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Madison Square Garden, Inc. (NASDAQ:MSG)

F2Q12 Earnings Call

February 8, 2012 - 10:00 a.m. ET

Executives

Hank Ratner – President and Chief Executive Officer

Robert Pollichino – Executive Vice President and Chief Financial Officer

Mike Bair – President, MSG Media

Melissa Ormond – President, MSG Entertainment

Scott O'Neil – President, MSG Sports

Ari Danes – Vice President, Investor Relations

Analysts

Benjamin Swinburne – Morgan Stanley & Co., LLC

Vasily Karasyov – Susquehanna Financial Group, LLLP

Bryan Goldberg – Bank of America Merrill Lynch

David C. Joyce – Miller Tabak & Co., LLC

Brett Harriss – Gabelli & Company, Inc.

Robert Routh – Phoenix Partners Group, LLC

John Tinker – Maxim Group, LLC

Martin Pyykkonen – Wedge Partners Corporation

Operator

Good morning. My name is Kelly and I will be your conference operator today. At this time, I would like to welcome everyone to The Madison Square Garden Company fiscal 2012 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 period. (Operator Instructions)

I will now turn the conference over to Ari Danes, Vice President of Investor Relations, The Madison Square Garden Company. Please go ahead.

Ari Danes

Thanks, Kelly. Good morning and welcome to The Madison Square Garden Company's fiscal 2012 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; Melissa Ormond, President, MSG Entertainment; and Scott O'Neil, President, MSG Sports.

Following a discussion of the company's financial results, we'll open the call for questions. If you do not have a copy of today's earnings release, it is available in the Investor's section of our website at themadisonsquaregardencompany.com.

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 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.

Hank Ratner

Thank you, Ari. This morning, we released our fiscal second quarter results. Most notably, we generated adjusted operating cash flow growth of approximately 14% versus the prior-year period, a reflection of the breadth and strength of our assets and brands across our three business segments.

We were able to achieve these solid quarterly results despite the NBA work stoppage which delayed the start of the regular season until December 25, two months later than originally planned and which has resulted in a shortened 66-game regular season. While we generated double-digit AOCF growth for the quarter, our results would have been much stronger if the NBA regular season had started as originally scheduled.

With respect to our business segments, MSG Entertainment was a strong performer during the second quarter, generating a meaningful year-over-year increase in AOCF. As we've previously discussed, we made a significant enhancement to the 2011 Radio City Christmas Spectacular, which is in keeping with our strategy of investing in our core assets and brands to drive growth.

In fact, these enhancements helped drive strong revenue gains this past holiday season for the New York production of the show, which Melissa Ormond will discuss shortly. With a 79-year history, the Radio City Christmas Spectacular remains extremely popular and is a meaningful contributor to the AOCF for our company.

Our MSG Media segment also generated strong AOCF growth during the quarter. MSG Networks continues to benefit from a robust array of live sports and other original programming. To give you a sense of the depth of compelling programming on MSG Networks, MSG and MSG Plus telecasted over 650 live professional and college sports events in calendar 2011, even with the NBA work stoppage.

In addition, the New York Knicks and the New York Rangers have both experienced strong ratings growth this season, a testament to their passionate and growing fan bases. We continue to view Fuse as a significant growth opportunity for our company and are executing against our plan to drive increased viewership to both Fuse's digital and linear network properties as Mike Bair will address.

Turning to our MSG Sports segment. With respect to the New York Rangers, the team is off to its best start in 18 years, led by coach John Tortorella, who was named coach in last month's NHL All-Star Game. The Rangers' strong on-ice performance so far this season also led to All-Star Game appearances for goaltender Henrik Lundqvist, forward Marian Gaborik and defenseman Dan Girardi. With a record of 33-13-5, the Rangers are currently leading the Eastern Conference.

In December, the NBA and the NBA Players Association came to terms on a new collective bargaining agreement. We are pleased that an agreement was reached that allowed the 2011/12 NBA season to begin. With respect to the New York Knicks, the team took another step forward in December with the acquisition of Tyson Chandler, one of the league's premier defensive centers. Despite the team's slow start, the Knicks have one of the best frontlines in the league in Amar'e Stoudemire, Carmelo Anthony and Tyson Chandler, and are positioned for success.

Turning to the Transformation Project. The transformed lower bowl of the Arena has now been open for several months. The feedback from our customers and partners continues to be very enthusiastic, and we expect the project to drive meaningful growth at our company. While obscured this quarter by the impact of the NBA work stoppage, we have begun to see the financial benefits of the Transformation Project across tickets, suites, sponsorships, food, beverage and merchandise sales.

Construction work continues behind-the-scenes daily as we advance towards our next offseason shutdown, which will commence following the conclusion of the current NBA and NHL seasons. During the previous offseason, we were able to advance a portion of the planned upper bowl work, building out new open areas on the 8th and 10th floors which provide fans with direct views into the Arena bowl, as well as new sitting, walkways and concessions.

Next offseason, we will transform the rest of the upper bowl, including new and more comfortable upper bowl seating with significantly improved sidelines that put fans up to 10 feet closer to the action. In addition, after the first offseason shutdown, we debuted the first phase of the 6th Floor Madison Level Concourse, which is nearly double the previous size with city views and significantly more amenities than before.

After next offseason, we plan to debut the new 8th Floor Garden Concourse, which would be triple the size in some areas and will feature new retail and concession options, including exclusive food offerings from top New York chefs. We also opened the sold-out event-level suites this season, as well as the Delta Sky360 Club and the 1879 Club presented by J.P. Morgan at two premier hospitality areas.

