Ari Danes - VP, Investor Relations
Hank Ratner - President & CEO
Bob Pollichino - EVP & CFO
Mike Bair - President, MSG Media
Melissa Ormond - President, MSG Entertainment
Ben Swinburne - Morgan Stanley
Ben Mogil - Stifel
Bryan Goldberg - Bank of America Merrill Lynch
Amy Yong - Macquarie
Vasily Karasyov - Susquehanna Financial
Laura Martin - Needham & Company
Martin Pyykkonen - Wedge Partners
David Joyce - ISI Group
The Madison Square Garden Company (MSG) Q2 2013 Earnings Call February 6, 2013 10:00 AM ET
Good morning. My name is Christie and I will be your conference operator today. At this time, I would like to welcome everyone to The Madison Square Garden Company Fiscal 2013 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. (Operator Instructions) Thank you.
I would now like to turn the call over to Ari Danes, Vice President of Investor Relations for The Madison Square Garden Company. Please go ahead, sir.
Thanks, Christie. Good morning and welcome to The Madison Square Garden Company’s fiscal 2013 second quarter earnings conference call. Joining us this morning are members of the MSG management team, including Hank Ratner, President and CEO; Bob Pollichino, EVP and Chief Financial Officer; Mike Bair, President MSG Media and Melissa Ormond, President, MSG Entertainment.
Following the discussion of the company’s financial results, we will open the call for questions. If you do not have a copy of today’s earnings release it is available on the Investor’s section of our website at themadisonsquaregardencompany.com.
Please take a 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 or developments may differ materially from those in the forward-looking statements as a result of various factors, including financial community perceptions of the company and its business, operations, financial condition and the industry in which it operates and 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.
Let me point out that on page four of today’s earnings release, we provide consolidated operations data and a reconciliation of adjusted operating cash flow or AOCF to operating income.
I would now like to introduce Hank Ratner, President and CEO of The Madison Square Garden Company.
Thank you, Ari. For the second quarter of fiscal 2013, we reported consolidated AOCF of approximately $108 million, 37% versus the prior year quarter. We are pleased with these results as we navigated our business through two events that had a significant negative impact on our second quarter results; the NHL work stoppage and Hurricane Sandy.
That being said, with long-term NBA and NHL collective bargaining agreements now in place, the majority of transformation project construction costs behind us, along with our strong base of recurring and growing affiliate fee revenue we have the clearest path in front of us that at any other point in our three year history as a public company. And as we look forward, we are confident that our company is well positioned to drive long-term growth and ongoing value creation for our shareholders.
Turning to our business segments, MSG Media was the primary driver of the increase in total company AOCF for our second quarter. The majority of Media segment AOCF growth this quarter was generated by recurring and growing affiliate fee revenue base and by the New York Knicks return to a full regular season schedule. Bob Pollichino will provide you with more detail on what impacted Media segment AOCF shortly.
At the same time, our regional sports network saw a strong advertising growth during the quarter, primarily due to the Knicks return to a full schedule of telecast as well as for the team’s passionate and expanding fan base. We are also excited that Hockey has returned to MSG Networks, which as you know serves as the local broadcast on to four NHL teams including the New York Rangers.
We are also moving forward with our plans for Fuse, which is now in the midst of rolling out its most extensive line-up of professional programming to-date. Most notably, tonight marks the launch of Fuse News, a brand new flagship show that will report on the important stories in the world of music with insights, credibility and an unparallel depth of coverage. As the only show on television dedicated solely to covering this dynamic industry, Fuse News is set to become the go-to-destination for anyone who listens to music.
Fuse News will serve as the centerpiece of Fuse’s largest initiative to-date which began with creation of a music news division that has already been delivering round the clock coverage of the music industry across Fuse’s multiple platforms since its launch in the fall. We are encouraged by the early results from our new slate of original programming and continue to view Fuse as a significant growth opportunity for our company.
Our MSG Entertainment segment was impacted during the second quarter by a decrease in revenue and direct contribution for the Radio City Spectacular franchise versus our expectations for growth. For the New York production, results were significantly impacted by Hurricane Sandy. That being said, nearly 1 million tickets were sold for this show the past holiday season and we fully expect the enduring popularity of the production to continue. At the same time, our booking business continues to perform strongly as our venues remain must-play destinations for a wide variety of artists and events.
With respect to our MSG Sports segment, the Knicks have had their best start to a regular season in 16 years, led by Carmelo Anthony, who is voted by fans to start the Eastern Conference in next week’s NBA All-Star game. Along with Tyson Chandler was also named to the All-Star team. The Knicks currently hold the top spot in the Atlantic Division with a record of 31 and 15 and we look forward to the rest of this exciting season.
Turning to Hockey, the Rangers regular season got underway on January 19th, after the NHL and the NHL Players Association came to terms on a new 10-year collective bargaining agreement. We are pleased that an agreement was reached that allowed the NHL regular season to begin. The Rangers are led by Henrik Lundqvist, who last season was awarded the Vezina Trophy as the NHL’s best goal tender and six time all-star Rick Nash was acquired during the off season. We believe that the Knicks and Rangers are well positioned for both near and long-term success.
