Q2 2020 Earnings Call
[music]. Good morning, My name is Christina and they'll be your conference operator today at this time it would like to welcome everyone to the MSG networks' fiscal 2022nd quarter.
This 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.
If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad.
To withdraw your question press the pound key. Thank you I would now like turn the call ever to argue dance Investor Relations. Please go ahead Sir.
Thanks Christy.
Good morning.
And welcome to MSG Networks' fiscal 2022nd quarter Conference call.
The company's president and CEO, Andrew 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 Companys E VP, Chief Financial Officer and Treasurer.
After their prepared remarks, well 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 web site.
Please take note of the phone.
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 result developments and events may differ materially from those are the forward looking statements as a result of various factors.
These include financial community perceptions of the company in its business operations financial condition and the industry in which it operates.
As well as the factors describing the company's filings with the Securities and Exchange Commission.
Including the sections entitled Risk factors, and managements discussion and analysis of financial condition 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 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 to free cash flow with that I'll now turn the call over to Andrea.
Thank you are and good morning.
We had an eventful fiscal second quarter as we took a number of important step that we believe well positions our company for the future.
As we've previously discussed in early October we repurchased approximately $250 million of stock representing 24% of class a shares outstanding and the transaction that reflects our confidence in our long term outlook.
This was followed later in the month with the refinancing of our outstanding debt.
Which provides us with enhanced financial flexibility.
And in December we successfully renewed affiliate agreements with two of our largest distributor.
We have now completed renewal with four of our top five affiliates over the past two years.
This demonstrates our track record of working with distribution partners to reach mutually beneficial deal that for us.
Our consistent with our goal of generating robust revenue adjusted operating income in free cash flow.
We believe there are a number of factor helping to drive these renewals.
Including the increasing importance of life content in today's changing media landscape.
The sheer number of like games, we telecasts.
More than any other our son in the country.
The strength of our relationship.
Many of which span decades.
And our presence in the New York DNA, one of the most competitive markets in the country.
Looking ahead, we believe our desirable position will continue to serve us well as we not only work to renew future agreements, but also explore incremental distribution opportunities.
Another area of focus is our commitment to providing compelling content.
She begins with our exclusive live game coverage of five local and be a in NHL team.
For the 2019 20 regular season, we will broadcast approximately 400 game.
Complemented by our pre and post game shows and behind the scenes team coverage.
We continue to pursue original programming that increases fan engagement and broadens our appeal, including with popular theme week programming.
On the return of a condensed version of our MSG 150 show.
Which initially debuted last summer.
And we will soon be entering a new 30 minute program produced for us by draft King.
Designed to meet the growing interest of our audiences sports gaming.
This collaboration with drafting is part of a recently renewed marketing partnership.
And highlights the unique value, we received by being part of MSG integrated sports.
Entertainment and media sponsorship deals.
Sports gaming continues to be a strong overall category for us with a variety of content advertising and sponsorship arrangements with some of the nation's top sports betting brands.
This past quarter. We also benefited from our pursuit of non ratings rely on advertising opportunities expanding many of our branded content partnerships and further improving the user experience of MSG go designed to increase customer engagement and ultimately enhance the value of the platform sponsorship inventory.
[noise] finally, while we experienced a higher year over year rate of subscriber decline as compared to our fiscal first quarter.
We are confident that the strength of our relationship.
Coupled with our compelling content and attractive offerings for advertisers positions us well to generate substantial free cash flow and create long term value for our shareholders.
I will now turn the call over to Brett who will take you through our financial results.
Thank you Andrea and good morning, everyone.
Let's start with a discussion of our financial results for the fiscal 2022nd quarter.
Total revenues of $187.7 million decreased $5.2 million were approximately 3% as compared with the prior year period.
This was driven by a $3.1 million decrease in affiliate revenue, primarily reflecting the impact of the decline in subscribers, partially offset by higher affiliate rates and to a lesser extent, a $2.3 million favorable adjustment recorded in the quarter.