Next season, we plan to open the 58 Madison Level Suites, which are as close as 23 rows up from the playing surface, bringing the suite holders much closer to the action. In addition, we're planning on opening the Madison Club which is an all-inclusive, membership-only, premium seating club with high-end food and dining that will be available to businesses and individuals looking to entertain at our events.

We have incurred total transformation related construction cost of over $650 million through the second quarter of fiscal 2012. And with the first offseason shutdown behind us, we remain on schedule and do not expect total Transformation Project construction cost to differ materially, higher or lower, from the previously disclosed $980 million, inclusive of various reserves for contingencies.

I'll now turn the call over to Bob Pollichino to take you through the specifics of our financial results.

Robert Pollichino

Thank you, Hank. As Hank stated, our results this quarter include the impact of the NBA work stoppage, which delayed the start of the regular season and has resulted in a shortened 66-game regular season. For context, the New York Knicks only played a combined six preseason and regular season games in our fiscal 2012 second quarter, of which only two were home games, versus 40 combined preseason and regular season games, of which 18 were home games in the prior-year period.

Our total company revenues for the quarter were $373 million, a 13.8% decrease versus the prior-year period, while consolidated AOCF was $79.1 million, a 13.8% increase versus the prior-year quarter. Operating income of $48 million was down 8.6% as compared to the prior-year quarter, primarily due to higher depreciation and amortization and share-based compensation expense, offsetting the 13.8% increase in AOCF.

Turning to the second quarter results of our business segments. Our MSG Media segment generated $142.4 million in revenues, a decrease of $1.7 million or 1.2% as compared to the prior-year quarter. Affiliate fee revenue increased $4 million versus the prior-year period, primarily attributable to higher affiliation rates, with the overall increase offset by the impact of a contractual adjustment and the previously disclosed expiration of a Fuse affiliation agreement.

Advertising revenue decreased $5.7 million versus the prior-year period, primarily due to the NBA work stoppage. MSG Media segment AOCF of $63.6 million was up 22.9% versus the prior-year period due to a decrease in direct operating expenses, partially offset by a decrease in revenues. The decrease in direct operating expenses is mainly due to lower rights fees, primarily as a result of the overall reduction in the number of events exclusively available to MSG Networks during the quarter.

Looking ahead, we continue our plan to strategically invest in Fuse. Based on the timing of planned programming, we expect these cost increases to be reflected in MSG Media segment results during the remainder of our 2012 fiscal year.

Turning to Entertainment; our MSG Entertainment segment generated $151.2 million in revenues, a 14.8% decrease versus the prior-year period. The decrease in revenues was primarily driven by a planned lower number of scheduled shows at the Radio City Christmas Spectacular production outside of the New York market really due to several factors, including the absence of the Arena tour and the presentation of the theater show in fewer markets.

In addition, revenues were impacted by the absence of Wintuk, our coproduction with Cirque du Soleil, which concluded its planned four-year run during the 2010 holiday season. The overall revenue decrease was partially offset by an increase in revenues for the Radio City Christmas Spectacular in New York, and excluding Wintuk, by an increase in event-related revenues at The Theater at Madison Square Garden, as well as at the Beacon Theatre.

MSG Entertainment AOCF of $37.2 million increased by 104.8% versus the prior-year period. The increase was primarily due to improved overall results for the Radio City Christmas Spectacular franchise, higher event related results at the Beacon Theatre and the Theater at Madison Square Garden, excluding Wintuk, and lower SG&A expenses.

Turning to Sports; our MSG Sports segment generated $88.6 million in revenue, a 31.2% decrease versus the prior-year period due to the NBA work stoppage which impacted nearly all components of MSG Sports revenues. The overall decrease in revenues included lower pre-season and regular season ticket-related revenue, broadcast rights fees, league distributions, food, beverage and merchandise sales and sponsorship and signage revenue, partially offset by an increase in event-related revenues from other live sporting events.

MSG Sports AOCF, a negative $19.9 million, was down $23.1 million from the prior-year period due to the decrease in revenues, partially offset by lower direct operating and SG&A expenses. The decrease in direct operating expenses was primarily due to lower team compensation and other team operating expenses due to the NBA work stoppage, partially offset by a $7.5 million increase and provisions for certain team personnel transactions.

The decrease in SG&A expenses was primarily attributable to lower marketing cost due to the NBA work stoppage, as well as lower employee compensation and related benefits. Turning to the transformation; construction costs incurred for the Transformation Project for our second quarter were approximately $142 million, while project-to-date costs incurred through December 31 were approximately $652 million.

With regard to MSG's liquidity position, total net cash and cash equivalents as of December 31 was $221.4 million, down approximately $7.2 million from September 30. We continue to believe that we have sufficient liquidity to fund our Arena transformation project and our other initiatives from our substantial level of cash on hand, cash flow from operations and if necessary, our revolving credit facility. The $375 million revolver remains undrawn, with our borrowing availability as of December 31 at approximately $368 million as there were approximately $7 million in letters of credit outstanding.

I will now turn the call over to Mike Bair to provide highlights from our MSG Media segment.

Mike Bair

Thanks Bob. As I've mentioned, ratings for the New York Knicks and New York Rangers have been strong this season on MSG Networks. For the 2010/11 season, Knicks' ratings increased 100% on a total household basis. Interest has grown this season with season-to-date ratings of over 65% versus the increased ratings of last season.

As the Rangers have been among the elite teams in the NHL this season, interest in the team's telecast has also grown. Through this past weekend, ratings for the eastern conference leaders have increased over 10% versus last season on a total household basis. Knicks and Rangers' ratings have grown even though a meaningful portion of our fans are currently unable to watch, which I will address shortly. The fact that ratings have grown nonetheless is a testament to the popularity of our local sports program.