Turning to the transformation, the second phase of the transformation has been enthusiastically received by our customers and partners who have been enjoying the transform upper bowl the Arena since we reopened in November. New amenities and products that were unveiled this fall include more comfortable upper bowl seating with significantly improved side lines and new eight floor Garden Concourse, which is up to triple the previous size in some areas and features new retail and concession options.
At Madison Level Suites and Madison Club, and our garden 366 visual retrospective and Defining Movements Exhibit on the Madison Concourse level. Construction work has continued since our reopening. For example, in mid December, we completed the construction of all of our Madison Level Suites and work will continue to take place behind the scenes as advance towards the third and final phase of the transformation that’s upcoming off season.
When the Garden reopened this fall after our third all season shutdown, we will debut a newly transformed 7th Avenue entrance of the arena, which will be named Chase Square. We also unveiled two spectacular bridges sponsored by Chase which will be suspended parallel over the [ice-end] court with seating for one of a kind feeling experience.
In addition, the final phase of the transformation will include a new 10th floor Budweiser Fan Deck, remodel Garden Suites on the 9th floor of the Arena, a new state-of-the-art garden vision, a center home multimedia display as well as the restoration of the Garden’s world famous Ceiling. We have incurred total transformation related construction costs of approximately $847 million through December 31st. We do not expect total transformation project construction costs to differ materially, from the previously disclosed $980 million inclusive of various reserves for contingencies.
Before I turn the call over to Bob Pollichino, I would like to spend just the few moments on another facet of the company that we haven't previously highlighted on these calls. We talk every quarter about the power of our assets and brands and how they work together to drive our business, but we’re bigger than that.
Our properties can unite and aspire people on an incredible scale giving us a unique opportunity to give back to our community. As many of you know, one of those moments occurred following Hurricane Sandy as we joined with Clear Channel Entertainment and the Weinstein Company to present the “12-12-12” concert to victims of the Hurricane.
The Robin Hood Foundation is in the process of distributing the first $50 million of initial proceeds from the concert with additional money still coming in. Our company is unique in its ability to help people which is why seven years ago, we decided that we should use the power of our company for truly heroic purpose. Thus, we created the Garden of Dreams Foundation, a 501 c3 charity that uses the magic of our company to make dreams come true for children facing obstacles.
And we are proud to report that it does so virtually every day of the year, working with 22 outstanding organizations, the foundation conducts an astonishing amount of events and programs, 500 events last year alone that brightened the lives of children facing homelessness, life threatening illnesses, tragedy, foster situations and extreme poverty.
Through Garden of Dreams, these children become part of our family and through ongoing programs that keep these children and their families as a regular part of our foundation; we developed strong long-term relationships that truly change lives.
To-date, our foundation has impacted more than 275,000 children and their families and we believe we are just getting started. To make Garden of Dreams happen, all areas of our company are committed to doing their part in conducting effective fund raising programs including our annual (inaudible) and Rangers Casino Night as well as our recently held Garden of (inaudible) event which featured some of the biggest names in comedy including Ray Romano.
As Garden of Dreams has grown into such a powerful force for good in our community, we want to share with you how important the foundation is to us as well as how effective it is as improving the lives of many very special children.
I will now turn the call over to Bob Pollichino to take you through the specifics of our financial results.
Thank you, Hank. As Hank stated, we had solid results for our fiscal second quarter with total company revenues of $387.9 million up 4% versus the prior year quarter. Consolidated AOCF of $108.3 million and operating income of $81 million increased 37% and 69% respectively versus the prior year quarter.
In terms of our business segments, MSG Media generated a $156.8 million in revenues, an increase of $14.4 million or 10% as compared to the prior year quarter.
Affiliate fee revenue increased $5.2 million primarily due to higher affiliation rates with the overall increase largely offset by the net impact of recorded provisions that are not expected to be recurring.
Advertising revenue increased $5.1 million primarily due to higher sales generated from professional sports programming resulting mainly from an increase in the number of mixed telecast, partially offset by the absence of NHL telecast. In addition, Fuse advertising revenue increased as compared to the prior year quarter.
Other net revenues increased $4.1 million primarily due to a short-term programming licensing agreement for which revenue will be recognized through the agreements expiration in April 2013 and is not expected to be [recovering] their asset.
MSG Media segment AOCF of $95.6 million was up 50% versus the prior year quarter, due to lower direct operating expenses in higher revenues. The decrease in direct operating expenses was primarily due to lower production and rights fee expenses, mainly a result of the NHL work stoppage, partially offset by the Knicks return to a full regular season schedule and to a lesser extent by a higher programming cause at Fuse as we continue to strategically invest in the network to drive growth.
In summary, the majority of MSG Media segment AOCF growth this quarter was driven by our recurring and growing base of affiliate fee revenue as well as the Knicks return to a full regular season schedule. At the same time, while the NHL work stoppage had a significant negative impact on total company AOCF, it contributed to an increase in AOCF in our Media segment.
Please note that we expect Media segment results for the second half of the year to reflect incremental expenses associated with new fees programming as compared to prior year period. Although, we continue to expect Fuse programming expense increases to be weighted towards the first half of our fiscal year.