Advertising revenue decreased approximately $1.4 million year over year.
This was primarily due to a lower net decrease in deferred revenue.
Related to ratings guarantees and the timing of professional sports telecasts as compared with the prior year quarter.
This decline was partially offset by an increase in per game sales for our life game telecast and other net advertising increases.
Primarily from our non ratings based initiatives, which include branded content MSG go and our outdoor digital billboards.
I would note that we currently anticipate that fiscal third quarter advertising results will reflect the impact of additional professional sports telecasts as compared with the prior year quarter.
Other revenues were lower primarily due to the absence of $800000 infuse media fees. Our fiscal 2019 second quarter was the last quarter, we recognize revenue from fuse me.
Direct operating expenses of $84.1 million increased $2.6 million were 3%.
As compared with the prior year quarter, primarily due to higher rights fees expense, mainly results of contractual rate increases.
Ethylene expenses of $32 million increased $700000 were 2% as compared with the prior year period.
This was primarily due to higher advertising and marketing costs professional fees and other cost increases, partially offset by lower employee compensation and related benefits.
I would note that the increase in SGN expense includes $600000 in expenses in the current year quarter that are not indicative of the company's core expense base.
Adjusted operating income of $77.1 million decreased 10% as compared with the prior year period, primarily due to the decrease in revenues and higher direct operating expenses.
Reported free cash flow from continuing operations for the six months ending December 31st 2019 was approximately $72 million.
Turning to our balance sheet.
As of December 31st 2019, total cash and cash equivalents were approximately $116 million or total debt outstanding was $1.1 billion and our $250 million revolver was undrawn.
Our average interest rate for the quarter was approximately 3.3%.
Net debt at quarter end decreased by approximately $240 million to $984 million and our net leverage ratio increased to 3.1 times trailing 12 months adjusted operating income as compared with 2.3 times at the end of our fiscal first quarter as a reminder, the increase in our net debt position.
And our net leverage ratio was primarily the result of our repurchase of approximately 15 million shares were 24% of our class a common stock for approximately $250 million in early October.
This was partially offset by incremental cash flow generated from operations during our fiscal second quarter.
As we discussed on our last quarters earnings call subsequent to the repurchase we amended and extended our credit facilities for a five year term from October 2019, and as part of this refinancing increased our term loan by $100 million to $1.1 billion.
Looking forward, our new credit facility provides for a total of $27.5 million and mandatory principal payments during the next 12 months.
Lastly, 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 will now turn the call back over to Ari.
Thanks, Brett Christy can we open up the call for questions.
Certainly and as a reminder to ask a question press Star then the number one on your telephone keypad and your first question is from Bryan Goldberg of Bank of America.
Thanks, I had a question on the new carriage agreements you called out today.
We think about your long term outlook.
Are there any changes in these new deals we should be taking into account and really focus on a few areas like did rates go backwards and forwards on you.
Are you going to be packaged any differently by these new distributor, but well by these existing distributors.
Have minimum guarantees changed.
Or or are there any shifts to add inventory sharing agreements with the distributors.
And then I have a follow up.
Oh, Hi, Brian well, let me, let me say that we're not going to get into the specifics of the agreement, but generally we are totally comfortable with renewal terms. They include rate increases packaging and other protections that are consistent with our goals of creating.
Continued robust revenue I and cash flow.
On your positioning question I'll say that the generally the packaging and other protections and RBL ensure continued expanded basic carriage.
Okay, Great and then on the subscriber results from a quarter was just wondering if you could share your views on the drivers.
Of the accelerated sub losses versus the September quarter, and I guess somewhat related to this if you could update us on your efforts to secure new carriage on streaming platforms like Youtube any color you could share would be great.
Sure sure I'm on the subscriber decline you know as it's been the case in our prior quarters. The virtually all of the acceleration came from the same to distributors that we referenced in previous calls and I'm. Just you know some some additional color one of these distributor.