This past November, MSG Networks announced that MSG and MSG Plus to telecast a lineup of 148 college basketball games to the 2011-2012 season, including games from power conferences, Pac 12, the SEC and the Big East. We also continue to produce a fixed lineup of programming on MSG Networks with the recent highlights including an original series "Beginnings" which takes a look at some of the Garden stars at the start and "Knicks Greatest Rivalries," a series of spotlight to the most unforgettable Knicks' rivalries of the 1990s.

In addition, we partnered with the Super Bowl champion, New York Giants, for the second consecutive season to deliver five shows per week, including Coach Coughlin's weekly press conference, as well as a special slate of programming highlighting the exciting Giants' journey to the Super Bowl Championship, including yesterday's telecast of the championship parade, with additional programming planned for this offseason. This month, we'll debut "The Garden Transformed: Year One", an original series which takes a behind-the-scenes look at the first of three transformation phases.

Turning to the Fuse, we continue to advance our plans to provide our viewers with a more robust array of programming options throughout the day. In December, we debuted a new primetime program, "Funny or Die's Billy on the Street" which is a unique music and pop culture music quiz show, hosted by comedian Billy Eichner. Bugs around the show has been very strong with Billy Eichner recently appearing on Conan O'Brien to promote the show, and Billy on the Street recently being named Entertainment Weekly's Must List.

In addition, our Fuse Presents concert series returned this past December with Z100's Jingle Ball telecast from Madison Square Garden, with performances by some of today's hottest artists including Pitbull, Kelly Clarkson and Demi Lovato. Looking ahead, we have a strong pipeline of original programming exclusive to Fuse, which we plan to debut during calendar 2012.

We also continue to execute our multi-platform strategy for Fuse to reach music levels, especially across [efficient] [ph] platforms, and leverage that engagement to drive increased viewership of Fuse's network linear properties. For example, we raised awareness of our broadcast of Z100's Jingle Ball and a new primetime show, Billy on the Street, through the online streaming presentation of two live Fuse-related concerts from our venues this past December.

We streamed Swedish House Mafia's live sold-out performance from Madison Square Garden; and the National, live from the Beacon Theatre, with hundreds of thousands of viewers logging on to watch. Finally, as you are aware, Time Warner Cable dropped Fuse from its channel lineup on December 16, and dropped the MSG and MSG Plus regional sports networks on January 1. This has impacted approximately 17.5% of Fuse subscribers, and approximately 30% of MSG Network subscribers.

Our last agreement with Time Warner Cable was reached in 2005. Since then, the market value of our content has risen meaningfully. And we have reached affiliate agreements with a number of top operators. We have been attempting to reach a new carriage agreement with Time Warner Cable, but Time Warner rejecting multiple offers which are based on fair market value and reflect what other top operators in the market are paying for our products.

There are no meaningful discussions currently raking place. For so long as this dispute continues, we expect increasing numbers of sports fans to subscribe to other providers to avoid missing our compelling programming again. Despite this issue, ratings, advertising rates and inventory sell-through are all up season-to-date on MSG Networks.

I will now turn the call over to Melissa Ormond to provide highlights from our MSG Entertainment segment.

Melissa Ormond

Thank you, Mike. The 2011 Radio City Christmas Spectacular marked the 79th year of the production, a testament to the show's enduring popularity. This past holiday season, over 1.3 million customers attended the Christmas Spectacular production in New York, Boston, Durham and Nashville. The production of Radio City Musical was attended by approximately 1.1 million customers, up from approximately 1 million last season. With attendance and per cap price, we increased overall revenues for the New York show by low double-digits this past season.

As we have discussed on previous earnings calls, the 2011 Radio City Christmas Spectacular features significant enhancement, including Rockettes performances, new scenes and musical numbers, dazzling new costumes, 3D live technology and state-of-the-art digital mapping technology. These enhancements were designed to attract new customers and increase attendance frequency among our repeat customers. And we are pleased with the results.

In addition, we prominently and efficiently promoted this year's show in connection with a variety of partners, including JPMorgan Chase, Gray Line bus tours and Henry Mandel. We also benefited from significant television exposure, including appearances on The Today Show, Live with Kelly, and Late Night with Jimmy Fallon, as well as dedicated primetime specials on WABC and HGTV.

The new Christmas Spectacular and the Rockettes were also featured in high-profile pieces in the New York Times and Vanity Fair with the Rockettes also appearing in the Macy's Thanksgiving Day parade and the Rockefeller Center Christmas Tree Lighting. We presented the theater version of the show in Durham, Nashville and at our Wang Theatre in Boston. The shows in all three markets were enhanced by the utilization of existing touring production assets.

Turning to our bookings business, we had a solid quarter at the Garden, particularly considering the venue did not reopen until late October due to the offseason shutdown for the transformation project. We hosted sold-out shows from Jay-Z and Kanye West, Foo Fighters, Katy Perry, Swedish House Mafia, Taylor Swift, Z100's Jingle Ball, and four nights of Phish to close our calendar 2011.

Further highlighting the venue's ongoing popularity, last week for the 10th consecutive year, the Madison Square Garden Arena was named Arena of the Year at the 23rd annual Pollstar Concert Industry Awards. The Theater at Madison Square Garden continues to be an attractive destination for family shows demonstrated by our successful multi-week engagement of Peter Pan at the venue in December.

The Beacon Theatre continued to experience strong demand during the quarter with year-over-year increases in total concerts and multi-night shows. During the quarter at the Beacon, we hosted artists including Kid Rock, Louis C.K. and Sting's 60th birthday celebration along with multi-night engagements from Crosby, Stills and Nash, John Fogerty, The Cure, The National for six performances, and Stand Up For Heroes event which featured Bruce Springsteen, Ricky Gervais, Jon Stewart and President Bill Clinton.