Our MSG Entertainment segment generated a $151.1 million in revenue, essentially flat versus the prior year quarter. Higher event related revenue at The Theater at Madison Square Garden and other net increases were offset by lower revenues for the Radio City Christmas Spectacular franchise and lower event related revenues at the Beacon Theatre.
Lower revenues for the Christmas Spectacular franchise included decrease in revenues for the New York production which was significantly impacted by Hurricane Sandy. MSG Entertainment’s AOCF of $30 million decreased 19% versus the prior year quarter. This was primarily due to lower results for the Christmas Spectacular franchise which as we stated was significantly impacted in New York by Hurricane Sandy and by a $5 million impairment charge related to a production of the Christmas Spectacular that played in three markets outside of New York.
In addition, the decrease in Entertainment AOCF reflects lower event related results at the Beacon Theatre as well as incremental expenses related to the form and other business development initiatives. The overall AOCF decrease was partially offset by higher event related results at The Theater at Madison Square Garden.
Our MSG Sports segment generated $89.9 million in revenue, a 1% increase versus the prior year quarter. The increase in total segment revenues reflects higher mix related revenues primarily due to the teams returned to a full regular season schedule.
Mostly offset by lower [Rangers] related revenues due to the impacted of the NHL work stoppage. The net impact of these two items resulted in higher league distributions and intersegment broadcast rights revenue, mostly offset by lower food, beverage and merchandise revenues, suite rental fee revenue and professional sports team preseason and regular season ticket related revenue.
In addition, event related revenues from other live sporting events decreased as compared to the prior year. MSG Sports AOCF loss of $14.5 million improved $5.4 million versus the prior year quarter, primarily due to a decrease in direct operating expenses and to a lesser extent higher revenues and lower SG&A expenses.
The decrease in direct operating expenses was mainly due to a decrease in net provisions for certain team personnel transactions. Event related expenses for other live sporting events and team personnel compensation cost partially offset by an increase in the aggregate net provision for NBA luxury tax and NBA and NHL revenue sharing expense as well as an increase in other team operating expenses.
In summary, well MSG Sports revenue and AOCF improved versus the prior year quarter, the NHL work stoppage had a significant negative impact on Sports segment revenues and AOCF in our second quarter. With respect to the new NHL CBA, there were several key variables to consider, including the player share of league wide revenues shifting from 57% to 50%.
Transition payments to be paid to the players over three years beginning in 2014 as well as a new revenue sharing plan. The net impact of the new NHL CBA is not expected to have a significant impact on total company AOCF.
As you think about our fiscal third quarter, you should expect to see MSG Sports segment results include a $10 million increase in expenses related to a compliance buyout of a Rangers player, which has allowed us to reduce our contractual obligation to this particular player and the buyout resulted in acceleration of expenses for the third quarter.
Turning to the transformation project, the construction costs incurred for the Garden transformation during our second quarter were approximately $53 million, while project to date costs incurred through December 31 were approximately $847 million, which represents a significant portion of total estimated transformation project construction costs.
Total net cash and cash equivalents as of December 31 was approximately $249 million, an increase of over $40 million versus our balance as of September 30. As we prepare for the third phase of the transformation, we continue to believe that we have sufficient liquidity to fund the transformation projects and our other initiatives from our substantial level of cash on hand, cash flow from operations and if necessary our revolving credit facility.
As of December 31, our $375 million revolver remains undrawn with our borrowing availability unchanged at $368 million, as there remain $7 million in letters of credit outstanding. I will now turn the call over to Mike Bair to provide highlights from our MSG and Media segment.
Thanks Bob. Turning first to our regional sports networks, MSG networks has benefited from the mixed terrific start to the regular season. Total household ratings for the first 23 rated games of the regular season through the end of December were up 78% versus the first 23 games of 2011-’12 regular season. This game follows an over 80% increase for the 2011-’12 regular season and a 100% increase from the 2010-’11 season.
MSG networks delivered strong advertising growth during our fiscal second quarter, primarily due to the return of the mix to a full regular season schedule as well as from higher advertising rates and sell-through during the quarter versus the prior season average. And looking ahead we believe that the mix strong ratings base are result of two and a half years of impressive ratings growth should support ongoing advertising revenue growth.
We are also thrilled to be able to bring hockey back to sports fans in our market. As you know, MSG Networks is the local broadcast home to the New York Rangers, New Jersey Devils, New York Islanders and Buffalo Savers, and we have already experienced strong advertising demand for the product. We also continue to telecast original programs in order to extend MSG's brands to create promotional and revenue opportunities for our company and to build our content library.
Examples include popular series such as Nick’s Extra, Beginnings, Hockey Night Live and WFAN’s Boomer and Carton show. And in December we debuted the Garden Transformed: Year Two, a five part retrospective series which gives viewers a behind the scenes look at the second phase of the historic Garden Transformation project.
Turning to Fuse, as we’ve talked about over the last year, we've had a pipeline of shows and development that we believe complements and strengthened our current roster while advancing Fuse’s commitment to being the go-to-destination for everything music. We've added a disciplined approach investing appropriately in Fuse while continuing to grow our media business.
As planned, the rollout of this new lineup of music inspired originals started this past quarter and we are pleased with the initial response. We look forward to taking the step further tonight with the launch of Fuse News, which we believe as the only show on television committed to delivering informed credible music news; will become the voice of the network.
