Q1 2020 Earnings Call
Good morning, My name is Carmen and I will be your conference operator today.
At this time I would like to welcome everyone to the M. S T Networks' fiscal 2021st quarter earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question and answer session.
He would like to ask a question. During this time simply press star one on your telephone keypad.
Withdraw your question press the pound King.
Thank you I would now like to turn the call over to our reading Investor Relations. Please go ahead.
Thank you Carlos good morning, and welcome unless you Networks' fiscal 2021st quarter Conference call.
Companies, President and CEO , Andrea Greenberg will begin this morning's call with a discussion of the company's operation.
This will be followed by a review of financial results of Bret Richter The company, the VP 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 Investor 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 back at 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 result 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 and what should operate.
As well as the factors described in the company's filings with the Securities 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'll discuss certain non-GAAP financial measures on todays 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 to free cash flow.
With that I'll now turn the call over to Andrea. Thank you are and good morning.
The first quarter, our company generated revenues of approximately $161 million.
Adjusted operating income $75 million and free cash flow of $56 million.
While these results were impacted by a challenging subscriber dynamics, we continue to believe in the unique strengths of our business.
We remain committed to successfully execute against our core objectives.
Our recent tender offer where we repurchased approximately $250 million of stock reflects our opportunistic approach to utilizing free cash flow to create shareholder value and the confidence we have and our long term outlook.
We have always managed our business with an eye towards long term financial performance, which has served us well over our extensive history.
This year in fact, MSG networks celebrates its fiftyth anniversary.
Since our debut as the country's first regional sports network in October of 1969.
We've had a proven track record of creating value through innovation and a history of first.
Including to name just a few.
Being the first to provide regular high definition sports coverage and the first to utilize virtual signage for hockey both now the industry standard.
The first a feature lifestyle and interactive gaming on a regional sports network streaming.
And in response to the growing interest in fantasy sports the first to provide a life fantasy infuse broadcast.
Looking ahead as the media landscape changes, we are confident in our ability to continue to innovate and drive value consistent with these changing dynamics.
Our exclusive live game coverage of local professional sports teams is valuable programming for distributors as they look for ways to differentiate themselves.
We believe this will continue to serve us well as we look to renew our affiliate agreements unexplored distribution opportunities for our networks on additional platforms and in new formats.
With respect to advertising first let me say that advertising demand for our content remains strong and we continue to believe we have considerable upside as the performance of our teams improves over time.
We expect that new advertising categories like last year's addition of legal I sports gaming will continue to support our advertising sales efforts going forward.
In fact yesterday, we announced a new sponsorship agreement with Fanduel, making them and official sports gaming partner for our next and Devils broadcast.
We are excited about this unique partnership which includes a mix of endgame integration branded content and commercial spot.
As interest in the sports gaming space grows we believe it will continue to drive not only advertising revenue, but also new content and engagement opportunities.
Other areas, where we remain focused on growing branded content and to our streaming App MSG go.
In fiscal 2019, we more than doubled our branded content revenue compared to fiscal 2018.
Which we believe is a testament to the unique value we create for our partners.
We continue to build on this momentum and anticipate another year of strong growth I believe or as we've already welcomed a number of new content partners, such as Fandel, who joined our already impressive roster of brands.
With respect to MSG go we are again, adding new functionality the season, including interactive gaming features which we expect will continue to drive user engagement length of tune and create additional sponsorship opportunities.
Finally looking at subscribers.
We experienced a slightly higher year over year rate of subscriber decline in our first quarter as compared to our fiscal 2019 fourth quarter.
While we remain focused on this dynamic we firmly believe in the strength of our business and in our continued ability to generate substantial free cash flow as well as long term value for shareholders.
I will now turn the call over to Brett who will take you through our financial results. Thank you Andrea and good morning.
Let's start with a discussion of our financial results for the fiscal 2021st quarter.
Total revenues of $161 million decreased $3.5 million or approximately 2% as compared with the prior year period.
This was driven by a 2.1 billion dollar decrease in affiliate revenue, primarily reflecting the impact of the decline in subscribers and to a lesser extent 700000 dollar on favorable affiliate adjustment, partially offset by higher affiliate rates.
Advertising revenue decreased approximately $600000, primarily due to a lower net decrease in deferred revenue related to ratings guarantees excluding the impact from deferred revenue advertising revenue would have been relatively flat year over year.
Looking ahead, we expect the year over year comparability of quarterly advertising results to be impacted by the timing of the regular season telecast schedule for the Knicks and or NHL teams. For example, we currently anticipate advertising revenue results in our second quarter to reflect the impact of fewer professional sports telecasts as compared with the second quarter fiscal.