Looking ahead, artists that are scheduled to play include Romeo, Van Halen, the Black Keys and Bruce Springsteen, all for multi-night engagements at The Garden, further will appear for eight shows and The Allman Brothers Band for a 10-show run, both at the Beacon Theater. With respect to multi-venue performances, Kelly Clarkson recently performed at both Radio City Music Hall and the Wang Theater, while we recently hosted Lenny Kravitz at Radio City, the Chicago Theatre, and the Wang Theatre.

I will now turn the call over to Scott O'Neil to provide highlights from our MSG Sports segment.

Scott O'Neil

Thanks Melissa. Fan interest in the Knicks and Rangers has grown this season as evidenced by strong increases across a variety of metrics that we monitor including ratings on MSG Networks, traffic on our Web properties, social media engagements, per caps on merchandise and average paid attendants. Season tickets for the Rangers and Knicks are sold out with both teams playing to at or near capacity crowds every night at the Garden.

In addition, the Rangers were selected to participate in early January against the Philadelphia Flyers in the Fifth Annual NHL Winter Classic. This is typically the most watched regular season hockey game each year. The Rangers were also featured in HBO's critically acclaimed documentary-style series, "24/7." Notwithstanding the impact of the NBA work stoppage, momentum continued on the marketing partnership front including a growing pipeline of potential marketing partnerships associated with the transformed Garden.

Last month, we announced that we are expanding our marquee partnership with JPMorgan Chase, making Chase the official card of Madison Square Garden in providing Chase card members with exclusive access to events and experiences across our venues in our sports and entertainment franchises. This deal replaces and expands upon the agreement we had with our prior credit card provider and also builds on our original marquee partnership with JPMorgan Chase. The deal includes permanent integration across our assets and brands including the transformed Madison Square Garden Arena.

We also recently announced the partnership with Duracell Powermat at the Consumer Electronics Show to be the official wireless charging partner of Madison Square Garden and the New York Knicks, Rangers and Liberty. Duracell Powermat wireless charging systems will be placed throughout the transformed Garden. In addition, we announced the partnership with Paige Management Group to launch Ainsworth Prime, a new restaurant concept in the transformed Garden, replacing the formerly named Club Bar & Grill.

With respect to transformation suite sales, interest and activity has increased since the reopening of The Garden and the start of the NBA and NHL seasons. As Hank mentioned, our 58 Madison level suites are expected to come online for the 2012 and 2013 Knicks' and Rangers' seasons. Over 75% of these suites are now under contract or have agreements that are being finalized. And with nine months to go, we continue to successfully work towards achieving full sellout by the time these suites come online.

We've also recently started the sales process for the Madison Club which would be a premium-experience location the size of 10 suites. The Madison Club which will sit on the same level as the maximum level suites is expected to come online for the 2012-2013 Knicks' and Rangers' seasons. We've gone in the market with two- and four-seat packages for all Knicks, Rangers and college basketball games. MSG Sports continues to host a variety of familiar and memorable sporting events.

In November, Duke's Mike Krzyzewski became the winningest coach in Division I college basketball when Duke beat Michigan State at The Garden. In December, boxing returned to The Garden with a much-anticipated rematch between Miguel Cotto and Antonio Margarito in front of a sold-out crowd. We also have several exciting upcoming events, including the BNP Paribas tennis Showdown which returns to The Garden for its fifth consecutive year on March 5.

The event features Maria Sharapova against Caroline Wozniacki, and Roger Federer against Andy Roddick. Consistent with our strategy to grow our business outside of our venues, we are also co-presenting the Montreal Rendezvous tennis event next month at Bell Centre in Montreal. And the biggest tournament returns to The Garden for the 30th consecutive year next month.

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

Ari Danes

Thanks Scott. Kelly, can we open the call for questions?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ben Swinburne of Morgan Stanley.

Benjamin Swinburne – Morgan Stanley & Co., LLC

Hey. Good morning, guys. I have two, and I'll start with Hank. On the Time Warner Cable dispute, it's obviously a big focus for investors and customers alike, there's been a lot written in the press that they did ask spread around 50% increase versus 6%, the Fuse carriage requirement, Time Warner Cable's inability to -- unwillingness to pay market value and discussion about political pressure from litigation.

And I know there haven't been meaningful discussions, but maybe you could just spend a minute as the CEO and talk about how shareholders should think about this moving forward and how you're thinking about the key issues and where we go from here.

Hank Ratner

Yeah, I'm going to ask Mike Bair to answer that question for you.

Mike Bair

Well, yeah, it's interesting. You've heard a lot of these numbers floating about the press, the 6.5%, the 53%. I can only tell you that those numbers are in some cases inaccurate and in some cases are gross mischaracterization of anything that's on the table that we've talked about. The deal that we had with Time Warner was constructed back in 2005, and the marketplace has changed fairly dramatically since then.

And remember, the top operators in the market that recognize the value of the programming and the content that we offer, and all we've asked of them what to do at this point is to recognize the fair market value of the services that we provide. We do think there will ultimately be a deal, but we can't really predict when and we can't offer any assurances that it would even happen during the 2011/2012 seasons which is why you hear us talk to you frequently about giving customers other options.

Unfortunately, DirecTV has full coverage of the marketplace, FiOS, as well as RCN also are ultimate providers, then we do see an uptick in their businesses. People move there to gain access to our programming which we think is very important. It is a little buzzy because we know that Time Warner knows the profound importance of local sports programming. I think that's evidenced by their reported $5-billion investment in the Lakers on the West Coast.

