Madison Square Garden Entertainment Corp
NYSE:MSGE
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Madison Square Garden Entertainment Corp
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Good morning. My name is Theresa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Madison Square Garden Entertainment Corp Fiscal 2021 Second Quarter Earnings Conference Call. All line have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session. [Operator Instruction]
I would now like to turn the call over to Ari Danes, Investor Relations. Please go ahead, sir.
Thank you. Good morning, and welcome to MSG Entertainment's fiscal 2021 second quarter earnings conference call. Our President, Andy Lustgarten, will begin today's call with an update on the company's operations. This will be followed by a review of our financial results with Mark Fitzpatrick, our EVP and Chief Financial Officer. After our prepared remarks, we will open up the call for questions. If you do not have a copy of today's earnings release, it is available in the Investors Section of our corporate website.
Please take note of the following. Today's discussion may contain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties, and that actual results, development and events may differ materially from those in the forward-looking statements as a result of various factors. These include financial community perceptions of the company and its business, operations, financial condition and the industry in which it operates as well as the factors described in the company's filings with the Securities and Exchange Commission, including the sections entitled Risk Factors and Management's Discussion and Analysis of financial condition and results of operations contained therein. The company disclaims any obligation to update any forward-looking statements that may be discussed during this call.
On Pages 5 and 6 of today's earnings release, we provide consolidated statements of operations and a reconciliation of operating income to adjusted operating income, or AOI, a non-GAAP financial measure.
And with that, I will now turn the call over to Andy.
Thank you, Ari, and good morning, everyone. Let me start by saying that we are thrilled with Governor Cuomo's announcement on Wednesday that arenas in New York can reopen with limited capacity. This comes on the heels of the governor's reopening New York City restaurants for indoor dining at reduced capacity starting today. We believe this is the beginning of our path back to normal operations, and we look forward to returning to what we do best. We've been preparing for this moment, working with state and local health officials to develop a comprehensive plan with rigorous safety protocols for our reopening. In addition, thanks to the NBA and NHL, we've learned best practices as a number of teams have been playing with limited in-arena fan attendance this season.
We think the time is right to welcome back fans, and we've been encouraged by the tremendous demand for live events we've seen recently. From the success of the Buffalo Bills playoff games to the crowds at the Super Bowl this past weekend, it's clear that people are eager to gather again. And we expect to see the same enthusiasm once we're able to reopen our doors to fans, which we intend to do on February 23 with the Knicks and February 26 with the Rangers for roughly 2,000 people per game. These types of events will be taking place not only at The Garden, but also in arenas across New York. And we believe this push forward, coupled with the ongoing vaccine rollout, will pave the way for our other assets and brands to participate in a broader reopening.
With this week's news, we've taken the next step and started talking to artists and managers to gauge their interest in playing The Garden to reduce capacity crowds. While the economics may prove to be more challenging for concerts, if there's one thing we know, it's that there's an intense desire by the entire industry for the return of live music. Nowhere is this more apparent than the impressive bookings schedule we've lined up for the second half of calendar 2021, which has the potential to be one of our busiest ever if we are able to fully reopen. And although it's still early, we're also seeing artists hold dates during the first half of calendar 2022.
Demand from fans is also strong as evidenced by our rescheduled shows where 73% of ticket holders have chosen to hold on to their tickets instead of requesting a refund. We've also continued to see strong engagement with our Rockettes and Christmas Spectacular brands, which we believe bodes well for the production's continued success. Traditional broadcast media still reaches the widest audience for the Rockettes. And their feature performance at Macy's Thanksgiving Day Parade and the Rockefeller Center Christmas Tree Lighting were seen by more than 29 million viewers.
We also partnered with MVC to televise a Christmas Spectacular special, which became one of the season's most watched holiday shows with nearly 9 million viewers over 2 airings and led to a noticeable bump in ticket sales around those areas.
Social media platforms have become another key tool we're using to stay connected with our existing audience as we also engage the next generation of fans. This fall, we relaunched the Rockettes' presence on TikTok and during the holiday season shared a video highlighting fun facts about the Rockettes that generated more than 5 million views, significantly exceeding our average viewers. This enthusiasm from a younger demographic has only reinforced our strong belief in the enduring popularity of the Christmas Spectacular and the Rockettes.
