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The Madison Square Garden Company (NASDAQ:MSG)

F1Q13 Earnings Call

November 2, 2012 10:00 AM ET

Executives

Ari Danes – VP, IR

Hank Ratner – President and CEO

Bob Pollichino – EVP and CFO

Mike Bair – President, MSG Media

Melissa Ormond – President, MSG Entertainment

Analysts

Ben Swinburne – Morgan Stanley

Bryan Goldberg – Bank of America

Vasily Karasyov – Susquehanna Financial

Martin Pyykkonen – Wedge Partners

Ben Mogil – Stifel Nicolaus

Rich Tullo – Albert Fried & Company

John Tinker – Maxim Research

David Joyce – ISI Group

Operator

Good morning. My name is Christy and I will be your conference operator today. At this time, I would like to welcome everyone for The Madison Square Garden Company Fiscal 2013 First 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.

Ari Danes

Thanks, Christie. Good morning and welcome to The Madison Square Garden Company’s fiscal 2013 first 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.

Hank Ratner

Thank you, Ari. For the first quarter of fiscal 2013, we’ve reported consolidated AOCF of approximately $63 million, a 37% increase versus the prior year quarter. Not only was this a strong start to the year, but similar to the prior year quarter, our results were impacted by the off-season shutdown of the Garden and the Theater at Madison Square Garden due to the transformation project. We also deliver robust first quarter results while increasing our investment in our businesses to drive long-term growth and create value for our shareholders.

Before turning to our business segments, as you know, Hurricane Sandy had a significant impact on the tri-state area this week. We can report that our venues in New York, Madison Square Garden, The Theater at Madison Square Garden, Radio City Music Hall and Beacon Theater all came through virtually unarms.

Turning to our business segments: MSG Media was the primary driver of the increase in total company AOCF of the quarter as our Media segment continues to benefit from strong recurring affiliate fee revenue growth. In terms of our regional sports networks, the New York Knicks 2012-13 regular season starts tonight and we expect MSG Networks to continue to benefit from strong interest in the team. We’re also advancing our plans for Fuse, which in September launched its largest initiative to date, Fuse News, by creating a dedicated news division, which is started to deliver round the clock coverage of the music industry across this Fuse’s multiple platforms.

The Fuse News initiative will include a brand new flagship show for the linear network, which is one of the several new original programs expected to rollout this fiscal year. MSG Entertainment results for the first quarter was driven by improvement in our bookings business, as our venues remain must play destinations through high variety of artists and events.

At that same time entertainment results reflect the start of increased investment in the segment to drive long-term AOCF growth, including some incremental operating expenses related to the form and the development of a new large-scale theatrical production for Radio City Music Hall. The Forum will establish a significant West Coast presence for our company and provide us with the Iconic venues in each of the countries, two largest entertainment markets. We’re confident in the financial opportunity that the Forum presents and expect the venue to become a meaningful contributor to MSG Entertainment’s AOCF on an annual basis.

In addition, the Radio City Christmas spectacular opens next week, as we celebrate the 85th anniversary of the Rockettes in New York. We expect to continue benefiting from the enduring popularity of the number one holiday show in the country. With respect to our MSG Sports segment, the Knicks tip of their 2012-2013 regular season tonight against the defending MBA Champion Miami Heat. We’re one of the best frontlines in the league along with newly acquired veterans Raymond Felton, Jason Kidd and Marcus Camby. We continue to believe the team is positioned for success.

Turning to the Rangers. As you know, the NHL’s collective bargaining agreement with the players association expired on September 15, 2012. As of today, the NHL has canceled pre-season games and all regular season games through November. If the canceled home games are not rescheduled in the second quarter, it would have a material negative effect on the company’s revenues, operating income and AOCF in the quarter. If additional games are cancelled and not rescheduled, it could have a material negative effect on our fiscal 2013 results.

While we know that there is interest and understanding on what NHL work stoppage might impact our contractual agreements with customers, partners and affiliates. In light of league restrictions and uncertainties surrounding the outcome of the current work stoppage, we cannot provide these details at this time. Well we can’t say is that we’ve factored the potential of an NHL work stoppage into our liquidity planning and we remain comfortable that we have ample liquidity to complete the transformation project and have other business initiatives.

Turning to the transformation. We’ve now completed the second of three consecutive offseason shutdowns of The Garden with the building reopening on schedule tonight for the next home opener. Starting tonight, our customers will get to experience many new amenities and enhancements, including more comfortable upper bowl seating that significantly improved sight lines that put them up to 10 feet closer to the action.

In addition, our new 8th Floor Garden Concourse is up to triple the previous size in some areas and features new retail and concession options including exclusive food offerings from our MSG Signature collection, featuring some of New York’s top chefs. 27 of the 58 Madison Level Suites will be opened starting tonight, while as planned, the remaining suites will open between now and January.

Also opening tonight is the Madison club and all-inclusive premium-seating club with high end food offerings that is available to members looking to entertain in our events. With the arenas reopening, we are also debuting as part of the 6th Floor Madison Concourse, a visual retrospective called Garden 366, which brings to life one moment in Garden history for every day of the year. The retrospective wraps around the entire circumference of the Concourse creating a visual calendar of the Garden’s rich history.