This is the number one market in the country, and we have extremely important products here that I don't think anyone can be without. And I think there the real disadvantage by not providing them. But our job here really is to maximize shareholder value over the long term. And we think this is the appropriate way to do it at this time.

Benjamin Swinburne – Morgan Stanley & Co., LLC

Thanks Mike. And my follow-up, Bob, I think last call, you talked about the year-over-year improvement in per caps for the Ranger games. I think there was just a couple handful of games on the last call that had already happened. Now that we have more games that have happened over the last couple of months, any more color on how the improvements at the lower bowl and the food-and-beverage spending have flown through the P&L and what kind of growth you're seeing now that you've got more data points?

Hank Ratner

Hey, Ben, it's Hank. I'll start on that and Bob could fill it in as he think is appropriate. We're delighted since we reopened. The fan reaction that we've received has been positive. We're very happy with the aesthetics, and we're very happy with the economics that have occurred. Some of these results, as you know, were obscured by the NBA work stoppage.

But when you look down all the different categories, when you look at ticket sales, we've significant increases in average prices. When you look at suites, we sold out the 20 event level suites that opened up in late October. You look at sponsorships, and we've recognized incremental revenues from sponsorships in a lot of the new products and services that were created, the premium clubs and all.

You look at the concourses and the food and beverage sales that have occurred there with increases occurring across the board. And this is just the beginning because then we look at next year, when we do the Opera Ball and the Concourse is triple 1 size in certain places and there are more concessions that are open and they're on the 58 new Madison Level Suites and the Madison Club that opens.

And we are very pleased where we are almost from every perspective and where we look to be going after the next season shut down. Bob, you --

Robert Pollichino

Yeah, I think we have more data points, we have more concerts, sports properties and of course, the Rangers have been playing their full season, I think, as Hank said, across the board, we have, not only increases in per caps, which is the fast food part of it. But really increases in revenue and contribution from all of the VIP amenities.

And those increases are double-digit increases over what our expectations were. So, we'll keep tracking them as the Knicks start playing and see if they sort of settle out to sort of a consistent theme but everything is tracking very nicely.

Benjamin Swinburne – Morgan Stanley & Co., LLC

Thanks so much.

Operator

Your next question comes from Vasily Karasyov of Susquehanna Financial.

Vasily Karasyov – Susquehanna Financial Group, LLLP

Good morning. Thank you. I apologize if I missed it but can you walk us through what the incremental impact of the new CBA and revenue sharing agreement is on your top line and bottom line? Thank you.

Robert Pollichino

So, let me see if I can give you some scale and scope of this issue because it's complicated. So you all know that the NBA and the NBA Players Association we came to terms. And we started the season in late December. That resulted in a 66-game shortened season and that 66-game shortened season is compressed into the second quarter of our 2011-2012 fiscal year.

Under that CBA, there are actually elements that can provide for potential savings based on lower player share of league-wide revenues on a going-forward basis. The player share actually was reduced from 57% to approximately 51% this season, and going forward, it will be in the range of 50% and approximately 50% give or take. But concurrent with that CBA, the NBA also adopted a new revenue sharing plan amongst the teams.

So we anticipate the Knicks will be required to contribute more under that revenue sharing plan than under the prior plan construction. And the other thing, though, is given our expectations of continued revenue growth we expect our revenue sharing to obligations to grow as well prospectively. Just a data point for you. The most recent NBA estimate and -- this estimate is based on preliminary league and team-specific revenues and expense estimates.

Their estimate indicates that the Knicks will be required to contribute about $9.5 million in revenue-sharing payment for this 2011/2012 season, net of our escrow receipts. So, that's the complication. To put it in sort of the context of financially, so what you've seen so far this year is that our Sports segment is down period-over-period about $25 million year-to-date. And there are a lot of moving parts in the second half of the 2012 fiscal year.

It includes the timing of the games we've talked about, the new CBA, the new revenue-sharing plans amongst the teams, and also our transformation-related efforts to grow our contribution. Of course, revenue streams of tickets, suites, sponsorships, food, beverage and merchandise. If you take all that into account, we expect that in the second half of the year, we're going to improve upon the current negative $25 million year-over-year variance. So it's kind of complicated but hopefully that gives you a sense of where it's going and what the pieces are.

Vasily Karasyov – Susquehanna Financial Group, LLLP

Thank you.

Operator

Your next question comes from Bryan Goldberg of Bank of America Merrill Lynch.

Bryan Goldberg – Bank of America Merrill Lynch

Hi, thanks. Just a few questions on the transformation of the Time Warner Cable tariffs disruption. First on the transformation. Thanks for the color earlier. I was just wondering could you give us a sense of what sport AOCF, the $20 million loss in the quarter? And similarly, entertainment at AOCF of $37 million gain. Well, it looked like, excluding the benefits of the transformation, so we can kind of get a feel for how it's flowing through the business?

Robert Pollichino

I don't think I can. I got to figure out -- you're asking me -- Bryan, you're asking for what the business would have looked like excluding the benefits of the transformation, or what the business would have looked like had there been a full NBA season, for example?

Bryan Goldberg – Bank of America Merrill Lynch

Excluding the benefits of the transformation.

Robert Pollichino

Yeah, I don't think we have that data available actually.

Bryan Goldberg – Bank of America Merrill Lynch

Okay, fair enough. Moving on to the Time Warner Cable situation, I was just wondering, with regards to 1Q advertising trends, how much of an impact are you seeing, if any, on CPM pricing for Knicks and Rangers inventory? I guess so you're seeing an impact because you're not able to offer advertisers a large chunk of Manhattan right now?

