Madison Square Garden Sports Corp

NYSE:MSGS

Earnings Call Transcript 2019-Q1

[Operator]

Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to The Madison Square Garden Company Fiscal 2019 First Quarter Earnings Conference Call. [Operator Instructions] Thank you.

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

[Ari Danes, executive]

Thanks, Christie. Good morning, and welcome to The Madison Square Garden Company's Fiscal 2019 First Quarter Earnings Conference Call. Our President, Andy Lustgarten, will begin this morning's call with an update on the proposed spin-off transaction and the company's operations. This will be followed by a review of our financial results with Donna Coleman, 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, developments and events may differ materially from those in the forward-looking statements as a result of various factors. These include financial community perceptions of the company and its business, operations, financial condition and the industry in which it operates as well as the factors described in the company's filings with the Securities and Exchange Commission, including the sections entitled Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations contained therein. The company disclaims any obligation to update any forward-looking statements that may be discussed during this call.

On Pages 4 and 5 of today's earnings release, we provide consolidated statements of operations and a reconciliation of operating income to adjusted operating income, a non-GAAP financial measure. Lastly, on Page 7 of the release, we present a reconciliation of adjusted operating income to adjusted operating income excluding the impact of the recent adoption of ASC Topic 606, the new accounting standard for revenue recognition.

And with that, I will now turn the call over to Andy.

[Andrew Lustgarten, executive]

Thank you, Ari, and good morning, everyone. For fiscal 2019, we are focused on delivering another year of solid operational performance. We have also made significant progress on our proposed plans for tax-free separation of our sports and entertainment businesses. A transaction that we believe will enhance shareholder value while positioning both new companies for long-term growth and success.

Last month, we reached an important milestone by filing an initial Form 10 registration statement with the SEC. We are continuing to make headway in a number of areas, including organizational structure and key intercompany arrangements, and we've made progress towards establishing a long-term venue license agreement between the Knicks, Rangers and The Garden. We believe we can complete the proposed spin-off during the first half of calendar 2019, subject to all necessary approvals and conditions. We will continue to update you in the coming months as we move through the process.

Turning to our entertainment segment. First quarter bookings results were down year-over-year at The Garden and Radio City Music Hall, as both the venues benefited in the prior year quarter from extended multi-night runs with Phish and comedian, Dave Chappelle. However, looking at the remainder of our fiscal year, we feel very good about our event calendar and are expecting another strong booking year. We remain focused on driving venue utilization through multi-venue and multi-night engagements. High profile recurring artists residencies, such as our current record-setting run with Billy Joel at The Garden, are important pieces of that strategy.

With this in mind, we recently announced that as part of a dual city, multiyear residency, Tedeschi Trucks Band will play multiple shows annually through 2022 at both Beacon Theatre and The Chicago Theatre. We also announced last week that our residency with Jerry Seinfeld will return to The Beacon Theatre starting in January 2019, with the legendary comedian driving utilization by performing twice a night on each of the scheduled dates.

We will continue to explore other opportunities that enable us to build our annual base of events. Our bookings expertise will play a key role in the success of our MSG Sphere initiative. In September, we officially marked the start of a new chapter with a ceremonial groundbreaking in Las Vegas at the future site of MSG Sphere at The Venetian. We're pushing forward on a number of fronts, including site prep and construction permitting process. And as we refine our design for the state-of-the-art venue, we are working towards engaging a main contractor, all with the continued goal of opening in fiscal 2021.

Meanwhile, in London, we remain on track to submit our planning application by the end of this calendar year and look forward to getting started as soon as we receive all necessary approvals. We will continue to update you on both projects, which we believe will pioneer the next generation of immersive experiences while generating significant value for our company.

TAO Group also continues to execute against its venue expansion plans, debuting TAO Chicago Restaurant and Nightclub this past quarter, which will be followed next year by the opening of Moxy Chelsea in New York and Marquee Singapore.