Further, the top 20 defining moments in Garden history will be commemorated through special exhibits that will feature photos, memorabilia, and additional artifacts. The first 10 moments which will be unveiled tonight are located on the Madison Concourse. The remaining exhibits which we located on the Garden Concourse will debut in the fall of 2013.

We believe that we have successfully created a special destination that will allow all fans who visit the Garden to experience the iconic moments that have defined us over the years. Looking ahead construction work will continue behind the scenes, as we advance towards the third and final phase of the transformation project next off-season.

Next year, when the garden reopens in the fall 2013 after our third off-season shutdown, we will debut a newly transformed Seventh Avenue entrance of the arena, which will be named The Chase Square. We will also unveil two spectacular bridges sponsored by Chase, which will be suspended above from east to west, parallel with the ice end court with seating for a one of a kind viewing 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 scoreboard and the restoration of the Garden’s world famous ceiling.

We’ve incurred total transformation related construction costs of approximately $794 million through September 30. We do not expect total transformation project construction costs to differ materially, higher or lower from the previously disclosed $980 million inclusive of various reserves for contingencies.

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

Bob Pollichino

Thank you, Hank. As Hank stated we had a solid start to fiscal 2013 with first quarter total company revenues up $204.2 million, up 15% versus the prior year quarter. Consolidated AOCF of $63.3 million, and operating income of $40.2 million increase 37% and 52% respectively versus the prior year quarter.

In terms of our business segments, MSG Media generated a $159.5 million in revenues, an increase of $20.9 million or 15% as compared to the prior year quarter. Affiliate fee revenue increased $17 million primarily attributable to higher affiliation rates.

Other net revenues increased $4 million, primarily due to a short-term programming licensing agreement for which revenue will be recognized through the agreements expiration in April 2013 and it’s not expected to be recurring thereafter. MSG Media segment AOCF of $76.7 million was up 20% versus the prior year quarter, due to the increase in revenues, partially offset by higher direct operating expenses and to a lesser extent higher SG&A expenses.

The increase in direct operating expenses was due to higher programming cost at Fuse, as we continue to strategically invest in the network to drive growth. Higher programming costs at Fuse were partially offset by lower MSG Network’s programming costs. The increase in SG&A expenses mainly reflects increased marketing costs, as well as higher employee compensation and related benefits due primarily to support our initiatives at Fuse.

Our MSG Entertainment segment generated $30.8 million in revenues, a 12% increase versus the prior year quarter. The revenue increase was primarily due to higher sponsorship, signage and suite rental fee revenues, and higher event-related revenues at the Beacon Theater and The Chicago Theater. This was partially offset by a decrease in event-related revenues at Radio City Music Hall primarily due to the venue being utilized for Cirque du Soleil Zarkana for approximately two months of the quarter versus being fully utilized for the prior year quarter. Largely offset by an increase in revenues associated with other events at Radio City.

MSG Entertainment’s ACOF loss of $12.6 million improved by $1.2 million versus the prior year quarter. This was due to the increase in revenue largely offset by higher SG&A and direct operating expenses. The increase in SG&A expenses was primarily due to higher employee compensation and related benefits and professional fees, which includes operating expenses related to MSG Entertainment growth initiatives as well as the Forum.

The increase in direct operating expenses was primarily due to higher event-related expenses at the Chicago Theater and the Beacon Theater, higher net sponsorship, signage and suite rental costs, incremental Forum related expenses and expenses for other MSG Entertainment growth initiatives. The overall increase in direct operating expenses was largely offset by a decrease in event-related expenses at Radio City Music Hall and other net decreases.

Our MSG Sport segment generated $31.6 million in revenue, a 10% increase versus the prior year quarter. The increase in revenues was primarily attributable to higher suite rental fee revenue and sponsorship and signage revenues, partially offset by a decrease in other net revenues.

MSG Sports AOCF of $1.5 million, increased $1.9 million versus the prior year quarter, primarily due to a decrease in direct operating expenses and higher revenues, largely offset by higher SG&A expenses. The decrease in direct operating expenses was primarily due to lower other team operating expenses, mainly the result of a non-recurring league related expense recoupment and an adjustment to the 2011, 2012 playoff related revenue sharing expense. The increase in S&G expenses was primarily due to a non-recurring item and other expense increases.

Turning to the Transformation project, construction costs incurred for the Garden Transformation during our first quarter were approximately $77 million, while project to-date cost incurred through September 30 were approximately $794 million, which represents a significant portion of the total estimated Transformation project construction costs.

Total net cash and cash equivalents as of September 30 was approximately $205 million essentially unchanged versus our balance at June 30. We continue to believe that we have sufficient liquidity to fund the 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 unchanged as of September 30 at $368 million as they remain $7 million on 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. Turning first to MSG Networks, our 2012, 2013 MBA regular season starts tonight. With MSG Network serving as the local broadcast home of the New York Knicks, the team set to deliver an exciting regular season campaign for sports fans in our marketplace. As you know, interest in our teams grew meaningfully last season over 80% and over 35% increase in ratings for the Knicks and Rangers respectively. This positions us well going forward with respect to potential advertising revenue for Knicks Telecast, as well as for Rangers Telecast, pending the outcome of the current NHL work stoppage. We also continue to develop programming that is designed to extend MSG’s brands and to create promotional and revenue opportunities for our company. Examples include shows that capitalize of the enthusiasm of our teams’ fans such as Knicks Night Live, Knicks Training Day Live, beginnings and WFAN’s popular Boomer & Carton show.