With Fuse News, we are going to inform and educate our viewers of the detailed look at what makes up the increasingly complex world of music, including stories on the artists, industry and the technology with commentaries from the Fuse News team and the experts panel. This half hour primetime flagship show serves as the center piece of our music news division, which has been delivering up to the minute music news and information across Fuse’s multiple platforms since launching in the fall.
Fuse News will debut tonight, surrounding the largest music event of the year, the 55th Annual Grammy Awards with multiple specials, including a two-hour red carpet special, live at the Grammy’s on Sunday.
We've also rolled out new originals on the Linear Network as part of our new Fuse Friday’s programming line up. Highlights include the debut of Warped Roadies, a series that follows the road crew charged with running the 2012 Vans Warped Tour. That’s a 15-year old, 50-city tour with a built in audience of over a million and the second season Billy On The Street, our unique music and pop culture quiz show, hosted by comedian Billy Eichner.
The show continues to garner critical claim. In addition to a game making entertainment weekly is much less, the show has been called the most laugh out loud show on TV by Intouch Magazine, while the New York Times called the show addictive.
We look forward to continuing this momentum with the roll out of more regional programs, including our first scripted show this fiscal year. As I mentioned, we're encouraged by the initial performance of our new original series. Fuse viewership has also benefited from our November 1 relaunch on Dish Network, with Fuse now distributed to approximately 63.4 million viewing subscribers and carried by every major MSO in the country.
I will now turn the call over to Melissa Ormond to provide highlights from our MSG Entertainment segment.
Thank you, Mike. Beginning with our productions business the 2012 Radio City Christmas spectacular marked the 80th, year of the production and the 85th, anniversary of the Rockettes in New York City, a testament to the enduring popularity of these iconic brands.
Our marketing campaign for the show included partnerships with JP Morgan Chase, Norwegian Cruise Lines, New York Life as well as several national retailers to efficiently extend the reach of the show. The Rockettes has also performed on NBC’s annual broadcast of the Macy’s Thanksgiving Day parade were celebrated during the half hour broadcast special on WNBC in late November and appeared with New York City’s Mayor Bloomberg in Times Square on New Year’s Eve for the ball drop ceremony.
The Christmas spectacular remains the number one holiday show in the country and one of our company’s key franchises. In New York City alone nearly 1 million tickets were sold this past season versus nearly 1.1 million last year. On our November 2nd, earnings conference call which took place just days after hurricane Sandy hit the Tri-State area. We stated that we have been cautiously optimistic about ticket sales for the New York production before the hurricane. But that the widespread and severe impact of the storm to the Tri-State area left it difficult to project how sales would trend.
The show opened its run a week later on November 9th, with the hurricane significantly impacting ticket revenues for the production. That being said, there were positive data points this fiscal year that it suggested improved financial performance for next year, including a higher average ticket price for the entire season versus last year.
With respect to the two Christmas spectacular theatrical productions outside of New York, our production in Nashville has been a long running success and we plan to continue presenting the show in that market.
Regarding the second production which played in three markets this past season, as a reminder two years ago we made the decision to repurpose assets from the former large scale Christmas spectacular arena tour by using them in the smaller theatrical production of the franchise.
With revenues from the smaller theatrical production not able to economically support these large scale arena assets, we recorded the $5 million impairment charge for the remaining deferred cost of the former arena tour assets. Having said this, we have evaluated this particular theatrical production based on several factors and have identified three new markets fully planned to present this production next holiday season.
Going forward we believe that this production is positioned to be a positive contributor to MSG Entertainment and we bring continued value and expanding the national brands of the Rockettes and the Christmas spectacular.
Turning to our bookings business, during our second quarter we saw an overall increased in the number of concerts and multi market engagements as the strength of our markets then used end marketing expertise continues to resonate throughout the live entertainment industry.
The Garden reopened in early November with a very strong and diverse lineup of artists including comedian Kevin Hart, Madonna and Justin Bieber each for two shows as well as the WHO, the [background] band, Aerosmith, Neil Young and Crazy Horse, Leonard Cohen.
We also welcome the return of Z100 annual Jingle Ball concert which featured all this including Taylow Swift, The Wanted, Jason Mraz as well as One Direction, who also headlined the Garden earlier that same week. In addition, we closed out the year in the arena by hosting our annual run of Phish for four sold out shows.
As we previously discussed the theater at Madison Square Garden has proved to be an attractive destination for family shows. For example during December we hosted family favorite Dr. Suess’s How The Grinch Stole Christmas for a successful multi-week engagement. We also hosted The Grinch for a multi-week run in November at the Wang Theater.
At the Beacon Theater highlights during the quarter included The Eagles who played a special event, Crosby, Stills & Nash, Gov't Mule, Grace Potter and The Nocturnals and So You Think You Can Dance? all for multi-night engagements. In terms of multi-market performances during the second quarter, we hosted artists including Jerry Seinfeld at the Beacon and the Wang and the Monkeys for Gina Specter, Chris Isaak and Martina McBride all at the Beacon and Chicago Theaters.
