Q1 2021 MSG Networks Inc Earnings Call

At this time I would like to welcome everyone to the MSG networks fiscal 2021 first quarter earnings Conference 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.

If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.

If you would like to withdraw your question press the pound key.

Thank you I would now like to turn the call over to Ari Danes Investor Relations. Please go ahead Sir.

Thank you Christy good.

Good morning, and welcome to MSG networks fiscal 2021 first quarter 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 today's earnings release. It is available in the investors section of the company's corporate website.

Please take note of the following.

Today's discussion may contain statements that constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.

Investors are cautioned that any such forward looking statements are not guarantees of future performance or results and involve risks and uncertainties.

And that actual results developments and events may differ materially from those in the forward looking statements as a result of various factors.

These include financial community perceptions of the company and its business.

Operations financial condition, and the industry in which it operates.

As well as the factors described in the Companys filings with the Securities and Exchange Commission.

Including the sections entitled Risk factors, and management's 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 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 the free cash flow.

I will now turn the call over to Andrea.

Thank you Ari and good morning.

As we begin our Q school year, we continue to navigate an ever evolving media landscape.

While we remain committed to our goal of engaging viewers and creating value for our partners.

With the ongoing effects of COVID-19. There is also no question that we are operating in an unprecedented time, which has continued to impact our usual activities.

Our first quarter typically means the start of the hockey pre season. However, this fiscal year. It Didnt does mark the return of the N.B. AE and NHL to complete their 2000 1920 seasons.

For our network the.

The resumption of like sports drove significant engagement in advertising sales and Stan tuned in to watch the Rangers and Islanders compete in the NHL returned to play.

Household ratings for our telecast of each team Stanley Cup qualifiers grew over 50% compared to 2000 1920 regularly season averages.

This momentum continued for the islanders into their first round series as ratings increase more than 85% compared to the regular season.

In addition in the qualifying round and that she goes so all time high usage levels.

Both teams set new benchmarks for unique viewers and minutes streams for single game.

In fact, the Rangers game too with the most viewed like hockey stream and MSG go its history.

We believe all of this firmly underscores the enduring popularity of live sports.

And more importantly, our teams in our market.

As is always the value MSG networks brings to our affiliate partners and sands.

Other product programming highlights for the quarter included.

Turn up the New York Red Bull as major League soccer resumed its regular season in August.

Nine days of life, French open coverage, which we brought to our viewers for the very first time and the start of the NFL season, with our comprehensive coverage of the Buffalo Bills in New York Giants.

And last months, leading up to the NHL draft in free agency we.

We are at a block of original programming, providing insight into the topic.

Grades and potential free agent signings of our team.

Including a lie dress nice saturates specials, featuring an exclusive interview with the legacy left friend here. The Rangers number one overall pick in the draft.

We will continue to super serve our audiences in the upcoming weeks with similar and be a draft programming and also look forward to introducing other sports talk content.

In addition to engaging our viewers. It is also very important to us that we were named connected to our community, particularly in the current environment.

This summer MSG networks expanded its award winning MSG classroom program for the Garden of Dreams Foundation.

To include the MSG networks Summer Speaker series.

This seven weeks virtual program provided at risk High school students with the opportunity to hear from athletes and entertainers on topics such as intelligence goal setting and achieving success.

The series with hosted by former and be a all store Alan Houston and gets included Super Bowl champion just in time and.

An original Hamilton cast member Christopher Jackson.

Supporting the garden of Dreams is always rewarding for everyone involved and I'd like to think that students and guess who participated in this special experience.

Turning to our financial results.

On the advertising front, our fiscal first quarter benefited from robust sales related to the Rangers and Islanders like game telecasts.

We saw strength across a number of key categories with sports gaming a notable bright spot.

Our coverage of the on a sales returned to play generated high demand from both existing partners.

Such as Draftkings, and Fanduel, and new partners, including that 360 sites and we expect this momentum in sports gaming to continue into next season.

We also saw sustained success.

From our non ratings based advertising efforts with several of our key partners.

Putting chase.

Yeah, Cadillac and Montefiore.

Looking ahead, we remain focused on expanding these efforts.

Well advertising revenue benefited from our like sports telecasts.

Our affiliate revenue was again impacted by a decline in subscribers, which we believe continues to be a reflection of the changing media landscape.

That said with the return of like sports this past quarter, we were reminded yet again.

Valuable our content is and we will continue to explore additional ways to monetize our media rights and existing library of content.

Looking ahead, we remain in close contact with our team at least partners and look forward to the start of the upcoming and BA in NHL seasons.

In closing I would once again like to thank our employees.

Nice viewers and shareholders for their ongoing support.

I will now turn the call EBITDA, 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 2021 first quarter.

Total revenues of $157.4 million decreased $3.6 million or approximately 2% as compared with the prior year period.

