Madison Square Garden Sports Corp

NYSE:MSGS

Earnings Call Transcript 2018-Q2

[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 2018 Second Quarter Conference Call. [Operator Instructions] Thank you. I would now like to 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 2018 Second Quarter Earnings Conference Call. This morning we are joined by our Vice Chairman, Gregg Siebert.

Before I turn the call over to Gregg who will begin this morning's call, I have a couple of items to note. First, if you do not have a copy of today's earnings release, it is available in the Investors section of our corporate website.

Second, 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.

Lastly, 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.

I would now like to introduce Gregg Siebert, Vice President of The Madison Square Garden Company.

[Gregg Seibert, executive]

Thank you, Ari, and good morning.

For the fiscal 2018 second quarter, we delivered strong year-over-year growth in revenues and adjusted operating income as our focus on providing the very best in live experiences continues to create value for our shareholders.

Before we provide a more in-depth discussion of our business and financial results, I'd like to take a moment to talk about our recent management changes. As you know, with Doc O'Connor stepping down, Jim Dolan is now the company's CEO. In addition, Andrew Lustgarten was recently named the company's President. Andy joined MSG in 2014 as Executive Vice President of Corporate Development and Strategy. During the past 3 years, he's been responsible for a variety of critical areas including our live operations and has played an important role in driving the company's growth initiatives. Prior to MSG, Andy spent 7 years at the NBA where he led the league's global strategy efforts, and before that, served as special assistant to the Commissioner. We're very pleased to have Andy in this new role and believe his unique experience makes him ideally suited to help lead our company as we continue to focus on enhancing our core businesses and identifying compelling opportunities that strengthen our presence in live experiences.

For our earnings calls, Andy will be discussing the company's strategy and operations and Donna Coleman, our CFO, will continue to provide a review of financial results.

As a pure-play live sports and entertainment company, we remain confident in our continued ability to deliver attractive, long-term growth and value creation for our shareholders. We look forward to sharing our ongoing progress with you.

With that, I'll now turn the call over to Andy who will discuss our recent operational performance.

[Andrew Lustgarten, executive]

Thank you, Gregg, and good morning, everyone. I'd like to start by saying that I'm honored to take on this new role. MSG's legendary brands and assets are known around the globe, and as Gregg stated, we remain focused on growing our position as a world leader in live experiences.

Our growth objectives continue to be: maintaining our commitment to operational excellence and maximizing the profitability of our core assets, supporting the growth of recently acquired businesses and leveraging our assets and expertise to drive additional value and exploring opportunities to strategically expand our portfolio of live experiences through both acquisition and development.

One way we continue to drive the profitability of our core assets is by increasing the utilization of our venues. For the second quarter, our booking business once again saw year-over-year increase in events. We attribute these results to our ongoing focus on growing multi-night and multi-venue concerts and driving a diverse array of content to our venues including family shows and marquee special events. This momentum has continued into the third quarter. Just last week, we are honored to have The Garden host the 60th Annual GRAMMY Awards, which returned to MSG and New York for the first time in 15 years.

We are pleased with the success we've had in bringing premium events to our customers and believe our position as a leader in live entertainment will only be strengthened as we expand our venue footprint. Through music- and entertainment-focused venues equipped with game-changing technologies, our goal is to redefine live entertainment by enabling the creation of entirely new experiences. We announced our plans to bring groundbreaking venue to Las Vegas and have made important progress on its design. In addition, we have also purchased a nearly 5-acre site in London next to the Westfield Stratford City shopping center. We look forward to sharing more about our venue expansion plans in the coming weeks.

At the same time, TAO Group continues to make steady progress in expanding its portfolio of entertainment, dining and nightlife venues. Following an extensive multi-month renovation in early December, TAO Group reopened the doors to Avenue nightclub, one of New York City's most sought-after nightlife destinations. This was followed by New Year's Eve opening of TAO Group's second international location, LAVO Singapore, located on the rooftop of the Marina Bay Sands hotel. As we look ahead, 2018 will be a busy year for TAO Group with a number of anticipated venue openings.

We are also continuing to successfully utilize the premium assets and brands of both TAO Group and MSG to drive additional value. On the corporate hospitality front, we are now in the second year of our renewal cycle for event Lexus and Signature Level Suite products at The Garden and are seeing solid early demand from our partners to combine their renewals with spending commitments at TAO Group venues.

Last quarter, we announced our first project with TAO Group, a members-only lounge at Madison Square Garden called Suite Sixteen. We've received very positive feedback to date and believe robust demand for memberships reflect the strength of marrying the best in sports and entertainment with TAO's premium hospitality.

Another example of combining assets and expertise to drive incremental growth is the Boston Calling Music Festival. Last year, we significantly expanded the festival's roster of marketing partners and are working with Boston Calling to grow its sponsorship business again this year. MSG's signature partner, Delta Airlines, along with Miller Lite, Samuel Adams and 47 Brand have already signed on as initial sponsors for the Memorial Day weekend event with more in the pipeline.

