Q4 2019 Earnings Call
At this time I would like to welcome everyone to MSG networks fiscal 2019 fourth 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 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 Christie.
Good morning, and welcome to MSG networks fiscal 2019 fourth quarter conference call.
The company's president and CEO , Andrea Greenberg will begin this morning's call with a discussion of the Companys operation.
This will be followed by a review of financial results and Bret Richter, the company's he 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 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 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 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 Larry and good morning.
For fiscal 2019, we successfully executed against many of the financial and strategic objectives.
We established at the beginning of the year.
We generated substantial revenue adjusted operating income and free cash flow.
Drove a double digit percentage increase in advertising revenue.
And successfully renewed several affiliate agreements.
However, our fourth quarter results reflect a few items that deserve some focus on this call starting with our year end viewing subscribers.
This time last year MSG networks had its lowest rate of some scriber decline in five years.
Last year's result, not only reflected the addition of OTI t. subscribers, but also a reduction in the overall rate of decline of our traditional operators.
In fiscal 2019. This trend did not continue and as of May MSG and MSG plus had a combined average of approximately 6.5 million viewing subscribers.
Our year over year decrease of 6.3%.
This represented an acceleration in the overall rate of subscriber decline.
Which was primarily related to distributor.
One of these distributors has publicly stated that it is currently being impacted by a roll off of certain promotional subscribers.
[noise] in addition.
Both of these distributors experienced subscriber growth in the comparable prior year period, resulting in a difficult year over year comparison.
[noise] subscriber declines or an aspect of the business we monitor closely.
And we continue to pursue new distribution outlets for our networks.
In addition, our fourth quarter financial results.
On a year over year basis were impacted by a number of items that are not indicative of our core operations.
Adjusting for the impact of these items, our full year financial performance reflects growth.
Both revenues and ally.
Brett we'll have more to share on this subject.
Looking ahead, we remain firm believers in the value of live sports content.
And in our ability to successfully capitalize on new opportunities.
As we've said in the past, we have multi dimensional relationships with our key affiliates.
And a long history of being able to successfully renew our agreements in the ordinary course, including this past year with a major affiliate.
It is our expectation this will continue to be the case.
With regard to advertising, we had an impressive fiscal 2019.
And believe we have a number of ways to continue to grow the business.
This includes new advertising categories, such as sports gaming, where we see the potential for further upside should additional markets and our territory legalize mobile gaming.
We are also very optimistic about our non ratings based initiatives.
Particularly as we drive MSG go utilization and Premier brands, such as Anheuser Busch and general Motors increasingly recognize the value of integrating their offerings with our sports programming.
Well branded content still represents a small percentage of our total advertising. It has been growing rapidly and in fact doubled in size as compared to fiscal 2018.
We also believe there will be significant upside should team performance improve.
The next have built a roster that includes RJ Barrick and number three pick in the 2019 and be a draft along with a number of other talented players acquired through free agency.
And our hockey team made some significant moves this summer, which we expect will lead to an exciting NHL season.
So while we understand the media landscape is changing.
We believe we are well positioned to continue to six specific so successfully monetize our unique content.
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.
I would like to start today by touching on our full year fiscal 2019 financial results before turning to our results for the fourth quarter.
For fiscal 2019 total revenues were $720.8 million, an increase of more than 3% as compared with the prior year driven by higher affiliate and advertising revenues.
Fiscal 2019, adjusted operating income was $335.4 million, which was fractionally lower as compared with the prior year.
As Andrew mentioned, there were various items that impacted our fiscal fourth quarter results on a year over year basis.
If we were to exclude these items from our full year results. Adjusted operating income would have increased in fiscal 2019 as compared with the prior year.
Turning to results for the fiscal 2019 fourth quarter.
Total revenues of $168.4 million decreased $3 million or 2%.
Affiliate revenue decreased $3.3 million, primarily primarily reflecting the impact of the decline in subscribers and to a lesser extent the absence of a 1.2 million dollar favorable adjustment recorded in the prior year fourth quarter.
