Q2 2021 MSG Networks Inc Earnings Call

Good morning, My name is Angie and I will be your conference operator today.

At this time I would.

I'd like to welcome everyone to the N F. G Networks, Inc. Fiscal 2021 second 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 people would like to ask a question. During this time simply press Star then the number one on your telephone keypad.

We would like to withdraw your question press the pound key.

Thank you.

And I'd like to turn the conference over to Ari Danes Investor Relations. Please go ahead Sir.

Good morning, and welcome to MSG networks fiscal 2021 second quarter Conference call.

The company's president and CEO, Andrea Greenberg will begin this mornings call with a discussion of the company's operations.

This will be followed by a review of financial results for Bret Richter.

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 on 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 1995.

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

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

These include financial community perceptions of the company and its business operations financial condition and the industry in which it operates.

As well as the factors described in the company's filings with the Securities and Exchange Commission, including.

Including the sections entitled Risk factors.

And managements discussion and analysis of financial condition and results of operations contained therein.

The company disclaims any obligation to update any forward looking statements that may be discussed during this call.

Lastly, we will discuss certain non-GAAP financial measures on today's call.

On pages five and six of today's earnings release, we provide consolidated statements of operations and a reconciliation of operating income to adjusted operating income and.

In addition on page eight of the earnings release, we provide a reconciliation of net cash provided by operating activities for free cash flow.

With that I'll now turn the call over to Andrea.

Thank you Ari and good morning.

Its way through our fiscal year, we continue to face the effects of the pandemic.

But with the 'twenty 'twenty 'twenty, one NBA and NHL seasons now underway our schedule was once again filled with like game telecast.

And we're proud of the way our colleagues have adapted in this environment to ensure our viewers are able to watch their favorite teams.

In December with welcome back for the next for the N V. As 72 game regular season.

Last month, our NHL teams return for the start of their 50 16 regular season schedule.

We've been very pleased thus far with the reception, we've seen for NBA and NHL team with strong viewership across all our platforms.

As we continue however to tackle the daily challenges of producing like games in this current environment.

We also remain focused on our company's longer term strategic objectives.

To that end over the last three calendar years, we for need affiliations with all five of our top distributors, including our most recent agreement near the end of 'twenty 'twenty.

We believe these renewals speak to about the strength of our relationships and the value of our live sports content.

Turning to our financial results.

The delayed start of bumping NBA and NHL regular seasons impacted our advertising revenue.

With only for preseason and five regular season NBA telecast.

And no NHL telecasts in the second quarter.

That said so far this season, we've had strong demand from advertisers for live sports programming and are continuing to work with our partners to create innovative opportunities that integrate their brands into our content and offerings.

For example, we recently introduced exclusively on MSG go from there.

Globe Ultra quite site can.

A dedicated camera view that takes fans courtside during next home games.

With regard to advertising categories, while we've seen strong broad based demand sports gaming remains a standout this season with higher levels of participation from our gaming partners handle draft kings and debt $3 65.

And we believe there continues to be significant upside from this category.

The recent announcements by New York, Governor Cuomo, and Connecticut, Governor Lamont debt.

Their administrations intend to pursue the legalization of mobile sports gaming are exciting.

And have us evaluating new ways to integrate sports betting into our business and expand our overall participation in the sector.

Through our gaming modules on MSG go we've already seen the benefit of interactive games on engagement and frequency of churn.

And we are now planning the first of what we expect will be several new and expanded sports gaming initiative.

With the launch of a dedicated free to play gaming up during our fiscal third quarter.

Does that roll off for sports fans, the chance to play predictive games involving their favorite teams for cash prizes.

We expect the launch of this new App will deepen our connection with viewers and provide us with data and insights as well as create additional sponsorship and other revenue opportunities.

Our learnings will be important as we continue to explore how best to leverage the significant potential of mobile sports gaming throughout our market.

Turning to affiliate revenue results this quarter reflected a decline in subscribers accruals for potential affiliate rebates and to a lesser extent the impact of frontier, which we discussed last quarter.

Excluding frontier our year over year rate of subscriber decline for the quarter was approximately 7.5%.

An improvement compared to the approximately $8 five per cent decrease in our fiscal first quarter.