In terms of our contingency programming plans related to the current NHL work stoppage, MSG and MSG Plus broadcast a wide variety of live professional and college sports, as well as additional critically acclaimed original programming, but also leveraging our deep archive library to develop additional exclusive programming for local sports fans.

For example in September, we did view the essentials. The 12 part retrospective series on both New York Rangers and New Jersey Devils 2011-2012 seasons. And last month, we’ve reviewed best of the Islanders 2011 and 2012 and the eight part series featuring the team’s most exciting games from last season. We’re also evaluating opportunities for other original shows, related to the hockey teams in our market.

Finally, MSG Networks is in the midst of third year of regular season coverage of the New York Giants, comprised of four weekly shows. Giants Opening Drive Live and 90 minute weekly pre-game show, Giants Rewind have done a review of the previous week’s game, Giants press conference, a weekly half hour program including Coach Tom Coughlin’s Press Conference Live and all new episodes of Giants Chronicles, which offers an in depth look at the team stars.

Turning to Fuse: consumer demand for music content continues its impressive growth. And in this rapidly expanding marketplace, we’re seeing opportunity for Fuse to become the destination for consumers seeking a credible definitive source of music news and information. With this goal in mind, this fiscal year, we launched our largest initiative to date, Fuse News. By creating a dedicated news division that is already delivering up to the minute music news and information across Fuse’s multiple platforms, including Fuse’s Linear Network as well as its newly redesigned website.

Later this fiscal year, we will take the Fuse News initiative a step further but the debut of the brand new flagship show that will report on the critical storage in the world of music with insight expertise and unparalleled depth of coverage. In addition to our Fuse News initiative, we’re also in the midst of rolling out the most significant slate of original programming on Fuse to date.

Earlier this year, we debut Popped, a music documentary series which highlights the tipping point when an artist reaches superstardom. And Off Beat, which features the funniest and most outrageous music themed internet videos and viewer crazy clips. We’re also set to rollout several more original programs this fiscal year, including Warped Roadies, which delivers the behind the scenes look at the Vans Warped Tour, and a new original series about a Brooklyn family trying to launch their own family style record label. Billy on the Street, our unique music and pop culture quiz show hosted by comedian Billy Eichner also retains with new episodes in December and is already generating buzz on national talk shows and across the social media world.

We continue to maintain a strong development pipeline and expect to have addition of original programs to announce in the months ahead. Meanwhile, our Fuse digital platforms which we utilize to drive viewership of the linear network, continue to gain momentum. For example, our Fuse YouTube channel a net averaging approximately 2 million views a week and is consistently ranked in YouTube’s top 20 of the 100 shows which YouTube has funded.

And is an excellent example of how we leverage our digital assets and collaborate with MSG Entertainment. This past September, we pretended Fuse Music Week live from Radio City Music Hall. As part of MSG Entertainment’s week-long series of concerts at Radio City by some of today’s hottest artist, we streamed live performances by Bon Iver, Metric, and Grizzly Bear on our Fuse YouTube channel. Fuse News was also on-hand to capture interviews and behind the scenes footage.

Our digital efforts created significant marketing exposure for these artists, further strengthening the value proportion of playing our venues. At the same time, we’re able to promote viewership of Fuse’s Linear Network, where viewers were able to watch Fuse Music Week highlights and additional exclusive content available only to our distributors.

Finally, we are pleased to report that as of yesterday, Fuse has returned to Dish Network’s programming lineup as a result of a new long-term affiliate agreements. The added distribution significantly increases the number of Fuse subscribers nationally and we’re pleased that dish customers once again have access to our innovative and exclusive music content.

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

Melissa Ormond

Thanks Mike. Turning first to our production’s business. The 2012 Radio City Christmas Speculator begins its holiday season run on Friday, November 9, as we celebrate 85 years of the Rockettes in New York. In addition, to the significant show enhancements made to the production last year, this year’s experience will feature an interactive historical exhibit about the Rockettes and attribute to the Rockettes which will also be incorporated into all performances.

Our marketing campaign for the show this year includes partnerships with JP Morgan Chase, Norwegian Cruise Lines, New York Life, as well as several national retailers to efficiently extend the reach of this year’s show. The Rockettes were featured in a September episode of lifetime networks project runway with over 2.1 million 18 plus viewers having tuned in and were once again perform on NBC’s annual broadcast of the Macy’s Thanksgiving Day Parade. We will also celebrate the Christmas Spectacular and 85th anniversary of the Rockettes during it has our broadcast special on WNBC on November 24.

We are also presenting the theater version of the show in four markets for the 2012 holiday season versus three markets last year. This includes the return to Nationals Grand Opera House for the 11th year, as well as engagements in St. Louis, Dallas and Chicago.

With respect to Christmas Spectacular ticket sales, we were cautiously optimistic prior to Hurricane Sandy. We given the storm significant impact to the tri-state area, it is difficult to project how sales will trend in the coming weeks. At the same we’ve had several concert postponements due to the hurricane and are working to reschedule those artists in this fiscal year. That being said if we have a terrific slate of artists performing in our venue this quarter, which I will discuss momentarily.