This was partially offset by higher affiliate rates.
Advertising revenue increased $900000, mainly due to higher sales from the telecast supply professional sports programming, including playoff games and to a lesser extent increased sales from the company's branded content initiatives.
This was partially offset by a lower net decrease in deferred revenue related to ratings guarantees.
Other revenues were lower primarily due to the absence of $750000 infuse media fees.
Direct operating expenses of $70.1 million increased $1.3 million or 2% as compared with the prior year period, reflecting higher rights fees expense, which was primarily the result of contractual rate increases.
This increase was partially offset by a decline in other programming related costs.
SGT expenses of $26.3 million increased $6.5 million or 33% as compared with the prior year period. This increase reflects $3.6 million in expenses incurred in the current year quarter, which are not indicative of the company's core expense base as well as higher advertising and marketing costs and to a lesser extent higher employee compensation and related benefits, including share based compensation expense.
Adjusted operating income of $76.4 million decreased 11% as compared with the prior year period, reflecting the increase in Estonia, and direct operating expenses and to a lesser extent the decrease in revenues.
Excluding the impact of the positive affiliate adjustment infuse media fees, both recorded in the prior year fourth quarter as well as the $3.6 million in SG expenses in the current year quarter that are not indicative of our core operating expense base fiscal 2019 fourth quarter, AOCF I would have decreased $4.2 million or 5% as compared with the prior year quarter.
In terms of our balance sheet as of June 32019, total cash and cash equivalents were approximately $226 million total debt outstanding was $1.02 billion in our $250 million revolver remains undrawn at quarter's end.
As of June 32019, net debt was approximately $795 million and our net leverage ratio was 2.4 times trailing 12 months adjusted operating income. This reflects a reduction of half a turn in leverage over the past year, our average interest rate for the quarter was approximately 4%.
Reported free cash flow for the 12 months ending June 32019 was approximately $203 million.
With regard to the allocation to this cash flow during the fiscal fourth quarter, we made mandatory principal payments of $18.8 million in accordance with the terms of our credit agreement.
For the full year fiscal 19, we made $175 million in principle payments, including $100 million in voluntary prepayments looking ahead, our credit facility provides for approximately $114 million in mandatory principal payments in fiscal 2020.
We believe our company's ability to generate substantial free cash flow, which to date has primarily been used to pay down debt should continue to be an attractive feature for our equity holders, particularly relative to our current market capitalization.
Furthermore, we view capital allocation is a dynamic process, we will continue to make determinations on a go forward basis that we think are consistent with the creation of shareholder value.
I will now turn the call back over to Ari.
Thanks, Brett Christy can we open up the call for questions.
Certainly at this time, if you would like 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 about the subscriber declines.
I was just hoping to clarify the greater than 6.5% decline rate that you reported this quarter.
Is that an organic figure that doesn't reflect any changes in packaging or distribution and I guess looking out over the next few quarters. What are the puts and takes that you see that could change this rate of decline either.
Positively or negatively and then I have a follow up.
Okay I'll take that one thanks, Brian .
First let me answer your first question there were no adverse changes to our contract.
With any of our distributors.
We did we're certainly mindful.
That the subscriber declines of accelerated.
In recent months and were very focused on this dynamic.
I think that it's important for us to point out or to reiterate some of the things. We mentioned in our prepared remarks, the may year over year rate of decline getting us to an average MSG MSG plus steaming subscriber number of $6.5 million was a may over may decline of 6.3%. So I think thats an important number.
To focus on.
The color that we provided I also think is important.
If you look at that acceleration in the rate of decline it came primarily from from two distributors.
And we thought it was important to provide a little bit more information about that those two distributors.
Actually had growth in the same period last year, which as you might imagine we were we were thrilled with their terrific partners and we were the benefits.
The beneficiaries of some real successes with them last year.
So that makes for a difficult year over year comparison for us.