In closing we are excited to have all our teams back competing on our networks.

And while the events of the past year have resulted in a challenging operating environment. We have maintained our focus on delivering compelling content and creating value for our partners.

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 2021 second quarter.

Total revenues of $146 $2 million decreased $41.5 million or 22% as compared with the prior year period.

This was driven by a $24.4 million decrease in advertising revenue.

Remember, we due to the delayed start of the 'twenty 'twenty, one NBA and NHL seasons, which resulted in nine NBA telecast in the fiscal 2021 second quarter compared with a regular NBA and NHL telecast schedule in the prior year period.

Affiliate revenue decreased $16 $1 million, primarily reflecting the impact of the 7.5 per cent decline in subscribers unfavorable affiliate adjustments are for point $9 billion recorded in the current year quarter, primarily reflecting accruals for potential affiliate rebates the absence.

Of the $2.3 million favorable affiliate adjustment recorded in the prior year quarter and the impact of the non renewal with frontier.

These decreases were partially offset by higher affiliate rates.

The results of the shortened 'twenty 'twenty, one NBA and NHL seasons, we currently expect to record accruals for potential affiliate fee rebates in each of the next four quarters at a similar level to the amount we recorded this quarter.

Direct operating expenses of $57 million decreased $27 million for 32% as compared with the prior year quarter.

Due to low rights fees expense into a lesser extent a decrease in other programming and production related costs.

The decline in rights fees expense in our second quarter, primarily reflected the impact of the NHL shortened 'twenty 'twenty, one regular season as well as the delayed start of the 'twenty 'twenty, one NBA and NHL seasons.

In addition, the decrease in programming and production related costs on a year over year basis also reflected the delayed start of the seasons.

Yes.

We expect to have low rights fees expense.

For fiscal year 'twenty 'twenty, one primarily as a result of the shortened 'twenty 'twenty, one NHL season, as compared with the level of fees that would be expected. If our teams were playing full seasons.

As a reminder, these forward expectations are based on a variety of factors, which may change.

SG&A expenses of $21.7 million decreased $10 $3 million for 32% as compared with the prior year period.

This decrease was primarily due to lower advertising sales commissions and advertising and marketing expenses.

Adjusted operating income of $73 $8 million decreased $3 $3 million or 4% from the prior year, primarily due to the decrease in revenues largely offset by lower direct operating expenses and a decline in SG&A expenses.

Ported free cash flow for the quarter was approximately $36 $2 million.

Turning to the balance sheet.

As of December 31, 2020, total cash and cash equivalents were approximately $283 $7 million, while total debt outstanding was $1 $1 billion and our $250 million revolver was undrawn.

Our average interest rate for the quarter was approximately one 6%.

Net debt at quarter end decreased by $36 $2 million to $788 $8 million and our net leverage ratio decreased to 2.5 times trailing 12 months adjusted operating income.

During the fiscal second quarter, we made a mandatory principal payment of $6 $9 million in accordance with the terms of our credit agreement.

For the next 12 months or credit facilities provide for $49 $5 million in mandatory principal payments.

Finally, with regards to share buybacks, we did not repurchase any shares during the quarter and currently have $146 million a share buyback capacity remaining on our authorization.

I'll now turn the call back over to Ari.

Thanks, Brett.

I'd now like to open up the call for questions.

If you would like to ask an audio question. Please press star one on your telephone keypad again, the star one to ask an audio question.

Our first question comes from the line of Michael Morris with Guggenheim.

Hi, Thank you good morning, guys I have two questions. One on affiliates and then one on the announcement of this are free to play gaming up so first one on affiliate fees.

You mentioned price increases being one other positive factors in the quarter, Brent maybe could you talk at all about sort of the relative rate.

Right.

Price increases that you're seeing.

There's just a number of sort of puts and takes in the quarter and you guys did a good job of enumerating them, but but it's still kind of hard to see the detail.

I guess, maybe there's some concern that your rate of affiliate growth of pricing in particular is slowing sequentially. So I'd. Appreciate if you could talk to sort of what that pacing looks like.

And then on the free to play gaming up I mean, I guess, there's a couple of questions. There one would be you know.