Turning to Tao Group. Tao entered the quarter with a number of its venues, including in New York, Las Vegas and Chicago, opened at reduced capacities. However, as a result of government mandates, select restrictions were reinstated in late fall. For example, in Las Vegas, nightclub capacity was reduced from 50% to 25%. And while venues in New York City were again closed, as I noted earlier, that changed today with indoor dining now reopened at 25% capacity. In this fluid environment, we are pleased with the Tao Group's creativity and flexibility, which will help ensure they're able to reopen their venues quickly as restrictions are lifted. We truly believe that this is a significant moment for the company. And until we can fully reopen, we are confident that the steps we have taken over the past several months to cut costs, raise additional capital and strengthen our balance sheet have provided us with sufficient liquidity to weather this period.
While protecting our core business is, of course, our top priority, we are also making important progress on the construction of MSG Sphere on states, a venue that we believe will create significant long-term value for our shareholders. We recently announced that we have assumed the role of construction manager for MSG Sphere. AECOM has transitioned from its role as general contractor to a new service agreement that facilitates their ongoing support through the project's completion. This new structure enables us to continue benefiting from AECOM's experience while also giving us greater transparency and control over the construction process.
Jayne McGivern, who joined us in 2018, has been named President of Development and Construction and will continue to lead our construction efforts. As many of you will recall, she has spearheaded a number of large development projects, including her work on Wembley Stadium and leading the development of the O2 Arena. Jayne has taken significant steps to build out our internal construction team, which played an important part enabling us to assume the construction manager role.
Our internal team now has direct responsibility for strategic planning and the construction time line and also currently oversees 30 AECOM employees who continue to support key areas, including specialist roles, such as health and safety.
On the construction front, we remain focused on several of MSG Sphere's critical path elements, including structural steel work, and we anticipate starting to build the steel frame for the Venues Group in the coming months.
In closing, we are excited to see the start of live entertainment return to New York. We have already been hosting Knicks and Rangers games at The Garden without fans. And we're now thrilled that later this month, those teams will play in front of crowds at the arena for the first time since last March. With this reopening, we believe that we've started down a path that aided by vaccinations and better health and safety protocols will lead to the return of normal operations. And when that day comes, our premier collection of assets and brands places us in a prime position to capitalize on the significant pent-up demand for live entertainment.
I'd like to thank our employees, partners, fans and shareholders for their continued support.
With that, I will now turn the call over to Mark.
Thank you, Andy, and good morning, everyone. I will start by discussing our second quarter financial performance, and then I will review our liquidity position.
For the quarter, total revenues were $23.1 million, and our adjusted operating loss was $64 million. This compares to $394.1 million in revenues and adjusted operating income of $108.5 million in the second quarter of fiscal 2020 as the vast majority of our operations remained impacted by COVID-19. Also as a reminder, our results are not directly comparable on a year-over-year basis as the second quarter of fiscal 2020 is based on carve-out financials does not include the impact of the various agreements between our company and MSG Sports.
In terms of our revenue, I wanted to spend a moment discussing the arena license agreement with MSG Sports. We were happy to welcome the Knicks back to the Garden in the second quarter. And as a result, we started to recognize our real license revenue and AOI related to these agreements, although at a substantially reduced rate this year given the current environment. As a reminder, while cash payments from these licenses grow at 3% per year, we recognize the revenue on a straight-line basis over the 35-year term of the agreement. As a result, in this quarter, approximately $1.2 million of the $1.6 million of revenue recorded was noncash. For the purposes of determining adjusted operating income, we exclude the noncash portion of the arena license fee revenue. This adjustment can be seen in the reconciliation of operating income to adjusted operating income on Page 6 of our earnings press release.