There's has again publicly disclosed that it continues to be impacted by the roll off of promotional subscribers. So we believe that the same dynamic impacted our subscriber results this quarter.
On I know TTR them, you want to yeah. So on a new distribution with respect to operators like you to bore Julio.
We continue to have discussions with with those operators in that evolving but still fairly small segment of the Paytv universe. This past quarter. We were pleased to have been included in 18 Tees New product. The 18 TTB service in New York.
Probably know is currently only available in select markets, but including New York and we look forward to that being rolled out in the rest of our regional footprint.
Of course, we remain focused on exploring in pursuing all incremental distribution opportunities going forward.
Great. Thanks, a lot.
Okay.
Thank you. Your next question is from Brandon Ross of light shed partners.
Hey, good morning, guys.
Verizon recently made some changes to its packaging or shall I say merchandising with.
Mix and match and they're now offering due to TV is a video alternative.
Maybe if you could give us some color on how this is impacting your business and what protections you have in place in your Verizon carriage agreements.
Potentially offset.
Some of the weakness that this would theoretically cost.
And and then maybe how.
This move by Verizon May have impacted your recent negotiations and towards the protections that you look for it in those deals.
Thanks, Okay, Yeah, I'll I'll jump in on it so horizons, a longstanding partner of ours. They also happen to be a significant significant advertiser on the network as well.
You probably know this just launched in January so, it's all really fairly new we're still discussing what would rise and but.
We're very comfortable with the terms of our Verizon agreements for the files TB branded packages. Our networks were not negatively impacted as a matter of fact were actually available to subscribers more packages now than we were before on what we see is simplified pricing elimination of certain fees.
On the files TV branded side on the you tube TV side, what we see as a price point, that's comparable to the base price for the Youre files TV package, one of the new packages with substantially fewer towels, and we think consumers will look at that and decide ultimately how that price value equation falls.
Ultimately, we're comfortable with the with our contract on the protections that we have.
We remain confident the value of our networks as far as the the recent renewals I think as Andrew said just to reinforce what we're pleased to have concluded those renewals and we're comfortable with the productions that we have in there and I would say there were no impact of this on those discussions.
Thanks, so much.
Thank you. Your next question is from Alexia Quadrani of JP Morgan.
Hi, This is Dave Okonski on for Lexia, just looking at the rate of affiliate revenue decline in Q2 factoring in adjustments would seem to imply an acceleration greater than we would've expected subs moving from down 7% down in so just wondering if there's other factors such as price or anything from your recent renewals that might have impacted results.
On the quarter.
Yes, David I'll take that the the primary impact.
On our affiliate revenue this quarter in the comparison to prior period was the rate of subscriber change you. We've talked consistently that theres a lot of complexity in these agreements and in any given quarter. There can be some adjustments when they're large enough we call them out we called out a large positive this quarter.
There's ended the relationship isn't holding linear to just rate and sub and of course the.
The renewals were at the end of the year, yes.
Okay and then just your stock is now approaching levels, where you would announce the tender offer over the summer.
It's in the recent renewals you did provide at some level of visibility and stability.
How are you kind of thinking about capital allocation here any update would be great.
Yes, our plans for capital allocation haven't changed we're going to continue to be very thoughtful about it and balanced the need for a strong balance sheet with allocating capital to efforts that we believe would enhance shareholder value I think our actions earlier. This fiscal year were wholly consistent with that both the tender and the refinancing of our balance sheet.
Looking forward you will make that determination on a dynamic basis, but I think it's important that we do have additional authorization.
And that was put in place at the time bartender, but.
We will allocate capital as we see fit.
Okay. Thank you.
Thank you. Your next question is from David Miller of Imperial capital.
Hey, guys I have one for Brad one for Andrea Brad as you know through our written research product, we've sort of continue to propagate theme that the public markets are not really recognizing the intrinsic value of the company and so with that you know you've gone over.