For our fiscal third quarter, the Garden will again host a wide range of headlining artists including Marine Five, Swedish House Mafia, Pink Passion Set and Jason Aldean; while at Radio City Music Hall we've already hosted artists including Ed Sheeran, [Teen and Fun].
In terms of multi-night engagements in our third quarter highlights include Lady Gaga and a 137th Annual Westminster Kennel Club Dog Show for two shows each at the Gardens. Two Brandy Carlisle shows, Nick Cave & The Bad Seeds for three shows and 11 Almond Brothers Band shows for their annual residents all at the Beacon in March. At the same time, the theater at Madison Square Garden will host extended runs by some of today's most popular family shows.
With regard to the Forum, we continue to make progress on our renovation plans. We are in the midst in the construction bidding process and in the meantime we expect to begin seat removal this month. We continue to expect the Forum to be a significant contributor to MSG Entertainment AOCF once the venue reopens for events.
I will now turn the call back to Hank Ratner to provide highlights from MSG Sports.
Thanks Melissa. The Knicks and Rangers are now in the midst of exciting regular seasons with both teams playing at or near capacity crowds every night at the Garden; a testament to the teams’ loyal and growing fan base. As previously discussed, we sold out season tickets for both teams and looking ahead, we remain optimistic about ticket sales for next seasons given the high level of demand we continue to see in the marketplace.
We also continue to see a strong level of demand across all of our premium products that are brought for transformation. We are pleased to report that we are now sold out for more than 170 memberships of the Madison Club, a new product which debut in November as part of the second phase of the transformation. The Madison Club joins the 1879 Club, the Delta Sky360 Club and the 20 event level suites all of which came online as part of the first phase of the transformation and are already sold out. And once we sell the couple of remaining Madison level suites designated for long term agreements, we will be sold out of every new premium product currently available in the Garden.
As you know as sponsors’ efforts got off to a strong start in fiscal 2013 as we form new signature marketing partnerships with Kia Motors America and Lexus. In November, we announced the long-term marketing partnership with Time Warner Cable. As part of the partnership, Time Warner Cable is now the naming partner for the concert series at Madison Square Garden as well as an official partner of the New York Knicks and the New York Rangers.
MSG Sports also continues to host a wide variety of memorable sporting events. During our second quarter, premier events at the Garden included the WBA Super Welterweight Championship bout between Migel Koto and Austin Trout as well as the NASDAQ Indexes Cup, part of the Power Share Series Tour which featured tennis legends John McEnroe, Andre Agassi, Pete Sampras and Pat Rafter. Tennis excitement continues in March when the BNP Paribas show down returns to the Garden for the sixth consecutive year with several of tennis’ top stars including Rafael Nadal, Juan Martín del Potro, Serena Williams and Victoria Azarenka.
On the college basketball front, MSG continues to host St. Johns games of season while the Big East Tournament returns to the Garden for the 21st consecutive year in March. We're also extremely pleased to welcome back the NCAA Division One Men’s Basketball Tournament, which will return to New York City and Madison Square Garden for the first time in more than 50 years. The Garden will host the 2014 NCAA Eastern Regional Championship, marking the first time ever that the tournament has taken place in a Garden building, which opened in 1968. We look forward to continuing to deliver marquee events like this to all of our customers.
I’ll now turn the call back over to Ari Danes.
Thanks, Hank. Christie, we're ready to open the call for questions.
Thank you. (Operator Instructions) And your first question comes from Ben Swinburne of Morgan Stanley.
Ben Swinburne - Morgan Stanley
Thank you. Good morning. I have two questions. One, could you talk about Madison Level Suites and how many came on during the prior quarter, just to get us a sense of what's incremental in the third quarter? And then, I don't know if you also have this but, and if you gave it at the beginning, I apologize, I have been a little late, but what's the number of Ranger home games in the March quarter given the compressed schedule versus last year, just as we think about the year-over-year comparisons? Thanks.
I think in the prior quarter, all the Suites were on by December 18th I think is the date. So all the Madison Level Suites came on. But the timing, the first 27 opened on November 2nd and then when we got to December 18th, they all were opened.
Ben Swinburne - Morgan Stanley
Got it. Thank you.
And the second question I think was how many Ranger games are going to be in the third fiscal quarter? Is that correct?
Ben Swinburne - Morgan Stanley
Okay. So in our third fiscal quarter with Ranger home games, we are going to have five, we have five less games, a total of -- in the third fiscal quarter a total of…
Third fiscal quarter…..
Ben Swinburne - Morgan Stanley
It sounds like from 23 down to 18?
Yeah, I am sorry it is; I am looking at the wrong column it is 23 down to 18. That’s exactly right.
The majority of the room is saying 18.
They are all saying 18 and I am fighting with them because I am reading the wrong column.
18 it is.
23 to 18 (inaudible).
Ben Swinburne - Morgan Stanley
Thank you very much.
Thank you. Your next question comes from Ben Mogil of Stifel.
Ben Mogil - Stifel
Just sort of a two part question; when you were to look at the Media affiliate revenue in the quarter and you mentioned the one-time event that obviously was a provision, do you think ex that one-time event provision you would be running at a sort of similar run rates what you ran the last two quarters which was sort of $18 million to $20 million year-over-year growth?