Turning to productions. The 86th season of the Christmas Spectacular staring Radio City Rockettes debuts next week. Continuing to build on the immersive elements we introduced last season, this year's production will include state-of-the-art digital projections created by Obscura Digital, along with an all-new groundbreaking finale. We are looking forward to this year's run and believe that combining tradition of the Christmas Spectacular with technological innovation will ensure the production remains a vibrant and growing asset for our company.

Turning to our sports segment. The Knicks and Rangers have returned for the 2018/'19 regular season. Under the leadership of new head coaches David Fizdale and David Quinn, the teams remain focused on developing their young talent and establishing a new culture as they execute on long-range plans to build championship caliber franchises. We look forward to watching the progress of both teams over the course of the seasons.

Our sponsorship, media rights and suite rental fee revenue continue to be driven by the strength and popularity of our assets and brands. On the sponsorship front, our new signature partnership with PepsiCo began in September 1. The agreement provides unique exposure for the food and beverage company across many of our marquee properties, and we look forward to a successful long-term relationship.

We also see legalized sports gaming as a potential catalyst to drive increased fan engagement and viewership of our teams and give our portfolio of assets -- and given our portfolio assets, are excited about the potential future revenue opportunities. With regard to our suite business, we are well positioned for another year of growth fueled in part by our success during the current renewal cycle, reflecting the ongoing importance of client entertainment to our partners.

In summary, we're making important progress on our key strategic initiatives, including our MSG Sphere venues and the proposed spin-off of our sports business. And at the same time, we're focused on strengthening and growing our live sports entertainment businesses with the ultimate goal of ensuring we are well positioned to drive long-term value creation for our shareholders.

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

[Donna Coleman, executive]

Thank you, Andy, and good morning, everyone. As we noted on our fourth quarter earnings call, beginning this fiscal quarter, we adopted the new accounting standard for revenue recognition. The most significant impact in fiscal 2019 from the new standard is a change in the timing of when we recognize a number of our revenue streams during the year, which impacts the quarterly year-over-year comparability of our results.

On a reported basis, for the fiscal 2019 first quarter, our company generated total revenues of $218.1 million and an adjusted operating loss of $9.9 million. Excluding the impact of the new revenue recognition standard, fiscal 2019 first quarter revenue would have been $258.4 million, an increase of 5%, and AOI would have been positive $25.6 million, a decrease of $4.5 million, both as compared to the prior year quarter.

Turning to reported segment results for the quarter. At MSG Entertainment, revenues of $163 million decreased 1%. This was primarily due to lower event-related revenues at our venues and, to a lesser extent, lower suite rental fee revenue, offset by the inclusion of results for Obscura Digital, along with higher sponsorships and signage and TAO Group revenues.

The decrease in event-related revenues reflects the impact of the new revenue recognition standard as well as lower results at The Garden and Radio City Music Hall. As Andy mentioned, both venues benefited in the prior year quarter from high profile, extended multi-night runs, which added 29 shows to our overall event count.

The decrease in suite rental fee revenue was due to the impact of the new revenue recognition standard, which more than offset the impact of contractual rate increases. Our suite license revenues for both our entertainment and sports segments are now recognized proportionately as events at The Garden take place, as opposed to being recognized straight line over the fiscal year onto the prior standard. While this change in timing resulted in a year-over-year decrease this quarter, we expect it will result in an increase in suite license revenues in our fiscal second quarter. Furthermore, we anticipate growth in suite license revenue for the full year.

Entertainment AOI of $9 million decreased $9.2 million as compared with the prior year period. This was primarily due to lower results at TAO Group as an increase in TAO Group expenses outpaced its revenue growth. In addition, entertainment AOI was lower due to the inclusion of Obscura Digital results as well as lower event-related contribution. Excluding the impact of the new revenue recognition standard, entertainment revenues for the fiscal 2019 first quarter would have been $168 million, an increase of 2%, while AOI would have been $9.4 million, a decrease of $8.9 million, both as compared to the prior year quarter.