Mike Bair

Well, this thing is obviously something we monitor very closely. Well, I can't kind of make any forward-looking predictions. What I can tell you at this point is that there's really no meaningful impact. We're fortunate because we've seen an uptick in ratings that we're very pleased about. Certainly, advertisers are asking about it and we are in conversations.

But we are unique here because many of our partnerships are integrated partnerships. We have a vast array of assets in which we can place their marketing dollars in other areas and not only media but also in sports and entertainment. We're keeping close relationships with the advertisers. We're able to actually fulfill their needs that way. So I think that's where we are right now and we'll see how it goes from there.

Hank Ratner

And just also to add that there is carriage in Manhattan through DirecTV files and RCN.

Mike Bair

Correct.

Bryan Goldberg – Bank of America Merrill Lynch

Right, thank you. And actually, just on that last comment, excluding Time Warner Cable, have you guys seen any meaningful changes in distributors accounts for the MSG network in the first quarter, assuming not everyone can make it to the viewing parties?

Mike Bair

No, but I'm glad you noticed that. No. We usually -- we get monthly reports from our providers and then there's a little bit of lag time even in that. Well, I don't have empirical data. First of all, there's a fair amount of press activity that reports the switching going on.

We also do hear from the other providers about some increased activity for them which they're pleased about. And there's a fair amount of anecdotal evidence both on residential and consumer -- and commercial basis that there is a lot of switch activity going on.

Bryan Goldberg – Bank of America Merrill Lynch

Great, thank you very much.

Operator

Your next question comes from Ben Mogil of Stifel Nicolaus.

Benjamin Mogil – Stifel, Nicolaus & Co., Inc.

Hi. Good morning. Thanks for taking my call. So, following up on Ben's question about the issue on the Time Warner carriage, is the gap on price alone or there are some issues such as streaming in the home and who has the rights to that like is it just a price issue or is it somewhat of a rights and technology issue as well?

Mike Bair

Well, I think it's really a very simple, straightforward issue. They have an old expiring agreement. The marketplace has changed over time. The value of the product has increased significantly. Other top operators in the market have recognized that, and we're simply asking them to be in the same ballpark as the other operators are.

Benjamin Mogil – Stifel, Nicolaus & Co., Inc.

Are your other existing deals in the market -- and then I forget, do the stream rates reside with you, or do they reside with the local operator?

Mike Bair

It's something I really can't get into specifics of our individual deals or where those rates are.

Benjamin Mogil – Stifel, Nicolaus & Co., Inc.

Okay. And then sort of secondly in terms of Forum, I think in the past couple of calls, you've mentioned you had an option -- you exercised the option, you're beginning to work on due diligence. Any update there, on the Forum in L.A. obviously?

Melissa Ormond

Right, right. Yeah, we did replace the option to buy with a definitive purchase agreement which remain subject to several customary and other closing conditions that we required, and several steps remained before we can close on the building.

Benjamin Mogil – Stifel, Nicolaus & Co., Inc.

Yeah. Has there been -- can you give us -- in terms of the capital and how much you've put up so far? Can you give us sort of any kind of sense of what is this going to cost, et cetera?

Melissa Ormond

No. As I said there are several steps that remain and we're continuing the diligence phase, and we continue with our planning of what to do to enhance the building. And it would be premature to speculate on numbers at this point.

Benjamin Mogil – Stifel, Nicolaus & Co., Inc.

Okay, fair enough. Thanks, guys.

Operator

Our next question is coming from David Joyce of Miller Tabak & Company.

David C. Joyce – Miller Tabak & Co., LLC

Thank you. With regards to the Entertainment division, granted you took out some of the money-losing shows from last year, so your margins, they were up nicely. But I was wondering if perhaps you'd pulled back versus expectations on new Fuse programming based on Time Warner Cable dropping, and what should we think about in terms of the programming investment there going forward this year?

Hank Ratner

So, questions really about Fuse programming.

Mike Bair

Yeah, well, as it relates to Fuse programming, we really believe in this kind of dedicated, music-focused programming network, Fuse is 24/7, we think we're a leader in this category. One of the unique advantages that we have is that we are tied to these iconic venues represented by the Madison Square Garden Companies, and with that comes our content operations expertise and our music industry relationships through MSG Entertainment.

This really gives us kind of a unique access to relationship with artists and their partners in order for us to create better content-rated programming. So, we've been pleased with our growth so far. We've been pleased with the kind of return that we've seen on our current investments on programming. We do invest very prudently and strategically. And we're going to continue to do that and measure everything as we go and obviously continue to develop our venues and the relationships with the artists. And build Fuse to where it should be to maximize the business.

David C. Joyce – Miller Tabak & Co., LLC

All right. And in terms of your comments on the ratings for the Knicks and Rangers' games, were those already quarter-to-date that were currently in or they adjusting for the loss to Time Warner Cable or was there something pro forma there?

Mike Bair

Yeah, those are strength ratings quarter-to-date. There's no adjustment.

David C. Joyce – Miller Tabak & Co., LLC

Okay, great. Thank you.

Operator

Your next question coming from Brett Harriss of Gabelli & Co.

Brett Harriss – Gabelli & Company, Inc.

Hi, good morning, everybody. Can you talk a little bit about the financial impact from the Time Warner Cable contract?

Hank Ratner

We can't hear you.

Ari Danes

Hey, Brett, it sounded like you were asking for the financial impact of Time Warner Cable but you're a little distant. Is that what you're looking for?

Brett Harriss – Gabelli & Company, Inc.

I'm sorry. I'm sorry. Is this better?

Ari Danes

Yeah.