Well, I think as you mentioned you can check out our 10-Q for additional details as we file later today. But except that one provision, it was relatively, one less quarter I think you will see us return to the same type of levels in the third quarter, we are typically being driven on the revenue side by a recurring and growing base of affiliate revenue and there was also the return of the full Knicks schedule, but I think other than that you will see us return to normalized schedule in third quarter.
Ben Mogil – Stifel
Okay. And then sort of as an adjunct to that when I look at the Media business again, if I look and say the third quarter of last year where you have both Knicks and Rangers both playing, your production cost or your (inaudible) your total cost on the operating expense side were around a $105 million or so quarter, is that as we look forward, I know you guys don't give guidance, I just want to get a sense as we look into the third quarter, is that kind of a reasonable operating expense level roughly speaking to be looking at when both Knicks and the Rangers and in fact the old NHL is back playing again?
I don't think that is unreasonable, if you are looking at, well you said what quarter were you looking at?
Ben Mogil - Stifel
Well, the third quarter of ‘12, so when you had both the NBA and NHL both playing, you think you are running about $400 million and $405 million of direct operating expenses in the quarter on the media side, so as I looking into the third quarter of this year, we just review looking at that number some sort of level of inflation but is that sort of a good run rate to be using for a quarter when you generally have both teams and in fact all four NHL schedules being up there if you will?
Yeah, it’s not a non reasonable function.
Ben Mogil - Stifel
Its fair to say, so under that, its fair to say that you actually heroically benefited on EBITDA on the media side kind of materially in the quarter by not having the four NHL teams being broadcast, and again its not a long-term sustainable plan but at least in the quarter is that kind of a fair analysis?
So you are right on the issue that we had four teams three and a half roughly with the NHL. So, that you see that impact in the quarter. And if you go back historically and look at the quarter where you have both team that is sort of a right level of expense to be thinking about, let me just talk about the third quarter first on anomalies.
Ben Mogil - Stifel
So when you think about this third quarter coming up, you have to keep in mind that and think about it on a sort of the sport side too you have to think that we had a compressed season last year for the mix. So we had, we are going to have lower percentage of mix related revenues and expenses in the third quarter related to the mix because of that compression last quarter and we are now on a normalized season, so you've got to take that into consideration.
And then on the Ranger side when you think through the quarter, you have a shortened season so we have 48 games versus 82 games. So when you look at the quarter what you are going to be seeing is that there's sort of no pick up to the extent of that compression because we have fewer games even though it’s compressed in the third quarter.
So think about those two things as you think about the third quarter. And the third thing to keep in mind is as I said previously, in the third quarter you are also going to see the impact of that player transaction that I referenced. So there are a lot of moving parts in the third quarter on the sport side of the business as well as it relates to the compression of last year and the compression of this year on the NHL was not going to be a quarter-over-quarter positive result.
Thank you. Your next question comes from Bryan Goldberg of Bank of America Merrill Lynch.
Bryan Goldberg - Bank of America Merrill Lynch
Just two on media, just want to drill into a little bit on fiscal 3Q media revenue as it relates to the NHL work stoppage impact. I just want to make sure I'm understanding correctly, you guys just called out a provision that was a headwind to affiliate rev growth in the December quarter because the NHL work stoppage did extend into the third quarter is it possible you would have to take another provision albeit a one-timer but in the third quarter?
Bryan Goldberg - Bank of America Merrill Lynch
No, okay. My second question is about Fuse, with the new programming, you sound pleased with the initial response so far and I guess just kind of wondering how would you grade the on air performance of the shows, I guess maybe from a rating standpoint, can you give us any data on how the ratings for the new programming are tracking relative to Fuse’s average prime time audience levels?
Yes, I mean I think we launched several new shows with the Fuse Friday Nights in the second quarter and I think we are pleased to see that they generally are performing above the day part averages and we are going to continue on that plan and as we've always talked about we invest in these shows in a manner that allows us to frankly not make a big bet on any one show. And so if at any time we see that they are not doing well, we can pull back. And if they are doing better we can put our foot in the accelerator that gives I mentioned before these seem to be doing well for us so we are to keep our eye on them as we always do.
I think you will also see that momentum continued with the launch tonight of Fuse News and this is important because not only does it give us an opportunity to really have a voice, music and have a very distinctive show but allows us to continue to create special programming for an audience that we think is underserved.
One of the benefits of targeting younger audience in music is that the category itself and a younger audience creates an opportunity for premium CPMs and premium rates and there is high demand and a very few networks offer the opportunity to reach that particular target.
So again, we are ever mindful of AOCF and the media department’s rule in growing that but at this point; we're encouraged to continue with our plan.
Thank you. Your next question comes from Amy Yong of Macquarie.
Amy Yong - Macquarie
One question on the entertainment side. Is there any way to quantify how much impacts of Hurricane Sandy was and what the margin would have been at Sandy? And then second question on media, can you just talk about advertising trends for next quarters now that you have the mix on NHL and I mean, should we be assuming acceleration in growth? Thanks.