So turning to our liquidity position. As of December 31, we had $1.45 billion of cash and short-term investments, which represented an increase of approximately $487 million compared to our September 30 balance of $965 million. This increase was driven by the net proceeds from our $650 million debt raised in November, $6.5 million of drawdowns under our Tao revolving credit facility and $20.6 million from the partial sale of our equity position in DraftKings. As a reminder, we invested approximately $10 million in DraftKings. And as of quarter end, we have sold shares for total proceeds of approximately $28.2 million while retaining approximately 894,000 shares. These inflows were partially offset by $64 million of operational cash burn for the quarter or about $21 million per month, which was slightly better than our previously disclosed expectations. We also had $107 million of capital expenditures, which primarily related to the construction of the MSG Sphere in Las Vegas.
Through December 31, project to date construction costs incurred were approximately $645 million, which includes $73 million of accrued costs that were not paid as of December 31 and which is net of $65 million received from Las Vegas Sands, In February 2020, we announced a cost estimate for the MSG Sphere, inclusive of core technology and self costs of approximately $1.66 billion, but this is subject to uncertainty given the project's complexity and more than 2 years remaining until the planned opening and the ongoing impact of the global pandemic. That said, we continue to aggressively manage costs. We're happy with the progress we made on the construction so far this fiscal year and look forward to opening the venue in 2023.
Finally, I would note that our cash balance as of December 31 included approximately $190 million in deferred revenue and collections due to promoters, which was roughly unchanged since September 30.
With that, I will now turn the call back over to Ari.
Thanks, Mark. Operator, can we open up the call for questions, please?
[Operator Instructions] And the first question comes from John Janedis with Wolfe Research.
May be one for Andy, one for Mark. Andy, starting with your opening remarks, on a practical level, can you talk about what being able to operate a 10% capacity actually means? And to your point, is talent toward that level? And for other the teams or concerts, does 10% translate to positive cash flow?
And then for Mark, just wanted to follow up on the cost of the Sphere project. I'm not sure, but your comments suggest some incremental uncertainty around the cost side and as moving away from AECOM impact, again, the cost or timing of the project.
Thanks, John. So in terms of the 10% capacity, so let me start where I started the call, like we are absolutely thrilled by this move. This was earlier than we had expected. We've been preparing for a long time. We've been working with the government and health officials. I'll say 10% -- we should split the types of events that would come through, right? So the sports teams, which mind you, as the MSG Entertainment, we have a license agreement where we got paid rental fees as well as shares of ticketing of suite revenue, F&B revenue, merch revenue. Since the events are already on because they're being produced by the sports team, it's automatically marginally profitable, right, minus the small number of people that we would staff the building to make it worthwhile. So put that into one bucket of events.
The touring business, it's going to be much more challenging. It's a big production to put somebody on the road. There's a lot of pieces and not only the talent, but the risk involved. So while we're enthused by the moving towards capacity, I don't expect a big piece of the touring market to be on the road at 10% capacity. But we hope that this is the beginning, right? We think this is the beginning of where the governor starts to reopen the economy. And we think that as the capacity is raised, we'll see further interest. I mean we've had a lot of interest already on 10% because everyone understands that this is the beginning.
And then on top of it, we were a little different than almost any other venue in America because of where we are and our relationships. So there are -- it is possible to have one-offs where an artist comes directly to us and either uses our equipment or brings in something small. But that's a settle -- those will be more one-off events and the exception rather than the rule.
But we really feel this is a great start towards getting us back to normal because this will 10% the beginning, not the end.
Thanks, John. This is Mark. And I just want to kind of hit on your question about the cost estimate. First of all, just want to clarify upfront, the movement to AECOM had no impact on the cost or the timing of the construction. So we're still planning to open the basic Sphere in 2023.
But as you know, last February, we announced the cost estimate was $1.66 billion. And since then we and the rest of the world were hit by COVID, which ultimately resulted in us announcing last August that we have lengthened our construction timetable by 2 years. It's 6 years later. We've learned a lot more, made some substantial progress on the construction. But we thought it was important to flag that there is uncertainty that we're seeing around the cost estimate. The uncertainty reflects the impact of the pandemic, which has another% layer of complexity to an already unique project. But as you know, we've transitioned to the construction manager, which is giving us more -- even more control of the progress. We continue to aggressively manage into every aspect of the project, and we look forward to opening the venue in 2023.