Your 2019, while our fiscal third quarter will reflect the impact of additional professional sports telecasts.
Other revenues were lower primarily due to the absence of $700000 infuse media fees.
Direct operating expenses of $68.7 million increased $2 million were 3% as compared with the prior year quarter, primarily due to high rights fees expense, mainly a result of contractual rate increases.
As street expenses of $22.3 million increased $5.4 million were 32% as compared with the prior year period.
This increase was primarily due to higher advertising and marketing costs employee compensation and related benefits and professional fees.
The overall increase includes $1 million in expenses in the current your quarter that are not indicative of the company's core expense base.
Adjusted operating income of $74.7 billion decreased 12% as compared with the prior year period due to higher restaurant expenses the decrease in revenues and to a lesser extent higher direct operating expenses.
Excluding the impact of the $1 million in SGN expenses in the current your quarter. There are not indicative of our core expense base. The absence of $700000 infuse media fees and the 700000 dollar on favorable affiliate adjustment fiscal 2021st quarter. Your why would have decreased $7.6 million or 9%.
Compared to the prior year quarter.
In terms of our balance sheet.
As previously announced in early October the company completed the $250 million modified Dutch tender offer of its class a shares while this transaction settled in the company's fiscal second quarter, a number of our balance sheet accounts reflect the drawdown of $100 million under our previously on drawn revolver a step that was taken in our fiscal first quarter in anticipation of.
The tender closing.
For instance, as of September Thirtyth, 2019, total cash and cash equivalents were approximately $360 million.
In addition to reflecting the contribution from the company's first quarter cash flow also reflects the proceeds from the revolver draw.
Total debt outstanding was approximately $1.1 billion at September Thirtyth, which reflected $1 billion outstanding on the company's term loan and the 100 million dollar drawdown on the revolver.
Net debt at quarter end was approximately $740 million and our net leverage ratio decreased to 2.3 times trailing 12 months adjusted operating income.
Our average interest rate for the quarter was approximately 3.7%.
Pro forma for the tender offer on net leverage ratio would've been approximately three times trailing 12 months adjusted operating income.
[noise] reported free cash flow from continuing operations for the three months ended September Thirtyth 2019 was $55.9 million.
In mid October , we amended and extended the maturities of our credit facilities as part of this transaction, we increased the size of the company's term loan by $100 million and use the proceeds to repay the newly outstanding balance on to the revolver. As a result, the company now has in place a new 1.1 billion dollar term loan along with the $250 million under one roof.
Bolvar each with the term of five years from October 2019, our prior facilities have been slated to mature in September 2020.
The terms of the new facilities are substantially similar to those of our prior facilities with certain terms, reflecting favorable changes and or incremental flexibility for the company. As an example, our new credit facility provides for a total of $20.6 million and mandatory principal payments. During the next 12 months. This reflects a substantial reduction from the prepayment about.
Outs that would have been do during this period under the old facility and provides our company with enhanced financial flexibility.
The refinancing of our credit facilities is consistent with our strategy of maintaining a strong balance sheet, which is the foundation that enables everything else, we do to drive shareholder value.
And to that end in early October we repurchased approximately 15 million shares of our class a common stock were 24% of class a shares outstanding at $16.70 per share for an aggregate cost of approximately $250 million. We believe this transaction represented an important opportunity for the company to allocate a meaningful portion.
And if its investable capital towards a significant effort to enhance long term shareholder value.
The company has $186 million remaining on its share buyback authorization and looking ahead, we will continue to maintain an opportunistic and disciplined approach to capital allocation I'll now turn the call back over to Ari.
Thanks, Brett Carmen can we open up the call for questions.
Certainly at this time I would like to remind everyone. If you do you have a question. Please press star one on your telephone keypad.
Your first question comes from a line of Alexia Quadrani with JP Morgan. Please go ahead.
Hi, Thank you so much you're having anticipate entrepreneur at year end I believe with all Keith I is there any update you can provide us and how you see yourself position intense negotiations.
And then I guess, all case management yesterday did mention some ARPU pressure from sub cord shaving just wondering if you have our expect to see an impact to that.
Yes, so on the negotiation front.
I'm not going to get into specifics regarding our negotiations, but I think we said and you guys have heard us talk about our long track record of successfully renewing our agreements.
Cludia with major affiliates each of the past two years.
We believe this reflects the long term relationships, we've built with our major affiliates, including all piece. We also believe it reflects the importance and unique and well established value over live content, particularly in this marketplace, which is one of the most dynamic and competitive markets in the country.