Returning to the productions business. As Hank mentioned we continue development of a new large scale theatrical production designed for Radio City Music Hall. While it is premature to provide specifics about the show, we believe this production much like the Radio City Christmas Spectacular will appeal to a broad audience, and while we’ll incur expenses related to the show throughout this year, the show will not debut in fiscal 2013.

Turning to our bookings business. During our fiscal first quarter, we signed increased number of concerts including multi-night engagements, as well as increased number of family shows as the strength of our markets, venues and marketing expertise continues to resonate throughout the live entertainment industry. Highlights include Jack White for two nights and Bon Iver for Four Nights of Radio City Music Hall including one night during, which Bon Iver was streamed live on Fuse’s YouTube channel as part of the Fuse Music Week.

We also hosted multi-night runs with Jackson Browne, David Byrne and St. Vincent, the Tedeschi Trucks Band, Seal, and eight shows of The KIDZ BOP sensation in the Fresh Beat Band at the Beacon Theater as well as Barry Manilow to Chicago Theater. Multi-market performances this past quarter included Dukes of September and Celtic Thunder at the Beacon and the Wang Theater in Boston.

In our fiscal second quarter, we’ve already hosted at the Beacon. Jerry Seinfeld Crosby, Stills & Nash for five shows and the Night of Too Many Stars charity event benefiting Autism programs. We also have upcoming performances at the Beacon by comedian Bill Maher Grace Potter and the Nocturnals and the annual government Mule New Year’s engagement.

The garden reopens tonight with shows booked between now and calendar year end including comedian Kevin Hart, Madonna and Justin Bieber each for two shows. The Who, One Direction, Air Smith, Zac Brown Band, Neil Young & Crazy Horse and Leonard Cohen. We were also welcome back Z100’s annual Jingle Ball concert in early December featuring some of today’s hottest artist including Taylor Swift, One Direction, Justin Bieber, The Wanted and Jason Mraz.

To close out the year we will have to start annual run a fish for four sold out shows at the Garden. We also have a strong plan of artists and events playing more than one of our venues in New York, Boston and Chicago during the second quarter including Regina Spektor, Chris Isaak, Jerry Seinfeld so you think you can dance and the monkeys.

Family favorite Dr. Seuss’ How the Grinch Stole Christmas comes to the Wang Theater in late November and the Theater at Madison Square Garden in mid December for multi-week engagement in both markets. With regard to The Forum, we continue to finalize our renovation plans and we’ll have more to say in the coming months. As previously discussed, The Forum will not be opened for events in fiscal 2013. Once the venues renovation is complete, we expect The Forum to be a meaningful contributor to MSG Entertainment AOCF on an annual basis.

I will now turn the call back over to Hank Ratner to provide highlights from our MSG Sports segment.

Hank Ratner

Thanks, Melissa. We continue to benefit from having amongst the strongest fan basis in the NBA and NHL and have seen strong demand this year for season tickets with respect to the majority of Knicks and Ranger season ticket sold in any given year.

As previously disclosed, the Knicks and Ranger presumed over 95% and over 90% of season tickets respectively for this season. And we’re pleased to report that we’re sold out of season tickets for both teams. As a reminder Knicks and Rangers season ticket prices this year have increased by an average of 4.9% and 9.5% respectively, primarily reflecting the new amenities we’re now providing as part of the second phase of the transformation project. In addition, we expect the Knicks to play at or near capacity crowds all season at the Garden, starting with Knicks’ home opener against the Miami Heat and we also expect the same for the Rangers once the team resumes playing.

Before moving on to the transformation, I wanted to mention that the New York Liberty announced last week that Bill Laimbeer, a WNBA Coach of the Year and three time WNBA champion has been hired as the team’s General Manager and Head Coach. We look forward to the team benefiting from his leadership next season.

Turning to the transformation. We’ve been placed with the strong level of sales across all of our extensive premium products that are part of the transformation. Starting last year with the debut of the 1879 Club, the Delta SKY360 Club and the event level suites and follow this year by the Madison Level Suites and the Madison Club.

We’ve continued to access the market opportunity throughout our sales process with a goal of ensuring that we are maximizing revenues across all of our premium products. In terms of our Madison levels suites, 27 of the 58 suites open tonight. Further, we’re pleased to report that we have only 2.5 Madison Level Suites still available for long-term agreements. And given the scares supply of our new suite products and continued significant demand, we have designated two additional Madison Level Suites or prevent news in order to maximize revenues. We’re also pleased with our sales for the Madison Club. Additional seats in the Madison Club will become available over the coming weeks as we are currently utilizing a portion of the Madison Club for Madison level suite holders until their respective suites become available, which as we mentioned earlier will occur as planned between now and January.

As sponsorship efforts are off to a strong start in fiscal 2013 as we’ve recently signed two new signature marketing partnerships in the automobile category with respect to the transform Garden, including a long-term extension and expansion of our marketing partnership with Kia Motors America.

As part of the expanded agreement, Kia will be the official vehicle of Madison Square Garden, The Theater at Madison Square Garden, the Knicks, Rangers, and Liberty, college basketball and tennis, as well as the concert series of the Garden. This significant partnership will also include an expanded presence for Kia on MSG and MSG Plus and integration on the Garden, Knicks, Rangers, and Liberty websites. We announced our new long-term signature marketing deal with Lexus, which includes Lexus’s being named the official luxury vehicle across the broad array of our assets and brands with significant visibility at all Knicks, Rangers and Liberty games as well as the concert series at the Garden.