Additional terms of the term loan you've talked about additional buybacks, which we appreciate what other levers do you think you can pull going forward to engineer additional tender offers at these prices.
Because it feels like you guys are slowly going private which you probably should just given the overall landscape and then Andrea.
Could you give us an update and maybe I'm asking this question out of NIE entity over here on the West coast in Los Angeles, but could you give you could you just give me an update on where the legalization of sports mobile sports betting rather standard the state of New York is that's the real juice in the story as we see it obviously, it's legal in new Jersey, but we'd like to.
I understand what the processes for legalization in New York extra much.
Okay, Brett you Wanna, Yes, I'll take the first one so I think.
With regards to engineering future tenders I think whats important is that we have a lot of flexibility, we have a $186 million maintaining on our buyback we've.
Put in place five year terms of our credit facility, which in the near term significantly reduced the mandatory pre payment obligations.
We continue to generate free cash flow and we'll continue to evaluate what's right for the company in the pursuit of shareholder value on a go forward basis.
And on the mobile sports betting question as you indicated.
Mobile sports betting is legal and new Jersey, and we've capitalized on that we're seeing strong demand for the product tied to the New Jersey legalization us to New York, It's really an evolving landscape and.
It is not legal in New York, Yes, we are closely following development and we believe that there is significant upside when an ETF legalized, what's gimme becomes legal not just in New York, but we also serve portions of Connecticut.
Hi, it's it's we're seeing strong demand from the category now.
So we expect to see continued strong demand.
Hey, Thank you.
Thank you. Your next question is from the Philly cherish outlets Cannonball research.
Good morning wanted to ask you about the cost side of the equation. So what do the current pressures on the topline me in for your relationships with the teams and the midterm because historically teams often push toward a step up and rights fees when renewing contracts and do you think that's still their mindset now given where how're you.
Business model is evolving or are there more understanding of what's going on so essentially my question is do you see a more or less stable margins going forward or they will get pressures from TV rights costs on the margin assuming the current revenue trends continue.
Well Oh, we have we have said that we have long term rights agreements for our professional Nbn NHL product. We've also disclose that for the Knicks and Rangers specifically our deal so far in excess of 15 years.
We have more than 15 years left on our remaining time.
Those deals all have six.
Step ups in REIT space. So we have significant visibility into our expense base on the rights fees side for many years to calm.
Alright, thank you.
Christy we have time for one last color.
Certainly your final question comes from burning Mcternan of Rosenblatt Securities.
Great. Thanks for taking the questions just a follow up on the carriage agreement I was wondering if you could provide any color on how long. These renewals were for and then also mentioned in the prepared remarks before the top five renewed renewals have been done over the past two years should we expect a hiatus over the next year or two.
And then lastly, just on free cash flow it was low lower year over year, there were some seasonality and free cash flow last year were twoq being the trough should we expect free cash flow pick back up in the second half of the year and if you can just detailed the seasonality in white snap back.
Adam you Wanna, Yes, just to start with the renewals I think that's all we could really say that are you able to generally multiyear nature of that come up from time to time and generally staggered manner, but we're not prepared to disclose more than that.
Temporary with regards to free cash flow obviously it starts with our operational performance. There were some expenses this quarter that related to.
The financial activity.
In Q2 with with.
The bank refinancing the tender.
In terms of seasonality. This is a high use of working capital quarter for us advertising revenues ramp up in Q2, the timing of receipts.
Trails, so you'll see some of that that's not new to the business. The one thing you might be noticing and as a reminder is last year, we aligned our tax year with our fiscal year moving to a June 30 tax year, which changed the timing of our estimated tax payments, we used to do higher estimated tax payments in Q4, and now we do higher estimated tax payments in Q2.
I think we're beginning to lap that change.
Great. Thank you very much.
Thank you I would now like to turn the call back over to our gains for any additional or closing remarks.
Thank you all for joining us look for the on our next earnings call have a great that.
Thank you. This does conclude today's conference call you may now disconnect.
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