And your next question comes from Brandon Ross with LightShed Partners.
I have follow-ups, I think, on each of John's questions. First was hoping to dive a little deeper into the decision to come the construction manager on the Spheres project. Maybe if you could walk us through the rationale and benefits for taking that over? And is there anything to glean about your plans for future venues from that decision?
Ben, as I mentioned, we -- so we took over as the construction manager. We should take a step back. The strategic decision on how we set up this project was in the cost-plus structure to AECOM, right? We did for a very specific reason. We thought it would allow us to make some quality of the work, allow us much great transparency into the costs and the labor being in materials being used by the subcontractor, bringing us a much more digital role in managing our costs overall and what product we're going to get here, so there's better consumer experience.
With the -- with the COVID and lengthening of our time line, it allowed us to reassess how are we going to work and go forward and how can we actually deliver the best way? So we decided to restructure the project -- the relationship with AECOM. It allows us to get the best of really both, right? It comes with expertise, got 30 of their top people on the sites still working with us, but at the same time, allows us to even greater transparency, even greater control. And it also gave us a little of time over the last 7 months, 8 months to really put together the fill out Jayne's team to allow her to have the staff that she needs to be able to effectively manage and drive this project, both the time line and the cost structure.
And to your point, this is also giving us our ability to think about what and who do we need and what infrastructure we need as we think about the future. So this does give us the further insight. When the time is ready and we have the people and we have the infrastructure, and so when that time there, we will be even better for them in our next project when it occurs.
Cool. And then on the partial reopening, can you just walk us through the health and safety protocols that are now in place? Maybe share the fan experience from when we arrive at The Garden to when we take our seats? And how you see that 10% capacity evolving? What have been the discussions maybe with Cuomo and others about milestones for further reopening from that 10%?
So I'll start. We are always focused on the guest experience and customer experience. So right now, safety of our guests, our talent and our employees is by far number one and something that we've always been focused on even before the pandemic, but now we're going to be further focused on it. We've been preparing for this for a while. Obviously, you could do a lot of preparations, but information keeps on changing. So there'll be always tweaks as we learn more about the disease and how it affects people. But in the highest level, we've been -- we also benefit from -- if we take a step further back. Our venue was built in -- less than 7 years ago, and we have one of the best venues. We've got amazing health and safety already built in. We had to supplement it, change filters, add some more touchless sinks. So those types of changes are in and well thought through.
In terms of the customer experience, so there's going to be: in safety, COVID tests before the event. Health screens, when they're inside the event, there's going to be limited specific types of food, and food and beverage in certain locations. You can't eat on the hallways. But we're -- it's going to be the best experience that keep people safe. We're going to have obviously social distance within the venue. And we're going to continue to go above and beyond. We've been working with many medical professionals to make sure that we've got the best state-of-the-art technology. And of course, we're going to acquire face masks, temperature checks on the entrance. And the governor's office has been great. I don't think that there's a specific number that we know of when the next capacity jump will be. But he's clearly created a road map in other types of industry when inflection rates are down and hospitalizations are down, parts of the economy open. And so as -- if we continue on the path that we're on, I think we're on a path to continue to increase capacity. But obviously, this disease will change over the next few months and we might be in a different place both very good or very bad in the future. It looks like everything seems to be going in the right direction, and we feel pretty good. So we feel good about this at the beginning of the opening.
And your next question comes from the line of David Karnovsky with JPMorgan.
Andrew, maybe just to follow up on some of the commentary prior. I guess how solid should we consider the bookings for the back half of the year in the context of potentially still having capacity restrictions? Like at what level do you think artist, promoters -- or maybe if it's easier to answer regarding their own residencies, right, where would you find it viable to have show at the level?