Lexus will also have a permanent presence in the Transform Madison Square Garden arena including the name, the partner of the new Madison Suite Level providing Lexus with the premier exposure through a who’s who of corporate America that have purchased the new Madison Level Suites and memberships in the Madison Club. We’re also pleased that Kia Motors America and Lexus joined our marquee partner, JPMorgan Chase and our signature marketing partners Delta Air Lines, Coca-Cola and Anheuser-Busch.

We believe that these important partnerships speak to our ability to deliver exceptional value across our unique portfolio of assets including the transform Garden. MSG Sports also continues to host a variety of premier and memorable sporting events. Tennis legends John McEnroe, Andre Agassi, Pete Sampras, and Pat Rafter will compete in the NASDAQ Indexes Cup as part of the PowerShares Series Tour on Monday at the Arena. And in March the BNP Paribas Showdown returns to the Garden for its sixth consecutive year teaching several of Tennis’s top stars including Rafael Nadal, Juan Martin del Potro, Serena Williams and Victoria Azarenka.

MSG will also welcome back several prominent cards basketball tournaments including the NIT Season Tip-Off, Jimmy V Classic along with the full slate of St. John’s games, which was set to take place of the next couple of months.

In addition, we’ve recently reached an agreement with the big east on a multi-year extension to keep the tournament at the Garden, which has hosted the premier event here since 1983. And on December 1, Miguel Cotto will take on Austin Trout in a boxing match that marks Cotto’s eighth fight at the Garden. We look forward to hosting another Great Night of boxing a capacity crowd.

Now I’ll turn the call back over to Ari Danes.

Ari Danes

Thanks Hank. Christie, we’re ready to open the call for questions.

Question-and-Answer Session

Operator

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

Bob Pollichino

You there, Ben?

Ben Swinburne – Morgan Stanley

Can you hear me?

Bob Pollichino

No.

Ben Swinburne – Morgan Stanley

Can you hear me?

Bob Pollichino

Yes.

Ben Swinburne – Morgan Stanley

Sorry about that. Good morning, I wanted to ask first of all question just on the second quarter impact from the storm. I know it’s probably impossible to gauge the impact on ticket demands, but just in terms of the event nights across – sort of you guys expecting to be down from last year or up from last year? Or any sense for how many events you may have – you may ultimately lose at this point?

Hank Ratner

I think we’re pretty much through the postponements that we’re going to experience and we have shows schedule to playoff next week that we believe we’ll playoff. And all the artists that are – that have postponed this week have indicated they want to reschedule. So we’re working to do that right now. We believe it will all reschedule within the fiscal year.

Ben Swinburne – Morgan Stanley

Great. And then just one quick follow-up for Mike, probably a long shot. I wanted to ask about the Fuse deal of Dish. Any way for us to think about that agreement and the impact on your business relative to say when Dish carried Fuse, a few years back, any way for us to think about the financial benefit?

Hank Ratner

Oh, sure. I mean – so we’re obviously very pleased that we reached this long-term deal with for Fuse to be launched back on Dish Network. I think some benefits are that we’re getting theater fair value for and I think that’s appropriate. We are actually going to be on a tier that is world widely distributed than we were in prior. So I think, we’re looking forward to seeing that expanded distribution on the effect on the business overall.

Ben Swinburne – Morgan Stanley

Thanks a lot.

Operator

Thank you. Your next question comes from Bryan Goldberg of Bank of America.

Bryan Goldberg – Bank of America

Hey, thanks. I’ve got one on the quarter and two quick follow-ups. With regards to your ongoing development initiatives at Fuse, spending at media seems lighter than expected this quarter. So could you help us to think about drivers of Fuse spend patterns and any kind of lumpiness over the next few quarters?

Bob Pollichino

This is Bob Pollichino. So the first issue when we think about media is the unknown outcome of the NHL lockout. So it’s sort of difficult to be precise with what’s going to end up happening with the year-over-year change in rights fees and expenses for media in total. That being said, if you think about media and its totality, you’re going to see higher mix related rights fee expense and production cost because this year we’re returning to a full 82 game season.

And we also expect that our Fuse programming expenses will increase as we continue to invest in growing the network. We said this in the past and I think it still holds true that those increase in costs that I just talked about both on – in the networks and in Fuse are going to be weighted towards the first half of fiscal 2013. And just one another thing to keep in mind with respect to the Media segment is with respect to the rights fee expense that sort of an into segment expense and revenue. So you get the offset on the sports side.

Bryan Goldberg – Bank of America

All right, thanks. And then on the Forum, I vaguely recall some earlier statements that renovation plans might be shared with the public this fall. And it sounds like that’s maybe another few months away now. So does this have any implications for the ultimate opening of the venue. We were thinking it was going to come online post renovation by January of 14. Is that still realistic?

Melissa Ormond

Well, we’re still in the planning and design phase and we do expect to announce details in the renovation in the next few months. And we don’t see – we’re not going to be evident in fiscal 2013 and at this point nothing else has changed.