At MSG Sports, revenues of $55.4 million were $25.6 million lower year-over-year. This was primarily due to the new revenue recognition standard, which impacted the timing of local media rights revenue as well as suite rental fee revenue, both as compared with the prior year. The decreases in these revenues more than offset growth and league distributions.

The vast majority of local media rights revenue is now being recognized over the course of the regular season as opposed to being recognized straight line over the fiscal year under the prior standard. While this change in timing resulted in a year-over-year decrease this quarter, it will result in an increase in local media rights revenue in our fiscal second quarter. We also anticipate growth in this revenue line on a full year basis.

MSG Sports AOI decreased $25.9 million to $0.6 million. This was primarily due to the decrease in revenues, again, mainly as a result of the new revenue recognition standard. Excluding the impact of the new standard, MSG Sports revenues for the fiscal 2019 first quarter would have been $90.6 million, an increase of 12%, while AOI would have been $35.8 million, an increase of $9.3 million, both as compared to the prior year quarter. These increases primarily reflects higher revenues from league distribution.

In addition, please note that MSG Sports results for the fiscal 2019 second quarter will include a $36.2 million charge in direct operating expenses related to a player waiver. Lastly, Corporate and Other adjusted operating loss of $19.5 million increased by $5 million, primarily due to expenses related to our proposed spin-off transaction.

Turning to our balance sheet. As of September 30th, total unrestricted cash and cash equivalents was approximately $1.1 billion. In addition, there have been no borrowings made under either our $115 million New York Rangers revolving credit facility or our $215 million New York Knicks credit facilities. As a reminder, there also remains outstanding an approximately $105 million term loan at the TAO Group level as of September 30.

With that, I'll now turn the call back over to Ari.

[Ari Danes, executive]

Thanks, Donna. Christie, can we open up the call for questions?

[Operator]

[Operator Instructions] And your first question comes from Brandon Ross of BTIG.

[Brandon Ross, analyst]

First, on the sale of the retained interest in sports, maybe you could give us an update on the timing there. Do you expect to sell some of that before the spin occurs? And maybe what's your confidence level that you could get a premium on that sale right now?

[Andrew Lustgarten, executive]

Brandon, thanks. So in terms of timing, I think it's a little premature to discuss the timing of when the sale will occur as we're still working through the timing of the spin-off and all the necessary approvals around it. I can tell you in terms of your -- I think your question is around value related to it, we think that these assets, they're a unique asset. There's not any other public sports teams, especially not prized like the Knicks and Rangers, and we really believe in the value. That said, timing is a question and we're just, as we always do, we look to maximize our shareholder value and maximize value, and that's what we're going to look to do with this transaction.

[Brandon Ross, analyst]

Okay. And then maybe have you learned anything on the opportunity in sports betting since the Knicks and Rangers seasons are underway and New Jersey sports betting is also underway? And -- or do you think we probably have to wait for New York to be legalized before you can size that opportunity?

[Andrew Lustgarten, executive]

Well, we've already started to experience some benefit from it. We began taking advertising on our network, and so we have a commission related to that advertising. And the market, while its fluid and there's a lot happening around it, we still feel very bullish as to what the effect is to our business. We'll have more at the right time as we progress and as we monitor the market, but we feel very strong about how it's going to affect both the consumer engagement in our product, as well as sponsorship and other revenue opportunities.

[Brandon Ross, analyst]

Okay. And then lastly, on Sears, is there any clarity on the budget there? And what unknown factors will significantly determine the size of the CapEx?

[Andrew Lustgarten, executive]

If I knew my unknown factors, I would -- they would be known, Brandon. In terms of timing on the cost, well, so as we mentioned, we're continuing to refine our design. We've made some significant progress in terms of permitting in Vegas. We're getting closer on the London side to submit our planning application. As we continue to work on both of these venues, we've been very focused on refining the design to improve consumer experience and also -- and not as important, but almost as important, it's to make sure we're getting economies of scale across those venues as we're designing them, and so -- we'll have to come back to you on cost.

[Operator]

Your next question is from Bryan Goldberg of Bank of America.