It's a difficult question to answer directly, right? So it's obviously 100% capacity. It's no question, right? There's just some of the incremental costs around safety and a protocols, but most of that's already. And 10% is very difficult. And on the gravy end, as we get closer to 100%, it's a lot easier. So I will say the back half of our calendar is, as I've been saying, very -- we feel very good about right now, both between the artists that move their schedule from before COVID to all the other artists who are looking to be on the road. But I can't give you the exact answer if the number is 50%, 60%, 70%, 80%, 90%. I think it's going to be very artist-specific, very promoter-specific in terms of the risk level they want to take on. But with our relationships and its venue, we feel very good that we'll be the leader of it. This market is different than other markets. And we think that we've shown over and over our ability to deliver for artists amazing experiences as well as our customers. And so we think we'll be back, and we feel very good about where this is going in the future.
Okay. And then is there any update you'd be willing to provide on how you're thinking about the return profile on the Sphere or maybe when you'd be willing to disclose to investors or provide some view into how to think about the financials once the venue is up and running?
Sure. This is Mark. I can take that one. So look, I think we just want to reiterate, we continue to believe that MSG Sphere will create significant long-term value for shareholders, and that has not changed. You've heard us talk before about the venue's unique platform, which will create compelling growth opportunities across the spectrum of opportunities, including events, sponsorships, premier and hospitality. And we believe that this is going to translate in a substantial level of revenue and AOI.
So I talked about there being uncertainty due to the pandemic. We also talked about the positive signs we're seeing, including the pent-up demand for live entertainment that Andy has noted. But overall, we're confident the pandemic will end. We're confident that Las Vegas will return and that we're building a venue that will capitalize on people's intense desire to gather and take part and new experience.
In addition to this, with our extended timetable, we may -- has enabled us to preserve cash in the near term. It's also given us -- it's given Las Vegas time to kind of recover. So we believe that's going to be work to our advantage that tourism and convention business will be in full swing by 2023.
So in terms of your second question about when we're going to give additional information, I think with 2 years left to go. We're not really ready to get into specifics. But overall, I just want to reiterate, we're very bullish on the opportunity.
And your next question comes from the line of David Beckel with Berenberg Capital.
So I had a question on Christmas Spectacular and the Rockettes. Thank you for all that color regarding engagement and social media. I'm just curious it sort of dovetails on what you've already talked about with respect to reopening. At what point will you need to make a go, no-go call on the Spectacular? And what are some of the contingency plans you have in place for that production this year?
So as I mentioned, we're very happy so far with the engagement we've had through social media and other -- and through our special NDC. And I mentioned earlier, we are -- you probably picked up, we're already on sale. So we're planning on having our show. And we benefited from the bump from those -- that exposure even this past Christmas. So we're on sale right now with about 200 shows for the 2021 holiday season. Obviously, we're going to have to continue to monitor the developments, but we're really excited about this week's decision, and we think this is just a path to begin to open. So we're planning on a show.
Great. And just to be clear, at any capacity level you'll we having a show?
I didn't say at any capacity level. But as I said, we think this is the beginning of an opening, not the end of an opening and very much are planning on a higher capacity by next November.
Fair enough. Appreciate that. And just as a follow-up. I'm curious if your -- the unfortunate circumstances surrounding live entertainment has left some venues and less than ideal financial condition. Are you seeing opportunities for venue acquisition in the marketplace that look interesting as a result of the pandemic? Or is that even a marketplace you're currently interested in?
Well, let me start. We generally don't discuss M&A that are -- that we don't have planned or said exactly. But I'll say we're focused right now on the Sphere. That's our main focus for our company and that's meaningful to growth. That's on the entertainment side. Obviously, there is a lot of opportunity, given to your point about the financial conditions of venues, both on the entertainment as well as in our hospitality or in the restaurant business.
On the Tao side, we have a really strong management team who is very focused on growth. That could be organically. Such as in 3 weeks, we're opening up a new restaurant, Tao up in Mohegan, or maybe inorganically through either new leases or any opportunity. But I'll tell you, there's nothing -- so we're looking at things, but at the same time, we're very focused on our base business and getting back to operations and growing and getting ourselves back and running.
And your next question comes from the line of David Katz with Jefferies.
Number one, with respect to the Tao Group, can you just talk about whether you can be profitable at this initial stage or where that pivot point is? And my second question is really around New York sports betting, which has become topical. What your interest level is, what your expected engagement might be and how you see yourselves playing a role in that?
