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MSG Networks (NYSE:MSGN)
Q3 2020 Earnings Call
May 01, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning and welcome to the MSG Networks fiscal 2020 third-quarter earnings conference call. [Operator instructions] I will now turn the call over to Ari Danes, investor relations. Please go ahead.

Ari Danes -- Investor Relations

Thank you Christy. Good morning and welcome to MSG Networks' fiscal 2020 third-quarter conference call. The company's president and CEO, Andrea Greenberg, will begin today'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.

As we operate in these uncertain times, we are pleased to provide some perspective on our third-quarter results. And while we understand you'll have questions, given how fluid the current environment is, today's call will only include prepared remarks. 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 company's 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 today's call. On Pages 5 and 6 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 8 of the earnings release, we provide a reconciliation of net cash provided by operating activities to free cash flow. With that, I will now turn the call over to Andrea.

Andrea Greenberg -- President and Chief Executive Officer

Thank you Ari. We appreciate everyone joining us today. Despite the fact that we are facing several unknowns, we have tried in preparing today's remarks to be as helpful as possible. I'd like to start this morning by extending our thoughts to those who have been affected by COVID-19.

The coronavirus pandemic has had a profound impact on not just our company but on the world. And while we expect this period of uncertainty to continue for some time, we are confident that our company is well positioned to weather the challenges we currently face. We remain firm believers in the enduring popularity of live sports which is so evident in the enthusiasm we all see for its return. And we believe MSG Networks as a leader in regional sports and entertainment programming has built a solid foundation that will benefit us as we navigate through the months ahead.

That foundation includes healthy, long-standing and wide-ranging relationships with our teams, affiliates and advertising partners. In addition, we have a strong balance sheet with substantial cash on hand. And earlier this fiscal year, we completed a debt refinancing which provides us with even more financial flexibility. We also have a long track record of generating substantial free cash flow for the benefit of our shareholders.

And our expectation is that we will continue to do so. As you all know, since March 12, there has been a pause in the 2019, '20 NBA and NHL seasons. At that time, we had already telecast over 335 live NBA and NHL games as both leagues were approaching the end of their regular seasons. We remain in close contact with our partners including leads, teams, affiliates and advertisers, as the NBA and NHL continue to assess the best path forward for the remaining of their current seasons.

In the meantime, our focus has been on providing content that enables our viewers to stay connected with our network. On the programming front, our very creative team, working remotely since mid-March, has been producing a weekday at-home version of our MSG 150 show using video conferencing technology as well as, utilizing our extensive library, scheduled thematic collections of current and classic games from our teams. This week on MSG Network, viewers are enjoying the excitement of the 2011, '12 mix teams and the Linsanity craze. In many cases, we are supplementing this content with fresh insights and interviews from key players and participants.

We've also seen high levels of engagement on our social platforms compared to an average week during the regular seasons as we focused on delivering light-hearted and interactive team-related content. Bret will go through our financial results in more detail shortly. But first, I'd like to spend a few minutes providing some additional color including how the current pause in the NBA and NHL seasons impacted us. For our fiscal third quarter, we generated $185 million in revenue, a decrease of 5% versus the prior-year period, and $79 million in adjusted operating income.

Our affiliate revenue results reflect the impact of an approximately 8% decrease in subscribers, a year-over-year rate of decline which was about the same as our fiscal second quarter, with a majority of the decrease attributable to the same two distributors that had driven the acceleration in the rate of subscriber declines during recent quarters. A portion of the impact from lower subscribers was offset by higher average affiliate rates. As we've previously discussed, earlier this fiscal year, we successfully concluded new carriage agreements with two of our largest distributors which include rate increases. The impact of these renewals is reflected in this quarter's affiliate revenue.

On the advertising front, we had expected an increase in advertising revenues for the third quarter in part due to additional professional sports telecasts as compared with the prior year. As a result of the pandemic however we aired significantly fewer games in the quarter on a year-over-year basis which led to a decrease in advertising revenue. And while the absence of these games also resulted in decreases in certain costs, such as variable production expenses and advertising sales commissions, this did not offset the advertising revenue decline. I would also note that the pause in the NBA and NHL seasons did not otherwise directly impact our third-quarter results.