Is this kind of like a step along the way what what whats the potential revenue impact of this in particular does it have sponsorships and how do you see that that possibly playing out but also is it is it a step toward a broader.

Potential gaming business.

And if I could can you share anything about the engagement with the existing products that you have out there.

And are actively like.

What percentage of your users are engaging with those.

Thanks I appreciate it.

Brian I'll take the second one first.

Okay go ahead.

Okay.

For the.

Good morning. This is the first step in what we expect to be several new and expanded sports gaming initiatives for our company just to remind you that we've been at the forefront of integrating these interactive games into our mobile platform.

For the last several years. So we are the only RF.

And we're winning for limited number of National sports streaming companies now off for livestock and.

An interactive games alongside our live games and MSG go.

So this is the first step was taken.

Day, two years ago, when we launched in.

And then D go interactive modules and this is the next step and what we see.

Okay.

Uh huh.

Our re look and a wholesale.

Launch and interactive application to MSG networks.

As for.

As far as statistics, we did in fact conduct this study.

Yeah season, using the prior season as a control group.

We saw that these interactive applications do in fact in free tune in frequency and total minutes watched.

We looked at one of our games, which is a matching game I dunno anybody's blade Sculpsure cannon.

And we looked at it versus the expected behavior of a given user from the prior year.

We saw that the number of games tuned into increased by about four to five games for that user.

And that the total minutes watched over the season increased by several hundred minutes. So we've seen success.

And we're going to look to build on that success.

It's helpful. Thank you.

With regards to affiliate revenue and thanks for the question I think.

Like several times over the last few years, we've been asked to dissect the quarterly trends and I want to reiterate a handful things. We've said I think first and foremost though.

We did highlight what we thought with the primaries.

So that needs to be pulled out for the quarter, but we've noted that our affiliate contracts of a variety of economic provisions that can impact the quarterly trends when the adjustments are significant like certain of them, where this quarter, we called them out.

But of course, there are other items that could affect that trend and importantly, if you go back over the last several years they can impact that trend in both directions. So while I don't think there's anything to further to pull out this quarter. What I think is more important is how we sort of widen the words about use a single quarter sales.

Pull forward point, given that we've seen it move in kind of both ways and with regards to the specific request in terms of isolating rate for the quarter.

Unfortunately, I can't do that today.

Okay. Thank you Brett.

Your next question comes from the line of Alexa QUADRA Ani with J P. Morgan.

Please state your question.

Hi.

Andrea just to follow up on your on your comments can you maybe talk about how aggressive you are allowed to be with integrating the free to play App until a it offers into your actual live game coverage, maybe speak a little bit to what's allowed by the means and how much how that might change and then just staying on the topic of sports gaming just in the context of New York and kinetic.

Potentially legalizing can you save MSG networks would ever consider licensing out naming rights for the cable network.

The sports book kind of similar to what we saw with Fox sports our event.

Would your team agreements even allow for something like that thank you.

Sure well, we have we have no restrictions in our agreements in terms of.

What we name given day parts are what we name our channel.

We certainly have the rights to them to do that and we will explore all opportunities to integrate them sports gaming and interactive games into our networks and into our sites and apps.

So we're going to we're going to we're going to take a look back we think that there is tremendous potential.

As New York, and Connecticut come on line and hopefully they will come on line sometime next.

Next season, we obviously.

I don't control that.

But we're seeing great success, just now from from New Jersey.

Having legalize mobile gaming and we've got some very significant advertisers and Andrew will draft Kings in debt $3 65, where we're looking at ways to program our networks.

Net to optimize viewership in integration, we're looking at ways to create features I mean, we had we've been doing it where we're and we're continuing to do what features within our games and and outside of our games, leading up to our games.

As we've talked about.

We were the first to integrate.

Interactive gaming into MSG go with free to play games.

We will continue to see how that evolves.

As as New York and in Connecticut, Hopefully legalized sports mobile gaming. So I think we've got lots of opportunities or all of them are on the table and all of them are being considered as we move forward.

Thank you.

Your next question comes from the line of John Janita with Wolfe Research.

Thank you. These are popular topics. So maybe I'll ask some follow ups Andrea just back to the App can you just dig a little bit more deeper into the rationale behind launching.

