous management team, I think, two fiscal years ago. And at the time I asked the question, I didn't feel like I -- it was either I didn't get a straight answer or I didn't understand the answer, probably the latter. So the question is -- given the single-digit subscriber declines that you have been talking about, Andrea, for the last four quarters, what is prohibiting you from declassifying MSG and MSG Plus as a regional sports network and reclassifying it as a national sports network, and exporting MSG or MSG Plus or both to other cities, particularly out here in Los Angeles, where there are just a ton of Knicks fans and Rangers fans and I see them every day wearing the jerseys. If you could just take me through why you are not able to do that, I would love to understand that. Thank you.

[Andrea Greenberg:]

Sure. Absolutely. David, we are subject to certain territorial restrictions that are imposed upon us by the league. So we can only take our professional product into certain areas of New York, Connecticut, Pennsylvania, New Jersey. Now, it is interesting that you say you would love to see some of our content, because in fact, we do have national distribution with some of our non-professional content, primarily on DirecTV. I think there are about, we have about 2.5 million, 2.6 million national homes, and that is something that we have been looking at pursuing over the last couple of years. Again, the pro product distribution is limited to the northeast, and national distribution, we do have a lot of compelling, Emmy award winning programming that's of interest in LA, but unfortunately not the Knicks, Rangers, Devils and Islanders. If you are a subscriber in market, and that’s in the New York, New Jersey, Connecticut, Pennsylvania area, and you have a subscription here, you can actually take your subscription with you to LA and see the Knicks, and see the Liberty, and see the Red Bulls while you are there, but we can't go there without that tethering to the territory. I hope that answers your question.

[Ari Danes:]

Thanks for the question, David. Christy, we will take one last caller.

[Operator:]

Sure. Your final question comes from Ryan Fiftal of Morgan Stanley.

[Ryan Fiftal:]

Great, thanks. Good morning. I have a couple on MSG GO and your digital rights. First, Andrea, you mentioned you have secured your live programming rights on a multi-year period, but does that include digital rights for the NHL? I know FOX was able to reach a deal recently, but I wasn't aware if you have secured those rights. And I guess if you haven't, do you have any expectation that you would have to pay more to get those rights, if you are able to get them?

[Andrea Greenberg:]

Our underlying rights agreements with our teams partners grants us all the rights we need to operate our Business. As we've said in the past those rights are subject to league rules, and league agreements, and one of those agreements needs to be with the NHL. FOX has done their NHL deal. We continue to have discussions with the NHL. We have nothing new to report during this call, but we are talking. And the good news is that our MSG GO product currently offers live Knicks, Liberty's, Red Bulls and lots of VOD programming around it that is compelling to subscribers, so we are seeing utilization, but again, on the NHL front nothing new to report.

[Ryan Fiftal:]

Okay. Do you know, just as a follow-up on that, I think the press reports were that FOX had to pay some additional amount for those rights. Do you know, has there kind of been a market set for those rights that you know of, or is it still very much in flux?

[Andrea Greenberg:]

Yes, we are in discussions with the NHL, so I'm not going to comment on those private negotiations.

[Ryan Fiftal:]

Okay. Sure. And then my second question is around direct-to-consumer. Obviously, we are seeing more and more companies launch direct-to-consumer offerings. We know, historically you guys have been very committed to staying in MVPD ecosystem, but as the sub losses continue and broadband only houses continue to grow in your footprint, is there any evolution in your thinking about going direct-to-consumer? Thanks.

[Adam Levine:]

Ryan. It's Adam. I think what; we are always going to explore opportunities that make strategic and financial sense for the Business. We are not restricted in if we choose to launch such a product, but we don't have anything to announce on this call.

[Ryan Fiftal:]

Okay. Thank you.

[Operator:]

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

[Ari Danes:]

Thank you for joining us. We look forward to speaking with you on our fiscal 2017 first quarter earnings call. Have a good day.

[Operator:]

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