This was driven by a $7.2 billion a decrease in affiliate revenue, primarily reflecting the impact of the decline in subscribers and to a lesser extent the impact of a 1 billion dollar on favorable feel with adjustments in the current year quarter.

This was partially offset by higher affiliate rates and to a lesser extent the absence of an unfavorable $700000 affiliate adjustment recorded in the prior year quarter.

Advertising revenue increased $3.6 million, primarily due to the Rangers and Islanders participation in the 2000 1920 NHL returned to play.

Looking ahead, we expect the year over year compare ability of quarterly advertising results to be impacted by the shift in the timing on the start of the 2000 2021 M.B.A. in NHL regular seasons.

Direct operating expenses of $65.1 million decreased $3.6 million or 5% as compared with the prior year quarter, primarily due to lower rights fees expenses and to a lesser extent.

Increase in other programming and production related costs.

The decline in rights fees reflects a reduction in media rights fees related to the 2000 1920, NHL season, partially offset by contractual rate increases.

That's trina expenses of $22.5 million increase $200000 or 1% as compared with the prior year period.

This increase was primarily due to higher advertising sales commissions, partially offset by lower professional fees.

Decrease in professional fees includes the absence of $1 million in expenses recorded in the prior year quarter, we're not indicative of our core expense base.

Partially offset by other debt increases.

Adjusted operating income of $74.4 million decreased less than 1% as compared with the prior year period due to the decrease in revenues and.

The modest increase in S., Gina expenses offset by lower direct operating expenses.

With respect to taxes.

Our income statement reflects an effective tax rate of 44% for the fiscal first quarter, which includes a $6.7 billion noncash expense related to a deferred tax liability adjustment.

In addition, we also recorded a 1.2 million dollar expense, resulting from the distribution of certain share based compensation awards. Excluding these items, our effective tax rate would have been approximately 32% for the quarter.

Reported free cash flow for the quarter was approximately $66.5 million.

In terms of our balance sheet as of September Thirtyth, 2020, total cash and cash equivalents were approximately $254.4 million or total debt outstanding was $1.1 billion in EUR $250 million revolver was undrawn.

Our average interest rate for the quarter was approximately 1.7%.

Net debt at quarter end decreased by $64 million to $825 million and our net leverage ratio decreased to 2.6 times trailing 12 months adjusted operating income.

During the fiscal first quarter, we made mandatory principal payments of $6.9 million in accordance with the terms of our credit agreement.

For the next 12 months or credit facilities provide for $44 million of mandatory principal payments.

With regard to our share buyback authorization, we did not repurchase shares during the quarter and currently have $146 million for me.

I will now turn the call back over to art.

Thank you Brett can we open up the call for questions.

Certainly at this time, if he would like to ask a question Press Star then the number one on your telephone keypad too.

To withdraw your question press the pound key.

And your first question comes from Alexia Quadrani of JP Morgan.

I think obstacle that circle back on that.

Yeah. The sad that you reported for fiscal Q1, I think the eight <unk> percent decline is better than the 8.9% I called out for me.

I'm going to report on it because I like to like basis. This does seem to imply some improvements in June maybe July I guess can you confirm that this is the case and what do you see sort of a better trend really just any kind of color on I'm not everyone clonal, perhaps some evidence of moderation subhlok.

The traditional NBP.

Sure Hi, Alexia. Thanks for the question there there were a variety of puts and takes this quarter by affiliate and over the last few months, we have seen a modest improvement in the overall year over year rate of subscriber decline that's based on the data we've received to date.

So, yes, a modest improvement so far Oh just to note.

We were unable to reach an agreement with a small cable operator and kinetics, Connecticut named frontier.

Our agreement with them expired at the end of September a frontier had filed for bankruptcy earlier this year and that we'd seen from them a pattern of dropping programming networks and clean including before S.S.N.Y.N. and yes. So this wasn't a surprise to us.

Just just to note this will not have a material impact on our revenue.

But you know we do believe that.

God I subscribers will be.

Impacted by the changing media landscape, but it's hard to predict the.

The future in this environment, particularly.

Okay, and just a follow up if I might I would briefly talked about dropped the soccer fans.

We've also dropped thank you very much.

Fourth if I remember correctly.

Okay, just to get your view on lighting I know, they're pivoting away from regional sports and whether carriage on Albert somebody could be selling that optical you guys.

Adam you want to.

Pick that one yeah, so I'll I'll take that one thanks flux, yes, so obviously hard for us to comment too much on a third party dispute or negotiation or whatever you want to characterize it I think we still see a you tube TV and who carrying other worsens. So not sure. If there was something specific to the Sinclair situation.

One or are there.

Nothing situation or or or what I.

I mean for US we continue to have discussions with operators in the space. Some weak, it's an evolving but still fairly small segment of the pay TV universe and like I think we said before when coupled with the price for broadband.

We've seen the price point of these offerings are growing and it's become comparable to or where maybe even greater than bundles that the true traditional guys have all our offering.