Bryan Goldberg – Bank of America

Okay, thanks. And then just finally you names met then out there in the press with regards to sale of AG. And I recognize you guys couldn’t acquire that entire entity because they own some (inaudible) a piece of the Lakers. But should that company ultimately be sold in pieces? Or a new acquirer looks to turn the – turn that portfolio of assets? How should we think about your interest level in the context of your long-term growth strategy for the company?

Hank Ratner

Consistent with prior questions along these lines Agee or other, we just don’t comment on hypothetical transaction.

Bryan Goldberg – Bank of America

Okay. Thank you very much.

Operator

Thank you. Your next question comes from Vasily Karasyov of Susquehanna Financial.

Vasily Karasyov – Susquehanna Financial

Thank you, very much, Hank I have a question about use of cash, you’re clearly, I think the management team deserves a lot of credit for keeping the transformation project on budget and on time, those probably more skepticism, than it was deserved couple of years ago. So you clearly have this ability into that, looking pass of their transformation project, what would be a good assumption for a run rate for CapEx and then given that you stated that you will be looking opportunistically at acquiring venues and so on. What percentage of free cash flow post Transformation project do you think you could commit to such deals? Thank you.

Hank Ratner

I’m going to let Bob take the question about capital.

Bob Pollichino

Yeah, I think it’s obvious that once we get through the Transformation that the CapEx spending is going to be significantly lower and without just to give you a frame of reference, think about when you look that our past level of capital expenses that was with the building that wasn’t a transform building. So we expect them to be significantly lower and kind of judge for yourself what you think they are going to be based on our historic spending.

Vasily Karasyov – Susquehanna Financial

And then what about, what percentage of your cash flow you would be willing to commit to acquisitions and what portion would be available to shareholder friendly initiatives.

Hank Ratner

As we spoke about initially when we went public in early 2010, we knew the big capital commitment, we had ahead of us from the transformation and that liquidity was going to be a top priority to us to make sure that we didn’t find ourselves in any squeeze. So as you rightfully say, the transformation now has two years behind and where down to home spreads with one year left and that does change our profile dramatically from where we were in early 2010.

We began – we begun to think about and what possibilities lie ahead for the increased cash that will be generating without the need to be funding a transformation project. So as we have discussed, we are mindful of growth and the opportunity to continue to drive the value with this company for our shareholders. We continue to focus on growth and look at growth opportunities knowing that a year from now the transformation is scheduled to be done and complete. So we continue to assess potential growth opportunities. We will assess other uses of capital which could include stock buybacks and dividends. Growth stock buybacks and dividends are not mutually exclusive options.

At this point in time, we haven’t made any decisions relating to how much or if or what we are going to be doing but it is something that we are studying and it’s something that we look very much forward to be in a position this time next year having the transformation done, having our liquidity position and cash position change in that positive way.

Vasily Karasyov – Susquehanna Financial

All right. Thank you very much.

Operator

Your next question comes from Martin Pyykkonen of Wedge Partners.

Martin Pyykkonen – Wedge Partners

Yeah thanks, but one thing on Fuse, the YouTube in particular, it’s a pretty impressive number in terms of the 2 million views. I’m just as you are – what you’re doing now on going forward, YouTube’s obviously turn up develop more longer form content monetize their own advertising business or you looking at that in terms of programming development for YouTube specifically towards that kind of longer form, 30 minutes plus or so far I’m just curious where you are at and kind of where do you think you’re going?

Hank Ratner

Yeah, we have a unique view of it, obviously they’ve got extraordinary reach every single day coming through their network. We like the content that we’re able to create right now. Because we think that that content build in audience and while building that audience and creating awareness for Fuse, it gives us the chance to promote and bring them back to the linear and network, it’s actually unique way to use it not only to reach awareness vehicle, but to bring back and build ratings against the linear network which is where frankly most of the economics are.

So we like that business we’ll continue to do it in that manner. Again it also allows us in an inexpensive way to test some programming ideas, have those come to fruition and they are attracting audience, we can see those blossoming on the linear network as well.

Martin Pyykkonen – Wedge Partners

And then for Melissa on the concert side I guess it’s maybe all good enough – a good thing the Rangers are planning for a few weeks because you get a little more buffer to maybe reschedule, but aside from that issue and then Sandy is the fact is that concert inventory for this winter season are going through the month of March meaning, number of concerts tends, number of seat for the Garden are you up versus last year on that in terms of what is, what is scheduled with the Sandy impact.

Melissa Ormond

Well, we’re are quite happy with our slate of artists that are coming into the Garden and I think, I mentioned a few in the script and going into early calendar 2013. We have Lady GaGa, we have Muse Jason Mraz, we have quite a few shows they are selling very, well. So our visibility into the New York concert market at this point is that’s it’s a good season.

Martin Pyykkonen – Wedge Partners

Okay, and then one last thing, I guess maybe more for Bob or you again more sudden AOCF’s sustainability in the positive zone on entertainment, it would seem like by the time you opened the L.A. forum concerning that – I think the outlook you will eventually be talking about, you could be sustainably positive on the AOCF for the entertainment segment, but at that time is that a fair way to think of it and could that even be similar to that in light of your various investments and bookings looking so forth.