[Bryan Goldberg, analyst]

I've got 2, one on the sports spinco and another one on the Spheres. On the spinco, I guess, what are your latest thoughts on the -- what the day 1 capital structure could look like? Would it make sense to draw on the existing revolvers you have in place with the teams to help fund the Spheres? And then more broadly speaking, how are you thinking about capital allocation priorities at spinco? And then I guess, on the spheres, it's a follow-up to Brandon's, I'm sure there's lots of complexity going into the planning right now. But are there any specific key issues you can point to that need to be addressed before you have clear visibility on the budget? And obviously, we would have clear visibility.

[Andrew Lustgarten, executive]

Well, let me start with the first question and we'll go for the second one. In terms of -- I heard a few questions in there, so I'll do my best to answer and follow up if there's something missing. As always -- I mean, to start again because I think it's really important, we're very focused on long-term shareholder value. So that's the #1 thing that we always focus on in creating value. So why I start there is because we're working through what the right capital structure is for both companies. We're still working through, as we just discussed, the cost and capital needs of the entertainment company. We feel very bullish about the future of entertainment. But before we could set a capital structure, we need to really understand what our needs are with both companies. And I can -- and I just want to reiterate again, we are focused on long-term shareholder value with both companies, and we will continue to be. So I think that -- tell me if that covers your question on the capital structure.

[Bryan Goldberg, analyst]

Yes. That does cover it. And I guess just on the Spheres, I mean, if there's any key issues you could help us think about that really need to be addressed before we have visibility on the budget, that would be helpful.

[Andrew Lustgarten, executive]

Well, look, Bryan, again, just -- it's a little, it's I guess, it's a little further on what I talked about earlier with Brandon. It's -- the design is -- we're very focused on getting all the permitting and moving as fast as we can on that side. At the same time, we're extremely focused on design and the consumer experience as to giving new forms of entertainment. Yes, it's going to have the current forms that we know over the booking and touring, but we believe there's all types of new forms of entertainment, and we're super focused on making it the best consumer experience. And so it's hard for me to tell you exactly what -- either I don't know or what to come out, but so far, things are going really well and we've got a great design team harmonizing the 2 designs so that we can maximize the consumer experience. And at the same time, realize as many economies of scale that we can.

[Operator]

Your next question is from Amy Yong of Macquarie.

[Amy Yong, analyst]

So 2 questions for me. The first one is a little bit longer, but I was wondering if you can share some of the details around your recent decision to sell your stake in Azoff? What led to the decision? How should we account for it? And what does this mean for your relationship with Azoff going forward? And my second question is around the process and the sale of Liberty WNBA team. If there are any updates around that.

[Andrew Lustgarten, executive]

Happy to help. My pleasure. So let me just start on the Liberty just because it's a quicker answer. We're continuing to look for the correct -- the proper owner to lead the team into the future. We very much believe in women's basketball and the team, and we think that the right owner will lead it to the future. And we'll have more to report at the right time. In terms of Irving and Azoff MSG Entertainment -- or Azoff Entertainment, we strongly believe in what Irving is doing in building that business. That said, as an organization, we're very much focused on the MSG Sphere initiative and the future of our business, and Irving is very focused on the future of what he's building. And both are great businesses and we have a great relationship with Irving. He's continuing to supply consulting services to us. And more importantly, over the last 5 years, Irving has been an incredible partner. He has created tremendous value for us, both the Forum, across the booking business, and we're very happy that he's going to continue to be able to do so as we head towards the Sphere initiative and working with us in LA and working with us across all of our business. In fact, Irving was here a whole number of nights the last few weeks and continues to be an integral adviser to us. And we're very thrilled with the relationship and we're very thrilled for what he's built for that business.

[Operator]

Your next question is from Michael Morris of Guggenheim Securities.