The app for integrating it into the go up and then you talked about.

Call it as broadly being a first step over the long term can you talk about your appetite. If there is one to pursue a gaming license.

Sure.

We we already have a pick of mapped integrated into I'd pick them getting them integrated into our app. So we're actually building on that.

By creating a standalone.

Pick them game free to play pick them game outside of D. A.

And the hope is and my expectation is.

That that will allow us to reach and recruit folks that may not be interacting with them.

On linear television or on the App.

So we've seen as I indicated before that it increases debt.

Having this interactivity increases tune and it increases length of tune or minutes watched and this just allows us to reach folks who arent already coming to us.

And as far as you know I think again I.

I can reiterate that we're looking at all different opportunities to integrate.

Our sports betting.

Our sports betting partners into not only our linear networks went into all of our sites and apps and there are a whole host of things that.

We've we've started to execute against and we'll certainly look to expand them.

To the extent that they make sense that's programming Inc.

Net interest interactivity.

For them.

Naming rights to the extent that makes sense. So everything is on the table as we move forward.

Okay, and maybe breakfast for back to the seven 5% subscriber attrition did that reflect any changes to cheering with any distributor and did the deal you referenced including the carrots changes and I guess understanding theres a lag on remittances do you have any kind of view you can share in terms of a high level look.

On a go forward basis.

You know what I'm going to let Adam respond to the contract question, but I would say one thing to 7.5% subscriber declined.

Declined did reflect as we did see as Andrew noted some improvement over the last several months of the underlying trends.

Yeah and I.

I just jump in and say no there's no impact from any change in carriage terms and with respect to the terms and the renewals those.

We're comfortable with those terms and those packaging and other protections we have ensure that we have continued wide distribution of our networks.

Yeah.

Thank you.

Your next question comes from the line of Ben Swinburne with Morgan Stanley.

Thanks, Good morning.

Andrew could you tell us a little bit about what youre seeing in terms of engagement are viewing on the go up you know now versus kind of pre Covid I know, it's early in the season our seasons.

But just whether you're seeing a change in behavior and if youre planning more programming.

For that App I think there's I've noticed a lot more kind of shoulder programming on MSG network and whether you guys are thinking about programming for the App more specifically.

Then Brett I'm, just going back I guess, a clarification of your prepared remarks, I'm trying to get at the net impact of the of the smaller NHL season on your NOI This year, which I know, you're probably not going to give us but.

You were very clear on the on the revenue impact I think you said around $5 million of accruals in the quarter for more of those.

On the right side, though are you expecting additional rights fee reductions from the NHL through the rest of the fiscal year.

I don't think you were specific there and I apologize if you weren't I missed it.

Yeah.

Okay I'll take the first part D MSG go.

We've seen pardon me.

Yes go ahead, we've seen considerable increases on MSG go across from.

The average viewers and minutes watched the season so far.

So on average were up about 65% Inc.

Viewers and we're up about 83% in minutes watched and if you sort of look at the individual pieces. We've got for example, you know the Rangers are the.

The audience is more than double on MSG go so we're up over 100% in viewers and we're up over 125% in minutes minutes watched and what I've said in the past is that we see a strong correlation there.

Between MSG go utilization and our linear ratings.

And you know so for that's bearings for bearing out this season, our overall generally on our linear ratings. This year hockey ratings at this point in the season. They are the highest they've been in close to a decade.

So when you you know when you add that to these all time highs of unique viewers blanks for tune on MSG go where we're seeing an incredible.

Appetite so far this season for our hockey product.

And.

And the next one for them continue to drive a strong audience, they're up over 50% in viewers and 70 per cent and average minutes waxed optimistic that.

Meetings are also.

Very strong and up versus season to date last year. So so for Oh good.

Great.

And then with regards to Reits.

Yeah, Let me see if I can give a little color, but first and foremost of course from all these comments are based on the facts and circumstances.

At the time that we make estimates and of course, the facts and circumstances.

<unk> been evolving throughout the last 12 months.

We do expect further rights rebates in the third and fourth quarter as compared to a normal season, but also keep in mind that last year's P.

Period particular fourth quarter was impacted by the early parts of the pandemic and.

And of course other factors too in terms of besides just game accounts.