And so again, what we're can't get into specifics regarding negotiations that we have we believe our unique position and as a provider of exclusive live game coverage in the local market for seven local sports teams will service well and our renewal negotiations.
And the second part of the question. Thanks, what we were not going to get into the specifics of individual operator performance.
Other than to say that the modest increase that we've seen this quarter versus last quarter in the year over year decline.
We believe it's come from one of our major distributors, who is publicly stated recently that it's been impacted by a number of factors, including roll off of promotional subscribers and I think more recently they've said by recent carriage dispute so what you've seen as a modest increase.
In the year over year rate of decline, we attribute to that specific major distributor.
Thank you very much.
Your next question is from a line of Bryan Goldberg with Bank of America.
Thanks, I've got a couple first on affiliate revenue looks like it came in a bit better than the spec expected and.
This is despite the sequential uptick in subscriber losses, and the onetime negative adjustment you guys called out the release I was hoping you can give us more color on what's going on there.
Perhaps with your rate card was there any type of step up in rate heading into the fiscal year, we should be thinking about either from a renewal or an existing contract is there a minimum guarantee it play versus any other dynamic.
You could talk to.
That would be great and then related on the subscriber side.
Thanks Your commentary just now.
Is it safe for us to assume that your subscriber declines would be.
Meaningfully or materially.
[noise] a better excluding the impact of this certain distributor.
I was just any color you could provide on the trend line in your your base of traditional distributors would be greatly appreciate it and then I do have one quick follow up.
Sure So Brian I'll start that so with regards to.
Your comment about the rate of growth.
Appreciate that and I think we've talked about this on prior calls at quarter to quarter sort of looking at sort of external expectations. The lights not always linear I think we've we've highlighted before that we believe that it's more important to look at quarterly affiliate revenue with a wide lens rather than try to dissect.
The percent change if you will.
Yes, I think we've offered this perspective, both when the trend line was well above external expectations. When it was below expectations I think ultimately what it.
Accounts to set our affiliate contracts are complex they have a variety of economic provisions and these economic provisions can impact the quarterly trend with regard to.
I would like pulling out the impact of a single operator, we're not going to do that I think we've been clear of Andrey his remarks, just before it on prior calls that our trends have been impacted by.
One operator particular and other quarters, others, but we're not going to try to give you a pro forma number of what the trend would have been if we took out one or added back something else.
Okay fair enough and my follow up on the advertising side.
Thank you guys were one of the first.
And the TV market to benefit from marketing spend related to the legalization of sports gambling.
I think you've lapped that initial influx of money now and I was just wondering if you could share with us your perspective on the outlook.
For this category from here and I know you had some commentary on it in your prepared remarks, but is this still high growth opportunity for you and how should we think about you know the potential legalization of sports gambling in New York State and how this might affect your.
Your advertising business.
Hi, Thanks. Thanks for the question Yeah, we certainly continue to see strong demand from the segment of the market and as as we announced yesterday.
He asked we and we have a new comprehensive partnership for the next in Devils telecast with sandal that include not only commercial spot, but also branded content and integrations, which I've talked about a lot as being part of our core strategy. So we we were very.
Very optimistic about the market, we're excited about the potential for future opportunities as you say, if additional markets and our territory legalize mobile gaming in the future, we think theres more opportunity for growth and we also as we said in the past we also see it as a way to drive.
The increase fan engagement and viewership so that has.
Additional benefits outside of just the new category I think the upside is significant for us.
Thank you.
Your next question is from a line of Brandon Ross wouldn't light Chad.
Hi, good morning.
First for Brett I'm wondering if you could tell us kind of the philosophy that was behind doing a tender offer versus open market purchases and if you would take leverage up further if there's another opportunity that presents itself like what happened last.
Quarter, and I have a follow up for Andrew.
Sure. Thanks Brendan.
I think first and foremost the activity this quarter was really consistent with the messaging that we've been giving for an extended period of time Inc. on these calls quarter to quarter, we use words like discipline and opportunistic and if you look back to 2019. The translation to that was primarily deleveraging when we hit the summer factored in all the.
All various factors, including yes.
Sorry, there's some noise on the call.
Not from US the week factoring in various factors, including the level of the stock price, we saw an opportunity to buy a substantial amount of stock where at least try to buy a substantial amount of stock in launching the tender with the tender was ultimately successful and that was consistent with again discipline, taking advantage of opportunity and using lever.
Rich. So we've also not quantified leverage targets in the past, we obviously took leverage down materially over the last four years from approximately five times too.
This inside of two and a half times, but we took up leverage in this instance.