Melissa Ormond

We certainly believe that over the longer term that entertainment segment will be a positive contributor on AOCF, I think the biggest and most exciting opportunity now for us is the pending conclusion of the Transformation, once the both the theater and the garden and the arena come back online. We’ll have a significant uptick in bookable dates and then in addition to that just the improved customer experience and the amenities we offer will be significant to entertainment. And

the Forum when it comes online will also have a significant impact, we continue to capitalize on the popularity of the Christmas Spectacular franchise, we think that will be a good contributor, and increase utilization of our other venues within the entertainment network and as you said the other growth initiatives that we look to develop productions to a degree their profitable et cetera.

Martin Pyykkonen – Wedge Partners

And I guess you have plans or tell us more about but just try this question, if there is any note, you can give on it, as far as opening the Forum in 2014 fiscal. Is that more a front-end of the year or back-end of the year and if you can say amounted this month.

Melissa Ormond

It’s really pre-mature to speculate at this point. We hope to have more information in the next couple of months.

Martin Pyykkonen – Wedge Partners

Okay, thanks.

Operator

Your next question comes from Ben Mogil of Stifel Nicolaus.

Ben Mogil – Stifel Nicolaus

Hi, guys good morning and thanks for taking my question. So I’ve got a couple, Melissa on the Rockettes, so you are now in, I mean four cities outside New York this year, if we look over the last couple of years, you’ve gone, some years you’ve gone very deep and that should be problematic last year, you secure a fewer cities, is the move to four assigned you’re feeling better about the consumer economy, are you pricing things differently that I am kind of curious on your desire to add sort of yet another tour in stores little bit tough outside of the major market leisure economy.

Melissa Ormond

Well, just to be clear, we didn’t add another tour we added another city to an existing tour.

Ben Mogil – Stifel Nicolaus

Okay.

Melissa Ormond

And I think the decision was very market specific and very season specific, the opportunities that we had in the four cities where will appear this year were opportunities based on state availability, theater availability, the deal et cetera. And so every year will be what we do when we determine on a case by case basis. And this was the right move for this particular season.

Ben Mogil – Stifel Nicolaus

Am I right. That you’re doing what you said last year, we are trying to sort of add on our part of broadway subscription series, you sort of get the incoming sales to start the run-off with?

Melissa Ormond

Certainly, a lot of the theaters that we are planning this year have sizable subscription basis and we do see the benefit of that, no question.

Ben Mogil – Stifel Nicolaus

Okay. Switching over to sports and or for more actually media/sports and maybe going for Hank, when you look – you look at LA and you now have time order being very aggressive both in terms what is paying for the Dodgers, as well as Lakers rights, they are not in term being aggressive in terms of what is looking for the other MSOs in the markets to pay for that for those new RSNs. When you look at what they are paying more probably with their pricing at with the MSOs and you look at what you are getting and those are obviously comparable markets. Do you actually see more upside potential on as affiliate deals come up for renewal, is it based on using the LA press applying in here?

Hank Ratner

I think we have seen that the regional sports business is a nice business. You try to be smart and strategic about it. You put your expirations out, you try to stager them, and you know opportunities get created so you look, each of the deals have their own built in increases and then one affiliate deals come up you access the market and you figure out, what’s the strength of your product and what rate is available for you at that point in time. You manage your business that way and you manage to be opportunistic as a result, you do look at factors that are occurring across the country and other indications of value that you get from other situations and that’s what we try to do here manage those expirations and take it any opportunities available when renewals become available.

Ben Mogil – Stifel Nicolaus

Do you have any meaningful expirations coming due in fiscal or let’s just call it calendar 2013?

Bob Pollichino

As you know, we don’t really talk about our expirations other than to say that we try to stager them. So, every show off and they are going to be expirations coming up.

Ben Mogil – Stifel Nicolaus

Will you look at what Time Warner is getting in LA for the Lakers or for the Dodgers, (inaudible) piece in the Lakers. Do you view that as being comparable to the increase in the – or the price that you’ve gotten in your recent contract renewals or do you still see more room to match that if you will?

Hank Ratner

I’m not quite familiar with exactly what Time Warner is getting for the Lakers. I’m not aware of many deals that have been done to-date, and I’m really not sure of the Dodger situation at this point in time either.

Ben Mogil – Stifel Nicolaus

Okay. Okay, that’s fair enough. And then I think last one, just for Bob. See I think you said you spent 794 on an accounting basis through at the end of September, what have you actually spent on a cash basis?

Bob Pollichino

Well 794 was what we incurred in that $77 million that is unpaged of that 794.

Operator

Thank you. Your next question comes from Rich Tullo of Albert Fried & Company.

Rich Tullo – Albert Fried & Company

Hey, guys. Thanks for taking my question can you hear me?

Hank Ratner

Yes, yes.

Rich Tullo – Albert Fried & Company

Okay. Two questions, the first question is not to talk about the future of the NHL, but just looking back at the September quarter, was there any revenue impact from the lockout during the September quarter? And my second question is going to be in regard to providing a little color on the Fuse network obviously this was a great addition, what future affiliate prospects do you have of those and beyond Dish for affiliate fee and/or we need to look at this network is emerging into online as a serial content provider, providing clips of concerts, driving viewers on to linear network, if my think on that strategy correct? And is there any opportunities to bring wide nation into that mix?

Hank Ratner

Well, I’ll take the first two pieces of the question and I think Rob may answer the first question.