Turning to productions. This past holiday season, we again sold over 1 million tickets to the Christmas Spectacular Starring the Radio City Rockettes. Coupled with a solid increase in average ticket prices, we achieved yet another year of record revenue for the show. On our last call, we talked about some of the technology enhancements we made to the production. Those enhancements include the ability to project content on all of Radio City Music Hall's proscenium arches, along with one of the world's largest 8K resolution LED screens, both of which received a very positive review from our guests.

In November, we purchased Obscura Digital, the creative studio responsible for developing content for both the digital projections and the LED screen, which visually transformed the Christmas Spectacular. Obscura is globally recognized for its work in designing and developing deep generation -- I'm sorry, next-generation projection-based immersive experiences and we look forward to sharing more about our plans to use these unique capabilities to drive new opportunities across most -- more of our live offerings.

It was also a successful quarter for our Sports segment, which realized growth across essentially all key revenue lines. With regard to our Sports franchises, we are now in the midst of the 2017 hockey and basketball seasons. The Rangers, led by All-Star goalie Henrik Lundqvist, are currently vying for playoff position, while the Knicks have continued building a stronger franchise around the core group of young players led by Kristaps Porzingis who recently named an All-Star for the first time.

In November, Counter Logic Gaming or CLG, a recently acquired esports organization, was selected to be one of the 10 professional teams in the new League of Legends North American Championship Series. The League kicked off on January 20, marking an important milestone for CLG. As esports evolves to more closely resemble other professional sports leagues, we look forward to helping the organization build on its success in areas where we have significant expertise including media rights, ticketing and marketing partnerships.

In summary, we are pleased with our progress so far this fiscal year. We have continued to drive growth across our core assets highlighted this past quarter by strong booking results, record revenue for the Christmas Spectacular and broad-based growth across our Sports segment. We also continued to demonstrate the value of our partnerships with TAO Group, Boston Calling and CLG as well as our newest acquisition, Obscura Digital. And lastly, with regard to our venue expansion strategy, we've made important progress in the design of Las Vegas venue, and we look forward to sharing more soon.

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

[Donna Coleman, executive]

Thank you, Andy, and good morning, everyone. For the fiscal 2018 second quarter, our company generated total revenues of $536.3 million and adjusted operating income of $118 million, which represent increases of 20% and 23%, respectively. Even excluding the impact of acquisitions, our company generated robust increases in both revenues and AOI as compared to the prior year quarter.

At MSG Entertainment, revenues of $271.2 million increased 41%. This was due to the inclusion of operating results for TAO Group and higher overall event-related revenues at the company's venues as well as higher revenues for the Christmas Spectacular production.

With regard to the increase in overall event-related revenues, our booking business delivered yet another solid quarter with revenue increases at nearly every venue led by The Theater at Madison Square Garden, the Forum, The Garden and The Chicago Theatre.

With respect to the Christmas Spectacular, we drove a solid year-over-year increase in revenues this holiday season. This was primarily due to higher ticket-related revenue, mainly a result of higher average ticket prices, and to a lesser extent, the impact of additional scheduled performances, partially offset by a decrease in average per-show paid attendance as we traded volume for ticket yield.

MSG Entertainment AOI of $81.9 million increased 29%. This was primarily due to a strong overall increase in event-related contributions at our venues, the inclusion of TAO Group operating results and an increase in Christmas Spectacular contribution, partially offset by higher SG&A expenses.

At MSG Sports, revenues of $265.1 million increased 5%. We generated growth across most revenue lines including sponsorship and signage, ticket-related revenue and food and beverage and merchandise sales as well as across local media rights revenue, suite rental fees and league distributions. This was only partially offset by lower event-related revenues from other live sporting events.

The increase in sponsorship and signage includes the impact of our new signature partnership with Squarespace and other recent renewals. The increase in ticket-related revenue this quarter was primarily due to 8 more Knicks and Rangers home games versus the prior year period and higher average Rangers per-game revenue, partially offset by lower average Knicks per-game revenue.

For the third quarter of fiscal 2018, we expect ticket-related revenue to reflect the impact of 6 fewer Knicks and Rangers home games versus the prior year period. In addition, please note that MSG Sports results in the year ago third quarter included $15.5 million in nonrecurring NHL expansion fee revenue. MSG Sports AOI of $55.1 million increased 17%. This reflects the increase in revenues partially offset by small increases in direct operating and SG&A expenses.

Corporate and other adjusted operating loss of $19 million increased by $4.1 million, primarily due to the inclusion of certain SG&A expenses from Obscura Digital and higher employee compensation and related benefits, partially offset by a management fee earned for providing services to TAO Group.