And was substantially fewer channels and in some cases and in some cases with channels that are coming off the line up.

That being said for us we continue to discuss and explore any and all opportunities for incremental distribution that make financial sense for us and where our Constance properly valued.

And we believe our networks and the volume of games and the local teams that we provide a is a compelling value proposition and it's important it's an important component for any distributor that's seeking to compete in this new York pay television market, which as you know is a highly competitive one.

Great. Thank you very much.

Thank you. Your next question is from Michael Morris of Guggenheim.

Thank you good morning, so some other traditional network businesses or are increasingly launching direct to consumer products outside of the pay TV bundle.

Which you know they they companies like AMC networks or discovery for quite a while they they didn't pursue that and now they are starting to offer that so you know Andrew you mentioned you are exploring additional ways to monetize your demanded content can you share what your current thought is on making your oh lapse or were other apps with all of you.

Your content available to consumers without a pay TV subscription.

And maybe I understand their sensitivity to it but is there not a clearing price, perhaps where you know your distribution partners feel that they're not being.

You don't have their value reduced but you can still start to grow the business given that there are so many viewers, especially younger viewers, who who aren't.

TV packages. Thanks.

Sure I'm and you said in the past we continue to actively monitor the direct to consumer marketplace and we're always looking for new types of offering if they make both financial and strategic sense for us.

And as we mentioned in our prepared remarks other ways to monetize our content Adam do you want to.

Just talk about some of the money.

As Asian opportunity.

Sure I mean, we have a content library and we have media rights that are extremely valuable and and.

For us today.

That's something that we continue to push for and evaluate and like those incremental distribution opportunities are there on the direct to consumer side I think we've said we're comfortable with the current business model.

The revenue and cash flow that we generate positive well of course, the possibilities exist and having the those valuable media rights allow us to explore those incremental opportunities in the D. P space, which at a certain price point may make sense, but we're not there yet we haven't made any decisions.

We haven't it's something that we're monitoring considering internally.

And I would be something that at the right time, we we would explore both with our distribution partners and ER and then ultimately tested in the marketplace.

Thank you.

Thank you. Your next question is from Bernie Mac tenant of Rosenblatt Securities.

Hi, Thanks for taking the question Andrew in your prepared remarks, you will get the benefit from draft carrying some of the other sports betting operators on advertising revenue. What do you think the potential could be if I'm like sports buried becomes illegal in New York and then on top of that is there anything that you can do kind of incremental to advertise.

I think to leverage the online sports betting opportunity more broadly.

Sure sure well you know as as I mentioned in there that you just referred to we saw last season sports betting as a really healthy contributor to our advertising business Sandal and draft came came back as key sponsors and we added a new advertiser in that three sales.

85.

During the returns the Rangers and Islanders returned to play.

We're really excited about the potential for further opportunity as additional markets come in today.

<unk> come into the territory, particularly legalized mobile gaming.

We've included some sports scanning programming, including in this recent returns to play we had draftkings sponsoring a pre pregame show we had draftkings.

I'm doing NFL season preview shows.

We had a nightly segment with sales and do all I'm. So in addition to just traditional partners, we we see tremendous programming and integration opportunities.

I do think and we have mentioned before that.

To the extent that we add additional territories integration of sports gaming opportunities and to MSG go is also a.

A significant opportunity for us so we're actively monitoring the landscape and where were looking at all sorts of different areas to increase our participation in it in the marketplace.

That's great. Thank you and just one for Brad I don't know meaningful or not but can you estimate or do you have an estimate of what the annual cost on that can you know being a public company.

So so.

I think first and foremost we run a pretty tight ship.

With regards to expenses in a very very cost conscious.

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There are there are certainly some costs that are specific to being an independent public company that wouldn't otherwise be there, but we think those costs are you know Phil you under control with regards to putting a number on it.

That's not something that we're going to do today, but we.

We do you know appreciate the insight.

Got it thank you.

Thanks, Bernie Christy can we take one last caller please.

Certainly your final question is coming from Paul Golding of Macquarie capital.

Thanks, So much. So I was wondering if you could help us understand the financial impact or cost plus revenue relationship as we look at fiscal Q2 with the 2021 season timing sort of influx.

Yeah, what I'd take that so I.

I think as we stand here today, and we look at the facts and circumstances that we know with regards to 2021 I think we're expecting forward and are we full seasons from the M., David NHL, but obviously those plans are not final and.

We you know continuing dialogue with her team to be partners, but until those plans. Our final it's really hard for us to paint a picture for you with regard stole the economics. There clearly there are certain economic support business, which are directly tied to the timing of the games AD revenues some production costs, but.

Regards to certain of the other elements, including your rights fees, we're gonna need so.

Definitive facts and circumstances before we can be a little bit too.

Got it thanks.

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

Thanks, Christy and thank you all for joining US we look forward to speaking with you on our next earnings call have a good day.

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

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