Absolutely. So on the Tao side, it's -- the operating restrictions have been extremely fluid in that environment. So remember, we have both dining as well as nightlife and hospitality. Both don't necessarily have the same capacity restrictions and don't necessarily have the same between cities and even within the cities of in a state and definitely not between different states. So it's really hard to give you a single number that says here's where we're profitable. But I will say the momentum is moving in the right direction. Today, New York City reopened dining at 25%. It's been outside, which obviously has been not the best operating conditions. And I think it's the first step towards going to higher capacities. There's still a curfew at 10:00 p.m. here in New York City on entertainment. So that will obviously be a big restriction that will affect performance in the long run. But again, as things get better, we're hoping that, that restriction changes as well.
In other markets, there's different indoor dining and outdoor dining restrictions, and it will be -- it's really case-by-case. But we do feel like most of the locations we're in are all moving in the right direction. Protocols between our safety and healthy protocols, we're proving that we can be health and safety -- very safe for our customers, and we feel good about the Tao Group’s path to profitability.
On the gaming side, yes, there's been a lot of noise, especially or a lot of talk right here in New York City about or New York State about gaming, and we're very thrilled that Governor Cuomo's recent announcement that they're intending to pursue level for gaming. So many times, there's -- we very much like sports gaming and what the impact is on consumer experience in terms of engagement. We think that it just further drives people's interest in sports, so it's very strong given that we have 2 tenants, tenants here in New York, The Garden. We note that Governor Cuomo said approximately 20% of all New Jersey sports wagering has come from New York residents. So we're very bullish about what does that mean for New York. And you might have noticed that the Metal Lands, which opened in 2018, is now one of the largest sports books in the country. So again, piques our interest as to what we could do here. Obviously, the legislation is going to affect how we could play. But I'll note, in D.C., Capital One Arena with The Wizards on Capital partnered with William Hill to create a sports book. The Cubs in Chicago have partnered with DraftKings and is pursuing a sports book inside Wrigley Field. Those are opportunities for us. And I'll also note that here at MSG Entertainment, we represent MSG network through an advertising agreement and MSG Sports through a sponsorship arrangement. And so as both of those businesses continue to receive the benefits of the advertising and sponsorship from sports betting, you will see or sports gaming where we'll see the effect on MSG Entertainment results as well. So we feel pretty good. There's lots of opportunity, and we look forward to hearing more about the rules and the regulations that will become into place as global sourcing incomes becomes authorized.
And your last question is from Ben Swinburne with Morgan Stanley.
This is Marianne on for Ben. Just one question on reopening in New York. If there's anything you guys can share on what you're hearing from the state in terms of for the reopening plans and capacity, and what you're doing during the interim process to prepare for a fuller reopening down the line that can impact the financials that aren't fully obvious to us today.
So I think we talked a lot about the path reopening, and we really -- we're thrilled with the 10%. But I really in the sense that we believe this is the beginning of the path towards reopening, not the end of that. There'll be as -- not that -- of those who follow the governor and actually and even said this in the very beginning in terms of the way he's thinking about reopening or I think this is 8 months ago, right? He laid out periods of time that said, as caseloads come down, as hospitalizations come down, he opens up certain sectors of the economy. We're now turning to the entertainment and dining, which I think is a very important sector for New York City to come back because that's what will drive New York's resurgence. And so this is the beginning of the reopening. And as caseloads continue to go down and hospitalizations go down, we're expecting capacity to continue to go up.
In terms of the second part of your question of what would we be hitting? I mean I think, look, we're -- we have an infrastructure. We need to continue to build back up our arena staff and or -- including our ushers and F&B. But that's it's -- that's about training and development. And we expect that, that will continue to grow as we increase capacity. And so we're very focused on our first event on the 23 -- sorry, the 26? 23 right? 23 and look forward to hosting a next Warriors game, and we look forward to just beginning the beginning of us welcoming fans back to The Garden.
So I would now like to turn the call back over to Ari Danes.
Thank you all for joining us. We look forward to speaking with you on our next earnings call. Have a good day.
Thank you, ladies and gentlemen for your participation. You may now disconnect.