Lastly, purchase accounting adjustments of $5.9 million reflected in operating expenses are primarily related to the TAO Group acquisition.

I would also note that as a result of the recently enacted federal tax reform law change effective January 1, 2018, which reduces the company's federal tax rate to 21% from 35% and provides future net operating losses have an indefinite carryforward period, fiscal 2018 second quarter net income includes a noncash income tax benefit of $113.5 million to reduce the company's net deferred tax liabilities.

Now turning to our balance sheet. As of December 31, total unrestricted cash and cash equivalents was approximately $1.1 billion. In addition, there have been no borrowings made under either our $150 million New York Rangers revolving credit facility or our $215 million New York Knicks credit facilities. As a reminder, there also remains outstanding a $110 million 5-year term loan at the TAO Group level.

As Andy mentioned, during the second quarter, the company purchased land in London for approximately $79.5 million or GBP 60 million. This amount excludes transactional taxes, the significant majority of which is recoverable value-added tax.

Lastly, in terms of the company's share repurchase program, this fiscal year through yesterday, we have repurchased approximately 56,000 shares for $11.7 million. Total repurchases under our current authorization now stand at approximately 1.6 million shares for $265 million, at an average price of about $170 per share. This amount represents 6% of total shares outstanding as of our spend date.

With that, I will 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 is from Brandon Ross with BTIG.

[Brandon Ross, analyst]

First, congratulations to Andy on your new role.

[Andrew Lustgarten, executive]

[ That's very nice ].

[Brandon Ross, analyst]

You're welcome. And I have one question for you, Andy, and one for Gregg. Andy, you purchased that land in London for $79.5 million in the quarter. Can you share with us any detail on your plans there? What you intend to build on that land and the time frame? And maybe if you'll bring Phish back to Europe? And then for Gregg, since we don't have you on the call very often, in the past, you've unlocked value across the original Cablevision assets through a number of spin-offs and strategic actions. Among the assets that you have now at MSG, do you see ways to unlock or highlight value within the portfolio?

[Gregg Seibert, executive]

Good. Andy, why don't you take the first part?

[Andrew Lustgarten, executive]

Brandon, as you noted, we've recently purchased nearly 5-acre site in London adjacent to the Westfield Stratford City shopping center. The amount excludes transactional taxes, majority of which are recoverable value-added tax. I can tell you the site is zoned specifically for commercial and leisure use. Other than that, I will -- we will have more information in the near future and look forward to announcing at the right time.

[Gregg Seibert, executive]

And Brandon, in reference to the question about asset spin-offs, et cetera, you went away and sort of partially answered your own question by saying that we have demonstrated over a long period of time that we're focused on ways to create long-term shareholder value. That basically means anything from the type of investments that we are making in venues today such as the one in Las Vegas, which, again, we'll have more details on in the relatively near future, but we do have quite a history of having done spin-offs. Just going back to Cablevision, we first spun MSG in 2010. We then spun AMC in 2011 and then in 2015 MSG was technically spun off from MSG Networks. I think we all sort of look at that really as a spin-off of MSG Networks, but it was technically the spin of Madison Square Garden from the Networks. So as you can imagine, we think about as many options as we possibly can to -- in order to enhance shareholder value. At this point, we don't have anything specific to discuss and we're not going to comment on hypothetical transactions. But you should assume that we look at all opportunities to benefit our shareholders.

[Operator]

Your next question is from David Karnovsky with JPMorgan.

[David Karnovsky, analyst]

In light of the London purchase and Vegas, can you just comment on how you view venue expansion from a financial and capital allocation perspective? Specifically, what types of returns do you look for in a venue? And then how do you balance that against repurchasing your stock, which is potentially attractive given the discount it appears to trade to private value?

[Gregg Seibert, executive]

No. So look, that's a very good question and what I'd like to do is just step back for a minute to the time when Madison Square Garden was spun off from Madison Square Garden Networks. At that time, we outlined 3 main priorities with respect to how we plan to allocate capital. First was to invest in current operations to drive growth, the second was to invest in expansion in complementary areas and the third was return of capital to shareholders. Now the order of these priorities can change from time to time based, for example, on the opportunity set in front of us and our stock price. Currently, we are focused on the expansion of the venue portfolio and we see that as a centerpiece of our investment strategy. And we believe we have a unique opportunity to create long-term asset value for our shareholders through that expansion. That said, we're also very focused on our buyback program and I know for one -- the one constant for MSG over the past several years is that we've pretty consistently repurchased shares. Prior to the MSG spin from Networks, we repurchased $241 million of MSG stock at an average price of a little over $76 a share. That's not comparable to the current trading price of the stock, but you can compare that directly to the $98 a share you'd have on a constant share basis if you recombined MSG and MSG on stock price today. So we're pretty pleased with that type of repurchase performance and the way it creates value for our long-term holders. Further, since the spin, we've repurchased another, as Donna pointed out, $265 million worth of stock at MSG or 6% of the shares outstanding. That stock was repurchased at an average price of around $170 a share. With the stock trading north of $220 a share this morning, we're also pretty pleased with the result of that program. Now this past quarter, as Donna pointed out, we only repurchased a modest number of shares. That really reflected the market price relative to the 10b5-1 program that we had in place at that point in time, but from our perspective that doesn't set a limit on the price we're going to buy back shares at. We're opportunistic, we're cognizant of current market levels, but I want to be very clear that we are committed to the buyback program because we feel it benefits all of our long-term shareholders.