And in terms of looking ahead, while we're not going to provide specific guidance, we're certainly not standing still and actually Adam do you want to talk a little bit about yes for sure. So I think I'd start by just reinforcing that we remain we're focused on all opportunities for incremental distribution of our content, which include expanding our relationships with our existing partners, but as well as securing new distribution partnerships.
So as an example, we expect our networks to be included in a new pay television broadband offering from one of our existing partners.
That we anticipate rolling out in this market later this year or in early 2020.
We also are discussing other.
New potential content offerings with our existing partners such as for K.
And of course, we're focused on new virtual MPPD distribution opportunities, but we're also discussing opportunities with other potential new partners about other content opportunities.
So there is no shortage of interest in sports content, especially the live professional sports content and.
As exclusive rights holders for realized gains of seven local professional teams are we're going to continue to explore all opportunities that properly value our content and make sense for our business.
Thanks, Thats very helpful and I guess your your 10 year deal with LTC is expiring in about three months, if our if our notes are correct and.
I was I was wondering as you head into this round of negotiations if you could share some of the goals you hope to accomplish.
With.
With a new deal with them.
Sure I guess I would start by just saying of course as you know this past fiscal year, we successfully renewed affiliate agreements with several distributors, including a major district major distributor and that's consistent with our track record of successfully renewing affiliate agreements.
And we think that reflects long term and positive relationships that we have with our partners and the unique value over the life of live content that we have especially in this hyper competitive New York distribution market.
I think we'd also point out that public statements from multi support that those statements and I think they pointed to the importance of arsone programming in this market as well as the strength of the relationship.
So I'd say I can't really get into specifics on our discussions or negotiations, but we're confident we'll be able to successfully renew our agreements as they come off in the future and that they'll have appropriate protections and be consistent with our goals to continue to generate significant affiliate revenue.
And Brian We've said this before we have we have multifaceted relationships with.
Virtually all of our distributors and we expect that to continue with LTC.
Great. Thank you very much.
Thank you. Your next question is from Brandon Ross.
Hi, guys. Thanks for taking the questions I guess first a follow up.
Andrews answer to Brian's question there.
You said that in May sub declines went down to 6.3% have you guys seen June numbers, yet and if so could you maybe share with us.
What those look like and then for breath.
I was hoping you could get a little more granular on your capital allocation plan I guess in the past year, you sensibly focus your free cash flow to de leveraging.
Over stock repurchase, but with the stock now where it is.
Does that change the calculus for you and habits the term loan exploration play into your capital allocation plans. Thanks sure.
Yes, thanks, Brett actually take them. Both yeah. This is would be the time, where we start to see.
Sub numbers, obviously the numbers, we report quarter to quarter on a lag but were not going to comment on a month forward and deviate from our practice.
With regards to capital allocation I mean, I think you already hit the major point. If you look back at fiscal 2019 that was pretty clear that our prior had been our priority have been deleveraging paying down $175 million or debt, including a $100 million of voluntary prepayments.
Looking ahead, and we've said this before capital allocation is a dynamic multifaceted process, where we consider.
Numerous variables, including some of the variables that you mentioned, but we're not going to deviate from our practice and and project forward, what we may or may not do it we'll continue to.
Conduct that process internally and report our results.
As we report finally with regards to the bank deal, Yes, and that is a factor and I'm not sure I could point to a more important factor in capital allocation that a strong balance sheet and we do intend to begin discussions with our banks regarding either amending we're replacing our existing facility and we did consider entering into those discussions and accumulate some additional cash on the balance sheet. We thought it would be prudent to have that on hand, as we figure out the appropriate capital structure for the company on a go forward basis.
Our E com comfortable with where your leverage ratio is now or would you like to lower it before you enter into those agreements.
Yes, I think we've made enormous progress reducing that ratio I mean, it was I don't have the exact would you give or take double where it was really is now when we started as an independent company almost four years ago.
And again, it's we think Thats an asset of this company you havent been able to apply our free cash flow, which is substantial to that process, but setting a leverage target.