So, first to address the Christmas Spectacular in New York and Sandy. While I can’t go in to specifics about it, the Christmas Spectacular doesn’t remain the number one holiday show in North America. Having said that, we did have an impact from Hurricane Sandy. The show opened just in days after the Hurricane hit the Tri-State area and affected ticket sales in revenues but despite challenges, we did realize a year-over-year per cap increase which we found very encouraging. What I can tell you is we did expect year-over-year growth this past holiday season and didn’t find that on a revenue basis.
As it relates to media segment, let me break it apart into two sections for you. First, is the local with MSG Networks. You know, based on the components, the first is ratings performance, always is a very helpful tailwind to drive things. So we've been very pleased not only with the Knicks performance but right out of the box even those early, the [Hockey] performance have been very strong and because little over a half of our local advertising money comes from the spot market, it allows us to really kind of leverage the moment to push our rates and manage our inventory which we do very carefully. That also sets us up for driving rates into the future.
And I think the last part about sports is to just remember that given the change in viewing patterns, it's going on television these days, live sports is one of the most valuable commodities in the advertising marketplace and so we think we have got a very good position. As it relates to Fuse, our second quarter results reflect the beginnings of the impact of our programming investment. So as planned, there were lot of this new line up of our inspired originals based on music will continue and one thing I need to point out is that also we did benefit from the launch of Dish in November 1, so they get combination of dish plus some new programs and to (inaudible) increase awareness in helping to grow our advertising base.
Your next question comes from the Vasily Karasyov of Susquehanna Financial.
Vasily Karasyov - Susquehanna Financial
Thank you very much, it’s a big picture question. In recent several months, we saw a lot of headlines about new or new sports networks or News Corp. for example, took a stake in the Yes Network. So my question is do you worry about increased competition in your existing markets for advertising dollars at least for ratings points? And then in more general terms, do you think there is still capacity in the market for more sports networks or do you think any incremental offerings will be making it harder for everyone to grow and stay profitable?
Well I think the transactions and things that you are referencing all validate the value of live sports product and everything we have seen over the past year continues and continues to validate that the value and the unique nature of live sports. Having said that, in our market regardless of what ownership changes may or may not occur, there is still the same product that’s out there and as we can see from our ratings and our results things are going well, not quite sure what else was asked there.
As it relates to the add sales conversation, we really do sell across different seasons, so its really not an issue for us and I think at the same time we have different value proposition that we offer and we have a wide variety of products as well and quite of bit of inventory we can make available different market, and then just as a larger answer to your question, let's not forget again just how important live sports is to advertiser and their clients and it continue to be more money pouring into the marketplace which I think we can all benefit from.
Yeah, and part of our value proposition is driven by the unique offering we have because we are fully integrated with the venue, with the team and with the television network, multimedia, multiplatform, so we can deliver solutions across various different products in a way that really others can't.
Your next question comes from Laura Martin of Needham & Company.
Laura Martin - Needham & Company
I know I have two questions and Hank for you. I was intrigued in the prepared remarks that you said on the Fuse News that you are interested in taking it across platform. So I am interested in what you guys have done on the non-TD platform today and then (inaudible) should we expect to see some of Fuse programming on Amazon, Netflix or mobile device, could you talk through kind of strategically how you think about some of this alternate platforms that are developing?
And then on free cash flow side, I am really excited about the returns of capitals as we finish up the transformation project and kudos to you for not going over budget. I am interested in your use of free cash flow, we are going to have a nice flood of cash availability, could you talk through kind of how you are thinking about your target leverage ratios and return of capital to shareholders? Thank you very much?
I'm going to let Mike answer the first question.
Sure. Related to Fuse News, we are very excited about starting this evening and getting out in the marketplace with a fresh voice around music. But first and foremost please understand that the linear network is the most important part of the Fuse ecosystem and that really drives everything, that's why we worked so hard at the last few years to solidify from a programming base economically and from a distribution base. It just so happens that music is generally consumed in large parts on other digital platforms plus we know the viewings moving there.
So we literally for the last year have been driving and creating content that goes out on YouTube and songs and [A tracks] and spot by us. We have a lot of partners in which we are giving our brand out there, but that entire strategy is based on developing awareness and creating a critical audience to bring back to the linear network, and we have found some success in that and I think you will really see tonight and through the weekend with the Grammy’s in which you will be able to pick up Fuse News on all of those platforms and again that aggregated audience gives us an integrated offering for advertisers, so that we can monetize that. And as it relates to those other distribution areas, right now we are focused on value to our cable affiliates and monetizing that to the extent that we can.
On your second question you are correct, I mean things are changing around here. When we spun off in February of 2010 and became our own public company as we stated at the time our main focus was going to be on liquidity and making sure we didn't run into any liquidity problems I think we stated at the time that was probably number one through five on our priority list being everyone of them was watch the liquidity. As time has gone by we've seen a lot of the things that concerned us at the time past, and number one which isn’t over yet is the transformation, but we have two summers down and things thus far we've been very pleased with how they have gone.
Likewise we had a lot of contingencies that we were planning in our liquidity planning in the event anywhere to come to be and those range from unlikely lockouts of the NBA or unlikely lockout of the NHL to potential affiliate dispute and other things that could have stressed our liquidity, and fortunately most of those things are behind us right now. So as stated earlier, it’s really the clearest look that we've had in going forward and seeing what's going to be as things come. So we've been using this time as we stated before to really analyze what makes sense for us to go do once our liquidity concerns are behind us.