And you will be thoughtful going forward, but what we havent ought to what we won't do is create expectations about how we'll allocate capital because we want to use those two important tools of sort of disciplined and opportunities and guiding principle.
Great and then for Andrea.
What 16 years left on your Knicks and Rangers right steels, and obviously the ecosystem is evolving pretty rapidly are there other ways. Maybe you can monetize those rights off of your own that work I guess I'm, especially interested in if you think you could sub license.
The rights to mobile batting apps.
As sports betting is hopefully approved in New York and Connecticut.
I mean, we'll we'll look at all any and all of alternatives to get our product out there. We'll look at we'll look at new formats, we'll look at non traditional distributors. We look at short form content that we've obviously put a lot of effort into MSG go and some of the ancillary benefits. There study. So the answer is.
As we will look at anything that makes sense for our business.
Great. Thanks.
Your next question is from a line of David Miller with Imperial capital.
Yes, Hey, Andrea I wanted to ask you about the potential of taking MSG and are both the MSG networks national very similar to what Fox has done with the Big 10 network. I mean, if you look at btn right, it's not really a regional sports network because.
You know I mean, obviously the big 10 is primarily encompass the schools in the upper Midwest and a couple on the east coast, but big kind alumni are everywhere in the same way that Ranger Sands and next fans are everywhere. So what are the restrictions in place that you have right now whereby you cannot roll out the networks nationally I'd just like.
I understand that back to our well what we actually do have a national product now.
It's distributed on on the Directv platform and on some some operators in some of their I believe in some of their sports tiers.
The product is our programming that's our professional team product. So we are limited by the leagues in terms of where we can take our local exclusive game product.
And.
And where were excited about looking for new distribution opportunities nationally for MSC. We agree that there are fans of the Knicks and Rangers Islanders Devils and Sabres nationally and we'll look to exploit that wherever possible.
Hey, Thank you.
Your next question is from the line of David Joyce with Evercore.
Thank you I think you alluded to some of the content earlier, but if you. Please.
Provide some more details on the incremental content that you've been adding to your properties lately just to help understand whats your with what some of the growth drivers can be thanks.
Okay, just our new programming, we've got we launched this summer I think I talked about it on one of our calls MSG 150, which over the summer was a three hour.
I did show that married culture, and sports and Weve continued that going into the season. So thats a new program that we have that errors.
Our post games, that's doing very well for us for we've got partnerships with brands like complex and over time that we've added to our programming lineup and that's designed to bring in some of our younger viewers. So I've talked a lot about this we look for organic an opportunistic ways to go.
Oh, our programming lineup and in all cases, we look for them to be accretive to our bottom line.
Okay. Thank you.
Thanks, David carbon we have time for one last caller.
And your last question will come from a line of Bernie Mcternan with Rosenblatt.
Good morning, Thanks for taking the question.
Our next.
Step function change in the level of spend for the past for quarters should we expect it to grow from here, albeit at a lower rate as we anniversary the step up starting next quarter and then just a question on the affiliate fee and a follow up to Brian's question was any impact on rate should we expect that to be recurring in future quarters, and then for Andrea you mean.
Comment on exploring distribution on new platforms was that just to comment on virtual NBP. These or was there something else as well. Thank you.
Yeah. Thanks, Thanks, Birdie I'll I'll take the beginning of that so your first we'll take our order with the second question with regards to rate, we don't provide guidance im not going to speculate on the impact of any given element of above the current quarter on a future quarter, you know similar with SGN aid not providing guidance, but yes, it on a year over year by.
Basis Theres been a step up we've highlighted both last quarter in this quarter that an element of that.
Relates to certain spend which isn't part of the company's core expense base.
A portion of that was professional fees, we have and and one of the things you're seeing in this percent change in a company that produces $750 million revenue on annual basis, we have.
Single digit millions of dollars in SDMA for marketing expense or advertising sales commissions, which can really move you know these numbers in this quarter as I highlighted in our prepared remarks. Unfortunately, the increase related to advertising marketing, what we're promoting certain of our product.
Yes, and I think just on the follow up to a brandon's question I think what Andrea Brandon's question. I think was focused on non traditional methods of distributions I think thats, what Andrea was and I was answering but I think generally speaking the answer applies to all distribution increment all incremental.
Ladies including virtual distribution of virtual mbd distribution opportunity.
Understood. Thank you very much.
Okay.
I'll now turn the call back over the Ari Dean for any closing remarks.
Thanks carbon thanks. Thank you all for joining us and we look forward to speaking with you on our next earnings call have a good day.
Thank you again for joining today's conference you may now disconnect.