To the extent of rate increases in contracts. So there are a lot of moving parts, but compared to normal yes, we would expect further in the third and fourth.

Got it thank you both.

Your next question comes from the line of Brandon Ross with <unk> partners.

Hey, good morning, guys.

So I guess on their call last quarter, Sinclair said that theyre going to take there our sense direct to consumer at some point soon.

Do you see a near term path for that for MSG and maybe if you could walk us through what your decision making process.

Looks like on that front and does the potential of mobile sports betting in New York changed that equation for you.

Hey, Brendan it's Adam so I'll jump in yeah, I'll I'll take this so.

So yes, we I think we commented on direct to consumer last quarter as well saw what Sinclair said for us when we see the media landscape continuing to evolve we're continuing to monitor developments and consumer behavior of course, we believe live local professional sports rights are unique and highly valuable.

Asset and they're always going to be new and innovative potential incremental offerings.

That allow us to maximize the value of the rights.

We said before we have the flexibility to do a direct to consumer offering if that's what we think ultimately makes sense I don't think we have any anything to announce now about the timeline for whether we will or won't all for such a product. It's an intriguing option for us down the road, it's something we'll continue to evaluate.

But that's.

I think as much as we're going to say about it at this point in time.

Okay, and then on the free to play games, how how specifically can do monetize those.

Or is it not even about monetization.

Well you know first as we've said we've seen how this interactivity increases frequency and length of tune generally on our R&R linear networks and on MSG go so that in and of itself is something that we're looking to achieve.

In terms of monetization opportunities I think there are central it's it's it's a little too early to provide specifics we haven't yet launched the app, we hope to do that.

And before the end of third quarter.

But clearly sponsorship is a significant opportunity for us.

There are other.

There are other data and insight marketing opportunities for us.

There are models were.

Partners will pay affiliate fees so there.

There are several ways that we can look to monetize.

This new App.

Really we're looking really to provide.

<unk>.

Create a.

A database.

To better understand consumer behavior and to use that.

To improve our products.

Cool thank you.

Thanks, Brandon operator, we'll take one last caller please.

Certainly your final question comes from the line of Bernie Mcternan with welcome Brett.

Great. Thank you for taking the question just sticking on the free to play game, what is the level of investment that you'd be comfortable with or necessary to launch. This and then to kind of follow up on Brandon's Brandon's question. I think do you think this product will or this game will be able to generate profits on a standalone basis.

And then just.

To follow up on Ben's question not sure if you're willing to go there but is the NFL sorry.

NHL shortened season, a net positive or negative to adjusted operating income this year.

You know I think I think on the zoom App question as I said, we've we've we've done the investment to launch the App.

The App will launch in the third quarter, we're not going to get into the specifics.

The specifics of our investment we do think again that the app can be monetized in a enough.

And a whole variety of ways as we said including sponsorship.

Database marketing.

Including length of to what we can what we can see from increased length of tune and frequency of tune them. So we're excited we're excited to see where it goes and as we've also said it's a building block.

To what we think will be more integrated offerings.

Should I take the piece on the impact for the season.

Oh sure sure sure sorry.

Sure so.

Right. There's a lot there's a lot that goes into this of course I think in.

We are you know in terms of giving guidance for the balance of the year, either overall or for any or any significant contributor to our P&L.

We're not going to provide forward looking guidance, but you can pretty much look back over.

The last several quarters, where we've seen the impacts throughout the P&L with regards to the change in seasons and see the net the net impact on an NOI of course, the scheduling affects Reits it affects.

Revenue for.

Next number of games effects of advertising revenue change from the seasons has changed the way we produce certain games, particularly road games and we've seen some production savings. We've we've of course taken on some incremental costs with regards to protocols and procedures for the protection of our employees, but.

Looking backwards, there's a picture of the overall relationship.

Looking forwards.

The potential.

Potential and it's not likely that the facts and circumstances will continue to evolve.

Got it thanks for taking my questions.

At this time I would like to turn the floor back to or day for any additional or closing them.

Thank you all for joining US we look forward to speaking with you on our next earnings call have a good day.

Yes.

Thank you for participating in today's conference call. You May now disconnect your lines at this time.

Yeah.

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