Hank Ratner

Yeah.

Brett Harriss – Gabelli & Company, Inc.

So, yeah, the financial impact on the contract renewal. I know you can't give specifics but just a ballpark. You're five-and-a-half weeks in, I get to about $7 million to $10 million of lost revenue per month, roughly that can bring a financial impact.

Robert Pollichino

When I kind of talk about the specific details of affiliation agreement, but if you think about what the impact to us has been from a subscriber perspective, they represent about 17.5% of Fuse subscribers and 30% MSGN subscribers. So, clearly, Time Warner is a significant distributor of ours and will have a material impact, though, on our results for as long as this feud continues. But as far as scoping it out, I think you can some judgments on that.

Brett Harriss – Gabelli & Company, Inc.

Okay. And then just on the Networks, just on programming cost, total cost for the segment was down $13.5 million, I think. And if you look at corporate eliminations, we're down about $8.5 million. And I've always assumed that those corporate eliminations were mostly the sports rights associated within teams. So, can we assume that sort of half of the cost reductions were from the fact that the Knicks weren't playing and then the other half from real cost reductions, or is the cost reductions mostly the Knicks?

Robert Pollichino

So on the media side, right, the biggest impact is related to rights, and it's related to the fact that MSG Media didn't have in this quarter the number of advances exclusively available to them. So, that's what really drove the cost down. The other component you should think about in the cost reduction is all the genuine costs associated with not having those events such as the programming-related costs. So, those are the two biggest components of the cost decrease.

Brett Harriss – Gabelli & Company, Inc.

Okay, thank you.

Operator

Your next question comes from Robert Routh of Phoenix Partners.

Robert Routh – Phoenix Partners Group, LLC

Yeah. Good morning, guys. Just two quick questions. First, you mentioned obviously the Christmas Spectacular was a lot better this year than probably most of you expected. You got to do a lot of great changes. But given the growth that we've seen, going forward, what do you guys have planned in order to maintain that growth and kind of keep revamping it and get it back to kind of what it was a decade ago on that front? And then I just have one follow-up.

Melissa Ormond

Okay. Yeah, as you suggested, we were really pleased with the results from the Christmas Spectacular this year. We received positive critical and fan response. And I think the feedback was overwhelming as the technology was beautifully executed. In terms of learnings that we can carry forward into next Christmas season and beyond, we had some pretty innovative group sale strategies that we've incorporated into our promotion this past season.

We saw significant results from our dynamic pricing efforts that we will expand upon next year, and continued engagement with our proprietary database. And this year is exciting for us because it's the 80th anniversary of the Christmas Spectacular production and the 85th anniversary of the Rockettes, so we have a lot to celebrate.

Robert Routh – Phoenix Partners Group, LLC

Okay, great. And then as far as your revamp -- the Chase deal. Obviously you expanded that. Now, it's kind of multi-platform across all your properties and venue. How should we look at that in terms of degree in magnitude and in terms of revenue recognition, how you guys are going to realize that in your financials going forward?

And also, along the same lines is, what is else -- you mentioned the pipeline is full. Obviously, you have sure you have been knocking down your door behind your sponsorships and signage and all that. How much can you take? What's maximum number before it gets a little bit too much, and what could the upside be from the back as you continue the transformation and continue to leverage all the properties and assets you have off each other?

Scott O'Neil

Sure, okay. I'll start with the Chase, the official card. We were thrilled. When do you a deal with a company like JPMorgan Chase at the marquee level, which is kind of our top partner, and they're across all our properties, all our assets fully integrated. And the one piece that was missing the credit card piece which is much more retail other than the bank, and all through other lines of business. AMX was our incumbent for some time and among our largest partners, and this deal expanded upon that. So, to give you a sense, if these were standalone, it'd be among our top partners.

And I guess, I don't want to minimize the impact of Chase and the impact. They have about 49% penetration in the overall market with their cardholders, card members. For us, as marketers and those of us who sell tickets for a living know that their reach and depth and the integration between their card members, the retail banks, their ATM network, we think not only give us a short-term boost and lift, but also kind of more long-term horizon gives us a chance to really blanket the market the way we haven't been able to in the past.

So, we're thrilled about the relationship, the partnership and the way they cover the market. In terms of where we are in the market, yes, we do have a full pipeline as I mentioned. Our biggest challenge quite frankly is more of one of yield management and that is a question of -- we don't have an inventory problem. We've managed that very tightly and efficiently, so the issue won't be do you have enough big or anchor assets to drive big deals, we have that covered. This is a company that is wide and has a breadth and depth that's unmatched when you're in the marketplace.

But one of the old management where -- can you go out and do a deal in the auto category or is it better for this organization to do six deals or three deals or five deals? That's what we wrestle with every day and that becomes kind of a little bit of mixture of art and science. So, I will tell you that we are pretty far along with a few deals and we hope in the next six months that it ends up, that it's more prudent to do deals with one or two partners in the category rather than four or five.

Robert Routh – Phoenix Partners Group, LLC

Okay, great. But is it safe to say that given where you are now, there's still some room to grow in those particular business lines which are very high margins? It's not like your top-valued, just a little a few more deals waiting in the wings as you're looking at that it could be incrementally positive. Is that a sure way to look at it?

Scott O'Neil

Yes, absolutely.

Robert Routh – Phoenix Partners Group, LLC

Great, thank you very much.

Operator

Your next question comes from John Tinker of Maxim Group.

John Tinker – Maxim Group, LLC

Hi, thank you. Could you just go through your taxes are a little more? I see the reported rate is 45%, which is up from the 37% in the prior quarter. And particularly given you're going through the transformation in some of the capital costs and that perhaps potential accelerated depreciation charges, could you discuss that a little? That'd be great.