This is in part because the remaining regular season games have not been permanently canceled. And while the situation remains fluid, we have examined the potential impact on our revenues and expenses under various possible scenarios. As I mentioned earlier, we are fortunate to have been in the final stages of our NBA and NHL regular seasons and to have delivered the vast majority of our teams' games. Hypothetically, even if the rest of both seasons were canceled, given the contractual protections in our rights and affiliate agreements, we would expect to continue to generate substantial adjusted operating income and free cash flow without any material negative impact to these measures for fiscal 2020 from the loss of those games.

That said, the impact of the COVID-19 pandemic is larger than our company and our industry, making it difficult to predict the impact it will have on the economy, subscribers, advertisers and even the number of games we should expect to air. Our plan is to stay in close contact with our partners as we continue to monitor the situation. I would like to end by thanking our employees, partners, viewers and shareholders for their support during this period. Everyone has come together in a great spirit of teamwork and creativity and embrace what New York sports are all about.

I will now turn the call over to Bret, who will take you through our financial results.

Bret Richter -- Executive Vice President, Chief Financial Officer, and Treasurer

Thank you Andrea, and good morning everyone. Let's discuss our financial results for the fiscal 2020 third quarter. Total revenues of $185 million decreased $10.1 million or approximately 5% as compared with the prior-year period. This was driven by a $6.6 million decrease in affiliate revenue primarily reflecting the impact of the decline in subscribers partially offset by higher affiliate rates.

While the affiliate revenue decrease of $6.6 million was greater than the $3.1 million year-over-year decrease for our fiscal second quarter, I would remind you that our results for our second quarter benefited from a $2.3 million favorable adjustment to affiliate revenue, and as we have discussed on past earnings calls, there are a variety of economic provisions in certain of our affiliate contracts that can impact affiliate revenue results in any given quarter. advertising revenue decreased approximately $3.5 million year over year due to lower sales related to live professional sports telecasts partially offset by other net advertising increases. The decrease in sales from live professional sports telecasts was primarily due to fewer games as compared with the prior year, a result of the pause in the NBA and NHL seasons. Direct operating expenses of $83.8 million increased $1.7 million or 2% as compared with the prior-year quarter primarily due to higher rights fees expense, mainly a result of contractual rate increases.

This was partially offset by other programming-related cost decreases which includes the impact of fewer live sports telecasts as compared with the prior-year quarter. SG&A expenses of $25.8 million decreased $2.9 million or 10% as compared with the prior-year period. This was largely due to lower advertising sales commissions, employee compensation and related benefits and advertising and marketing costs. Adjusted operating income of $79.1 million decreased 11% as compared with the prior-year period primarily due to the decrease in revenues and, to a lesser extent, higher direct operating expenses partially offset by lower SG&A expenses.

Reported free cash flow from continuing operations for the nine months ending March 31, 2020, was $137.8 million. Turning to our balance sheet. As of March 31, 2020, total cash and cash equivalents were approximately $138 million, while total debt outstanding was $1.09 billion and our $250 million revolver was undrawn. Our average interest rate for the quarter was approximately 3.2%.

Net debt at quarter end decreased by approximately $29 million to $955 million, while our net leverage ratio remained 3.1 times trailing 12 months adjusted operating income. During the fiscal third quarter, we made a mandatory principal payment of $6.9 million in accordance with the terms of our credit agreement. As Andrea noted, earlier this fiscal year, we amended and extended our credit facilities for a five-year period beginning in October 2019. The amended terms of the facility provide our company with significant financial flexibility.

For example, our credit facility provides for a total of only $33 million in mandatory principal payments during the next 12 months. To put that in context, we generated over $200 million in free cash flow during the trailing 12-month period. And as Andrea noted, our expectation going forward is that we will continue to generate substantial free cash flow. Lastly, during the fiscal third quarter, we resumed our share repurchase program, a reflection of our confidence in the strength of our business.

Specifically, we have repurchased approximately 3.5 million shares since January 1, 2020, for $40.1 million at an average price of $11.61 per share, this amount represented more than 7% of Class A shares outstanding. We currently have $146 million remaining under our share buyback authorization, and looking ahead, will continue to maintain a disciplined and opportunistic approach to capital allocation. I will now turn the call back over to Ari.

Ari Danes -- Investor Relations

Thank you Bret, and thank you all for joining us. We look forward to speaking with you on our next earnings call. Until then, stay safe and healthy and have a good day.

Questions & Answers:


Operator

[Operator signoff]

Duration: 15 minutes

Call participants:

Ari Danes -- Investor Relations

Andrea Greenberg -- President and Chief Executive Officer

Bret Richter -- Executive Vice President, Chief Financial Officer, and Treasurer

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