Bob Pollichino

There was no, no reduction in revenue in the quarter for sports because of the NHL number, this quarter is fairly dormant for the team’s starting up now. So there was no reduction in revenue.

Bob Pollichino

And as it relates to Fuse, obviously you know that we think there is an important growth opportunity and we like the cable business because there is just scalability and good strong economics. As it relates to our audience, which is the most important thing that we deliver, it’s an important part to reach youth audience and it’s embedded in this really highly desirable music category. And I think that gives us a premium to extend with advertisers. From a distribution perspective, we are now on every major affiliate within the country, we tend to be on digital peers although with Dish. We’re on this highly penetrated peers that includes some of the network U.S. AT&T, AMC. So we’re very pleased with that positioning.

But as digital continues to grow and that picks up over time, we expect to see that kind of growth in our sub-base, the overall content strategy and then you alluded to the digital, we are first and foremost, a linear network and that linear network, we think continues to be grow and be important with them in the affiliate world. The strategies compared to the YouTube and others is a marketing strategy and that marketing strategy again allows us to have a very efficient way to reach a broader youth oriented audience, which tend to view music first online. Yes, we can create clips and we can do this other things. But in the end it’s all in service to building a larger audience and having that audience come back to the linear channel. And then I think the other piece to not forget about is that our unique relationship with MSG Entertainment, allows a unique position within the artist and the music community.

Not only to have a such a relationships, but we have our iconic venues in which we can

market and create unique opportunities for the music industry, but I think at the same time it’s something that allows us to also market our own services and create sponsorships that are 360 that no one else can offer to advertisers and marketers.

Operator

Thank you. Your next question comes from John Tinker of Maxim Research.

John Tinker – Maxim Research

Thanks. Could you just discuss your tax rate a little bit and exactly how the deferred tax benefits sort of flow through is obviously a big difference in the rate. And secondly your deferred revenue, I think went up from a couple of hundred million to over 300 million, if you could discuss that a little bit that will be great. Thank you.

Hank Ratner

So I guess when you think about our tax rate, you should think that on a full-year basis the tax rate that we’re thinking about is in the low 40s. so what you’re seeing there this quarter is sort of aberrational, but it will happen in quarters, where we have the types of things that happen, so you saw the tax rate grow from like 15% to 47-ish%, what’s really happening there is the year-ago quarter got a big benefit related to a change in our state of our apportionment and when we got that benefit on state taxes in effect, we had to apply those benefits to the deferred tax liability that is on the books, and that cumulative benefit got booked in the quarter ago period, so you’re really seeing an aberrational, it’s not a growth in the rate from 15% to 47%. It’s really just a benefit that we had a year ago quarter and you will see a smoothing out of the 47% to the low-40s as we go forward.

So that’s the tax question and the other question was I think deferred revenue from last quarter went up about 100 – and looking at it right now and $113 million and deferred revenue is really a timing issue. So it’s really what you are seeing is the collection of revenues associated with the teams or beginning that season and also the concerts that we have coming on line, so deferred revenue you will see sort of ebb and flow based on the quarters and based on the activity of the teams and are actually also related to the Radio City Christmas Spectacular. So you are seeing both the teams and the Radio City Christmas Spectacular, it’s just a measure of activity which is little greater than same time last year.

John Tinker – Maxim Research

Thanks.

Hank Ratner

Thanks John, Christie we have time for one last caller.

Operator

Thank you. Your final question will come from David Joyce of ISI Group.

David Joyce – ISI Group

Can you just help us, think some more about the sports in this upcoming quarter – you got – you don’t have the Rangers so, on last year second quarter, was there any revenue whatsoever, attributed to other than the last couple of days attributed to the next just trying to back into what it might be and thinking about year-over-year.

Hank Ratner

So, let’s think about what’s happening in sports, so you hit the first issue right on the head, the impact of the NHL work stoppage is unknown at this point, but if you can put that aside for a second, as you think about sports, what’s going to happen in the Sports segment is, if it’s now going to reflect the 482 game regular season for the next, it’s going to reflect these second phase of the Transformation project, and that will – those two will benefit ticket revenue, as we said before, the enter segment right fee between Media and the Sports segment, and our other revenue category suites and sponsorship.

Thinking about tickets for a second, the capacity for the Garden this season is going to be temporarily reduced by approximately 1000 feet for both the Knicks and the Ranger games, and for concert it’s going to be a lesser amount. And then as we go through the pieces with respect to the new 58 Madison Level Suites, that begin to come on in November. As we said, 27 opens beginning tonight the balance of 58 expected be opened by January. So when you think about that suite capacity, we’re not going to get the full benefit of the full 58 Madison Suites this coming season.

On the expense side, we have the full season and so we’re going to have substantially higher NBA revenue sharing expense, and the one thing that we can sort of point you to as we do expect the next to be a luxury tax payer the season. The increase in the NBA revenue sharing though is a reflection of the return to the full regular season, which we didn’t have last season.

Our expectation for higher Knicks revenue related growth and some other factors. And then thinking about last year, as compared to this season, you always have to keep in mind playoff. So, you guys think about playoff separately as they are really a key driver of our sports fourth quarter results as you look forward in the year, so a lot of moving parts but sort of the landscape as we see it.

Operator

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

Ari Danes

Thank you all for joining us. Have a good day.

Operator

Thank you. This does conclude today’s conference call. You may now disconnect.

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