[Michael Morris, analyst]

I just want to ask about the bookings and kind of the dynamic in the quarter and going forward. And specifically around kind of the multi-venue, multi-night bookings that I think have become a greater part of your sort of portfolio. So I guess my 2 questions, can you just provide some more detail on kind of the year-over-year comp and sort of what happens this first quarter versus last year? And I guess, the point would be, we think of this as being less lumpy as you have more of these kind of agreements, and so there was a little bit of lumpiness here. So how we should think about that? And then maybe going forward, it does seem like something that is a competitive advantage for you to offer this to artists. Have you sort of maximized your ability to deliver against that with your current venue portfolio? Can you still expand within the current portfolio and what else could you do to take advantage of your position there?

[Andrew Lustgarten, executive]

So in terms of the booking business, we feel very, very bullish about the business. The current environment around live entertainment has never been better and it's only -- and we believe only getting -- only improving, which is largely why we're investing behind 2 entertainment venues in 2 amazing entertainment markets. The -- all consumers are more and more focused on live entertainment and millennials are even further focused than every other consumer and I think driving consumer behavior. There's other dynamics that work in our favor, too. The artist industry realizes a large -- the largest part of their compensation from touring, so -- and it's -- I think it's only going to continue as well. So that also -- that will help us with some strong tailwinds as we continue to think about our business and we are very focused on realizing -- driving our current business across the multiple -- multi-markets. Once we have Las Vegas and once we have London, those are 2 great markets that have tremendous growth, we think growth available for -- on the entertainment side. And as we look across those 2 markets plus our current markets, we think there will be even further synergies that will drive our business. In terms of your question at lumpiness, well, let me give you a -- well, 2 things, one is we did have Chappelle which had, I think, it was 16 nights in the middle of August. That's not going to happen every year no matter how strong we do in terms of bookings, but it will come back and there'll be other examples of it. Same thing with Phish, we're not going to have a 13 night residency in the middle of July every summer. But again, that will -- that, too, or someone like that will come back as well. And we really feel good about this year's -- both this year and the future. In fact, I was just looking here at The Garden, we've announced almost as many shows this -- as of today. We've announced almost as many shows as we had all of last year. So in our biggest venue, we're almost -- and there's more to come. And so we really feel good about where this is going to be this year and the future.

[Operator]

Today's final question will come from David Joyce of Evercore.

[David Joyce, analyst]

If you could just update us please on the TAO Group's -- without the specifics, I understand, but how have -- how has the tenants been trending year-over-year at the open venues? How's the revenue per attendee been trending? Is it -- are those factors you're looking at or is it just growth in the number of venues over time that will be driving that? And then, secondly, if you could just update us where you are on the timetable with New York City on the Penn Station renovation and all those related factors.

[Andrew Lustgarten, executive]

So on TAO Group, let me talk -- there's a few ways to think about TAO Group. First, we think about what does it do for us strategically. We've been very happy with them strategically. They've been a great partner. They are helping us think about our business in different ways, reimagining what does it mean to be a premium hospitality, which we thought we are the leader in. They are the leader in. And so together, we're just -- we're driving each other's business on the premium hospitality side. What they've done with Suite Sixteen here at The Garden has been remarkable, and we're continuing to look at other ways to drive our business. And as we enter the new markets, especially Vegas, we feel very good at having them on our side, helping us drive that business. In terms of the -- and they've generated very strong, really strong revenue since the acquisition and very -- and strong AOI. This past quarter, the financial didn't meet our expectations, but -- and while it probably will include -- continue through the next quarter, TAO and us are working very hard to figure out how we can continue to drive both revenue and AOI on those businesses. And I think that answers that question. In terms of Penn Station, we are -- we continue to support the Governor's vision for the station and -- or whichever Governor will be post-election. But we believe in the Penn Station, that's great for consumers and everyone in the neighborhood, and we look forward to working with -- working to find a solution.

[Operator]

Thank you. This does conclude today's Q&A session. I will turn the floor back over to Ari Danes for any additional or closing remarks.

[Ari Danes, executive]

Thank you for joining us. We look forward to speaking with you on our next earnings call. Have a good day.

[Operator]

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