So that's what we have been doing and we've been looking at various alternatives and we've been looking at various leverage situations. It’s pretty mature for us at this point to go and state where we come out as far as leverage, but we do agree we do have plenty of capacity given that we have no debt to date and we have a 375 million revolver which we haven't tapped into to date, but again its something that we are mindful and aware of as well as what to do with future cash as it becomes available to us with the transformation ending and as we've stated before we look at potential ways to grow the company and put it to use as well as potential dividends or stock buybacks and we are analyzing what's the smartest thing to do, what's in the best interest of creating shareholders value in the long term and we will continue to do that. But at this point in time we are not there yet. So really being prudent to get ahead of ourselves and talk about any timeframes or any optimal leverage ratios or things like that.
Thank you. Your next question comes from Martin Pyykkonen of Wedge Partners.
Martin Pyykkonen - Wedge Partners
Two things, one I want to try in the LA Forum. I know you haven't unveiled the full plan here, but if I can try two things just to scope it out if you are willing to talk is with it's opening sometime in fiscal 2014, can you talk all if that’s more a first half or second half of the year. And then secondly, if you just kind of compare it to the Garden, I think your Garden events is something going on, 275 days or north of that per year, with the LA Forum being, as I think, you said so far, mostly focused on the concert segment. Should we assume that's far less number of days, one that is actually fully running or are there other things there that maybe you are planning to do that would be understating that if we limit it to the concept viewpoint.
And then my second question kind of following on [Laura’s] question about kind of the free cash flow picture. As you finish the transformation and as the LA Forum’s fully up and running, assuming the teams, Knicks and Rangers are doing well a few years out from now, you’ve obviously got that strong free cash flow story. So not so much the leverage ratio, but to what extent would you be looking to acquire growth even if that is more tuck-in kind of deals, obviously not specific and (inaudible) deals at this point but I am just curious if you would be looking to still grow your top line because relative to a Disney and Time Warner, you get a, I think, a more substantial topline growth opportunity that’s obviously very accretive. So, as oppose to just returning a few buybacks dividend, should we assume it growth by acquisition would still be an ongoing part over the next few years? Thanks.
Okay. So starting with the Forum, we’ve made significant progress over the past few months and we’ve nearly completed our design phase, and as I had stated early, we're currently in the construction bidding process. But given that the bids are not backed from perspective contractors, we're not in a position to discuss when the venue could potentially open. So it's really premature to speculate on that. As to the number of events I think you estimated a number for the arena. Of course the arena is inclusive of not only concerts and family shows, but sports properties and league sports. And the main focus of the forum in Los Angeles will be entertainment. So we expect to have a significant number of concerts and family shows, and we hope to do some non-league sports as well. So it is fair to say that there will be fewer events at the Forum, but we think there is a tremendous opportunity because the LA market is underserved and couldn’t be more excited about continuing on with the renovation plans, and as I stated we are starting work we believe this month we will removal and we continue to look forward to progress in that respect.
Martin Pyykkonen - Wedge Partners
Yes and relating to the observation about the cash flow to be generated going forward, absolutely on our list is potential growth opportunities. Like the Forum which was a growth opportunity available to us; like the large scale production we are working on at Radio City, and there could be other things that we could acquire or build, we are going to continue to be prudent, we are going to continue to be smart and we are going to continue to be very thorough in our analysis and scale potential investments to the opportunities that they present for us and also try to make sure that we stay strategically aligned and try to level off our core competencies here and things that we can bring. So we look for businesses that can make the base company stronger or the company can make that acquisition stronger and may have some relation to each other, but clearly on our list going forward is how to continue to grow the company, how to continue to grow and enhance shareholder value, and if there are opportunities available to us that will help us do that those are opportunities we will clearly be looking at.
Christie, we have time for one more caller.
Thank you. Our final question will come from Vijay Jayant of ISI Group.
David Joyce - ISI Group
This is David Joyce is ISI, I was hoping if you could help to quantify what you invested in the Forum in the December quarter, and how we should think about that in CapEx terms, going forward this year. And secondly what will be impact on your share count and mix and now that the Barclays is opened, thank you.
Bob, you take the first one.
So I love to take it, I just can’t answer, so I think we just going to have to tag along because I don’t have (inaudible) at the top of my head. It’s not a significant number but we will get back to you.
David Joyce - ISI Group
Okay, and Melissa the question is, any impact from Barclays?
We are announcing any impact to share count in the Garden from Barclays, and as I stated before we have a number of great shows that have already play off this year, Jingle Ball, One Direction, Neil Young, Phish and certainly the 12 concert extraordinary lineup of talents and celebrities, musical artists and celebrities. And we look forward with some great shows in the future Lady Gaga, Swedish House Mafia and others that I mentioned. And we are actually expecting to drive year-over-year growth in the arena this year, so we are very pleased with the result.
Yeah, let me just clarify that because I really just can't get back with information once I have it to share with everybody, so I think the takeaway here is that, it’s de minimus, it’s very small and I can't give you any more color on this call right now.
Thank you. I would now like to turn the call back over to Ari Danes for any closing remarks.
Thanks for joining us. We look forward to see 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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