Robert Pollichino

Yeah, it's Bob. So we have an interesting dynamic that's happening. So, because of the fact that we're going to benefit from the 100% bonus depreciation deduction, what ends up happening is that reduces taxable income. But there's another benefit that we've experienced and will continue to experience and that is really something called the domestic production activities deduction which is called the 199 deduction, if somebody knows taxes better than I. And on that deduction, what happened is that deduction is limited to your taxable income.

So, because of the bonus depreciation deduction which lowered the taxable income, we didn't get the full benefit of what we historically -- or we've been experiencing on the domestic production activities deduction. And therefore the rate goes up on a smaller base. And if you need more than that, I have to turn you on to my tax department. So, what will happen going forward just to get the construct of it, is we will start to recapture the deduction under the bonus depreciation deduction.

And then we will revert back to getting back the full benefit of the domestic production deduction just for size of what I'm talking about that depreciation deduction on a cash basis, which is the way we've been looking at this is in excess of $40 million and from a cash perspective, we will see the significant portion of that benefit in the second half of the year on a cash basis. Hopefully, I didn't confuse it, but I hope that I helped you with what's going on.

John Tinker – Maxim Group, LLC

Okay.

Hank Ratner

Sort of the inverse going on between the two different deductions.

John Tinker – Maxim Group, LLC

Right, right, right. So, the reported rate will remain high but the cash rate will be lower.

Hank Ratner

You got it. The cash --

John Tinker – Maxim Group, LLC

Right, right, and Hank, just one last question. On MSG Sports, talk about the decrease in direct top rating expenses is partially offset by $7.5 million increase in provisions of certain team personnel transactions. Is that one-off or should that be built into our cost base going forward?

Hank Ratner

That's just the actual experience of the recent restructuring of the Knicks roster, so that particular transaction is clearly a one-off.

John Tinker – Maxim Group, LLC

Okay, thank you.

Ari Danes

Thanks, John. Kelly, we have time for one more caller.

Operator

Okay, our final question comes from Martin Pyykkonen of Wedge Partners.

Martin Pyykkonen – Wedge Partners Corporation

Yeah, thanks, good morning. Two questions, one on average ticket prices for next season. I know we're still obviously Rangers and Knicks a ways to go, Rangers doing relatively better. But at this point considering that you raised tickets pretty significantly, last year seems from everything I can see the flow-through and the season demand has been very strong and held up.

At this point, what are your thoughts about raising tickets for next year? I know you're not going to say a number. I'm just looking more for tone and to what extent of that depend on how the teams do from here? And then I have a question on the Madison suites after that if we can.

Hank Ratner

Sure. I don't think I'm going to be able help you in terms of tone or direction other than to tell you that in early March, we'll be releasing the ticket prices. Obviously, it's pretty standard. It depends on a variety of factors.

Martin Pyykkonen – Wedge Partners Corporation

Okay.

Hank Ratner

But we're in that process now. It's still a little early for us.

Martin Pyykkonen – Wedge Partners Corporation

Okay. And then on the Madison suited, the 58 next year, I just want to clarify because I thought at one point, they were maybe half opening at the start, half opening at the start of calendar 2013, so can you just clarify that? And then in terms of the physical layout, is that replacing something? What I'm trying to get at is there an incremental average seat price benefit to you in terms of what was equivalently there before in terms presumably raised prices and so forth? Just trying to get the kind of an ASP delta, if you will, for what that's maybe replacing or in addition to?

Hank Ratner

Just to go about the physical space, what happens -- if you've seen the building today and you see where the lower bowl ends which is where the new seats end. At that point, there'll be the -- the suites will be built right there. And what will happen is it will replace some rows of seats. But those rows of seats then are going to be placed above the suites.

And that's really why the -- that the seats get closer, up to 10 feet to the playing surface because they're now sitting on top of suites and moving forward, which also creates the ability then to increase the size of the concourse because you're pushing the seats while we're -- you're getting them closer to the action, and you're creating more space behind it to increase the concourse and get more concessions and bathrooms and all.

So, physically speaking, it's sort of -- the construction, it's just a different model whereas -- where seats were before, the suites come. And you're charging suite prices instead of seat prices. And then you get to push the seats forward, and you create also a break between the upper and lower bowl to have total unobstructed seating as the upper bowl starts. So, that's sort of what's physically occurring.

And it's really a kind of beautiful win-win situation across the board because you're accomplishing so many improvements to the building at the same point. And I'll let Scott take it from there.

Scott O'Neil

I think the other question you're asking was around when the suites come online. There are -- there is a plan for 16, eight on each side of the -- you'd argue the best or most prominent suites to come on in January. It is a little bit of a moving target where they want all come on January 1, but they'll come on periodically as the season comes on.

We'll be locating those people from those suites to fairly in the Madison Club, which will then come online. So that will fully be sold in online that will start in January 1st or earlier as the suites become available. So, I'm not sure if that's a clear enough picture for you, but there is a drag on the 16 best suites.

Martin Pyykkonen – Wedge Partners Corporation

Right, yeah, that's fine. Just to clarify what Hank is saying on the Madison suites, was that a similar kind of concept this year with the event level lower bowl where you effectively are getting more revenue per seat because of the way the suites were designed in which you're replacing that primary concept?

Hank Ratner

Correct, that's correct. Yes.

Martin Pyykkonen – Wedge Partners Corporation

Okay, thanks.

Hank Ratner

Thanks Martin.

Operator

Thank you. I would now turn the conference back over to Ari Danes for any closing remarks.

Ari Danes

Thank you for joining us. Have a good day.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

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