Implies almost a view of all these factors going into the future. We don't set a leverage target that we are going to be held to on a go forward basis.
Great. Thanks for your color.
Thank you. Your next question is from Michael Morris with Guggenheim Securities.
Thanks, Good morning, I have two questions. The first is following up on the subscriber twin trend questions from me up prior to analysts.
Can you just reconcile for us the greater than 6.5% decline.
Do you cited in the press release and on the 6.3% decline from Andrew's comments, what's the difference between the two and.
His analysts what should be important to us in terms of just running the trend is it does this indicating something is getting better which numbers are important to us and then I have another topic.
Yes, I don't think I'd rank any of the numbers in importance. I mean, there are two different numbers that are derived from the same dataset the more than 6.5% relates to the revenue in the quarter. So you can think of the period from the end of March to the end of June and how that was impacted by subscribers and the 6.3 is the number of subscribers. We had at the end of May.
Okay compared to the end of the prior may compared to the prior may yes.
Okay and and then.
You talked about having discussions open discussions.
In an effort to expand carriage when you can and my first question here is price the primary sticking point when you look at platforms that you are in Taiwan.
That you would benefit from having carriage on and if so how do you think about at some point potentially having some flexibility on the pricing side in order to offset subscriber declines and make sure that your eurs broadly distributors possible.
And also we have the best opportunity to reach the advertising audience you want to reach.
Sure. So I'll I'll jump in on this one it obviously price is important and it's an important element of our negotiations.
I'm not going to get into specifics on our negotiations are negotiating strategy, but I think we strongly believe that we provide highly valuable programming to our affiliates as I said live local professional games for seven teams.
And we've been successful achieving broad distribution and substantial affiliate revenue.
And price is one important terminal negotiation its not the only one it's not the only economic term that we negotiate and basically our focus is to ensure the content is properly valued overall and we have a track record of success in that regard and ultimately we have the flexibility to negotiate deals that make sense for our business going forward.
Great. Thank you.
Thank you. Our next question is from David Miller of Imperial capital.
Yes, Hey, guys two questions Andrea could you talk about maybe just new advertising categories that you think might you merge onto the platform over the next fiscal year similar to what we saw with Fanduel and some of the sports betting stuff over the last year I thought that really kind of change the paradigm for you guys over the last fiscal year end and what other categories. Do you feel are out there that maybe investors aren't aware of that you guys are working on and then separately just kind of an offshoot question. One one metric would you guys had I don't think is is highly appreciated by the street is your free cash flow generation, I think you get $302 million and in.
Levered free cash flow over the year, that's a free cash flow yield of 16% based on Yesterdays close of course that number is higher just given where your stock is right now so given that why would be a public company why not consider going private.
With a private equity sponsor you could certainly pair that debt very quickly over say a seven year timeframe much the same way you've done over the last five years since the split from the mother ship appreciate any comment in that regard. Thank you.
Sure I'll start with the advertising question I think that.
You know our demand for our product remains really strong not just by new category, but.
By expanded opportunities with existing advertisers and Weve as you know been focused on that for the last several years.
We think legalized sports gaming is represents a continuing opportunity for us I think as Connecticut comes online as New York Hopefully comes online with mobile.
Gaming opportunities, we think the category can continue to expand we've also recently added.
Programming around the sports gaming industry. So.
We will continue I believe to grow that category other new categories that were looking at last year. We added studios we added tourism.
If we go through a very very specific evaluation of how we can integrate all of these different categories and specific partners into our content and that brings us to the branded content initiative, you've heard me talk about that over and over again and while it's still very small.
It grew at double last year, and we have aspirations to continue to grow that.
At double digit percentages.
It's non ratings guaranteed.
It's it's we have the ability to use our infrastructure. So our costs are low and I think the yield is high to us and to the client.
Other advertising opportunities MSG go last year, we added new interactive features we saw that that increase stickiness for the app.
This year, we're adding even more enhancements.
Fun enhancements that are now in beta that we'll talk about next quarter.
But overall I think that our ability to to continue to push advertising is is is is a good one.
In our new content MST 150.
Team performance, we had a very exciting off season I'm, giving you my last year, we had a very exciting off season.
Our next added some.
Some new free agents.
They added RJ Barretts the number three draft past if you look at our hockey teams. The New York Hockey scene is very exciting with the addition of.
The number one and then number two draft sex capo, Conoco, and Jack Hughes, and PK, Sudan, and our Tammy Panera again, I mean, we've got some exciting things coming up on there on the horizon I think from from the advertising front.
And David I'll take the second half of your question I. Appreciate you, putting a spotlight on the cash flow, we generated $203 million this year and the company's ability to generate cash flow I think the economics of the business are really powerful to generate.
200, plus million dollars of after tax free cash flow on our revenue base reflects into the low capital intensity of our business and real flow through for Maria Hawaii directly.
To free cash.
Cash flow.
Accrues directly to the value of the equity whether we keep the cash on the balance sheet use it to pay down debt or return it to shareholders and it's a really powerful aspect of the business, but with regards to your hypothesis on the elbow. While we appreciate it we're not going to comment on hypotheticals or.
Of the like but again.
Thanks for the note on the cash flow.
Fair enough. Thank you.
Thanks, David Christie, we have time for one last caller.
Sure. Your final question is from Ben Swinburne of Morgan Stanley .
Thank you.
Andrew I am sure you Didnt leave the islanders out on purpose, but I think they're going to have it.
And the dollar yet.
Once the islanders redesigned their playoff making roster.
Okay actually Zack.
[laughter].
I just wanted to ask.
About the go opportunity in a little more detail you talked about advertising.
I don't know if there's any statistics you guys can share with us about usage of that app over the course of the last year or two any sense for engagement trends I know you've invested a lot in it and there's obviously a lot of growth around streaming and I know we talk about this from time to time on this call, but whats how do you guys think about the opportunity to take that service beyond the bundle I know, that's that's not something.
In the regional sports network business that typically gets brought up but since it's quite invokes across the landscape.
And you clearly have highly passionate fans of all your teams.
It's probably something that you guys kick around often so I just want to know how you think about the sort of risk and opportunity associated with that and any statistics, you can share with us about engagement and usage would be of interest to.
Sure well last year MSG go was was impacted by team performance and while we saw a length of tune increase because of the increased I think.
Features and functionality and the redesign of the App.
Our ratings for our teams except for the Islanders.
There were down.
So.
But but weve, but we found and we've talked about the fact that MSG go is for us an incremental viewership play.
And that we have advertisers that are actually.
Purchasing MSG go opportunities separate from opportunities on our linear platform and I think that that's important to note.
We continue to improve the user experience and we will continue to drive utilization and length of tune. That's our goal last year, we offer things like Nics mobile view I don't know if anyone.
Check that out it enabled you to watch the livestream fully optimized for mobile viewing that the angles and the.
Yes, the picture was.
More appropriate for mobile viewing it got you closer to the action. We also last season, where the first rfn ever to integrate game team and player staff into our platform. We integrated interactive features like gaming and and again as I said this year, we're going to do more and more.
To increase engagement and length of tune.
I do think utilization of MSG go will improve in terms of the number of users as you know our team performance.
It gets better.
Not on the on the other question.
Yes, I think I think we've I think we've we've talked about this in the past is something that we're comfortable with our current business model and the strong revenue and ally free cash flow that we generate.
It's something that we.
We think about and look at evaluating we have the flexibility to do it if it made sense for us but for right now I think we.
Weve pointed out that we're comfortable with the partnership that we have with our mbps.
Got it thank you.
Thank you we have no further questions at this time I will turn the call back over to Ari Danes for any additional or closing remarks.
Thank you all for joining US we look forward to speaking with you on our next earnings call have a good day.
Thanks Aaron.
Thank you. This does conclude today's conference call you may now disconnect.