[David Karnovsky, analyst]

Okay. And then just on the recent management turnover, is there any additional color you can give on that beyond the release you had put back in November and just maybe comment on why this was the right time for a change?

[Gregg Seibert, executive]

Sure. Look, I'm not going to do a deep postmortem on how the decision was made for the management change, but I will say a couple of things. First, there was no specific event that led to Doc's departure. We all believe that Doc's a very talented individual and enjoyed working with him. But at this point in time, given where the company is moving, given the venue expansion program, given the focus on operations, we just feel that the best leadership team for the company is to have Jim in the position being the day-to-day CEO of the company and bringing Andy in for the President position in order to continue that focus on operations. But again, we wish Doc well in his future endeavors and he continues to have a lot of friends here at Madison Square Garden.

[Operator]

Your next question is from John Janedis with Jefferies.

[John Janedis, analyst]

I think you touched on Knicks attendance being down a little bit versus last year and I guess it's hard to predict performance. But based on how you're thinking about it, do you expect attendance to improve or decline from here for the rest of the season? And on the flip side, what revenue benefit in terms of average ticket price are you seeing from the change in the ticket sales strategy?

[Donna Coleman, executive]

Well, first of all, I think on our last earnings call we mentioned that we had seen some early impact on the Knicks ticket revenue based on attendance. And as I noted in my prepared remarks today, for the second quarter, our ticket-related revenue was up due to the 8 more home games played by the Knicks and the Rangers and that was -- and also the higher Knicks (sic) [ Rangers ] per-game revenue and that was partially offset by the lower Knicks per-game revenue. And while we have actually seen improvement since our last earnings call, we still expect to experience some impact over the balance of the season. Most importantly, I would note that we expect overall ticket-related revenue for our teams in the third quarter to reflect the impact of 6 fewer Knicks and Rangers home games versus the prior year period. And I will say we've seen -- I think we've been very pleased with our change in ticketing strategy. We don't give specific average ticket prices, but in general, both -- across all of our productions and our teams, we are very pleased with where ticket strategy is working.

[Operator]

Your next question comes from Michael Morris with Guggenheim Securities.

[Michael Morris, analyst]

Two topics, if I could. First, Donna, could you expand a little bit about the impact of tax reform on the company? I know you have the reduction, the deferred tax liability and tax hasn't been a primary issue as we analyze the company. But going forward, can you help us at all with the benefit, how you look at -- and what the benefit could be there? And then also, just secondly, Andy given your unique position and experience with the NBA, could you share any thoughts on the globalization, the international opportunity for the NBA, where you think we are in the process of really getting that product in front of a global audience and maybe how as operator of the Knicks how that impacts how you think about the business or whether you can be involved there?

[Donna Coleman, executive]

So I'll take the first part. So as you point out, firstly, there's a decrease in the corporate tax rate from 35% of 21% and while we are currently not a full taxpayer, that -- it's certainly something that's a benefit in the future. Secondly, and something that's very important to us, is the law has made a change in the way we're allowed to expense domestic CapEx other than the core or shell of a structure or building for the next 5 years. So when the Las Vegas venue opened, we're going to be able to write off 100% of all personal property, which includes anything that essentially could be removed from the property without damaging the structure. And we are planning on investing in technology as we've discussed in the past, so we're very -- we think that's going to be a big benefit for us when the venue opens. As you can see in our press release, we've got $116 million tax benefit, income tax benefit. Almost all of that is due to the tax law change. One piece, as you just noted, is writing down our deferred liability on the rate. The second piece is that the tax law change allows us to use NOLs indefinitely and so we had previously had a valuation allowance against our deferred tax assets that we're now able to release. So those 2 items gave us a really big benefit in the quarter. Hopefully that answers your question.

[Michael Morris, analyst]

Yes, that's helpful.

[Andrew Lustgarten, executive]

So thank you. I'll start with the NBA growth is -- international growth is like no other sports league in the world, started probably roughly 30 years ago under David, his leadership, where he was beginning to fuel the fire internationally. Adam has stepped in and really taken it to the next level. I think, and I'm doing this slightly from memory, I think they have -- they currently now coverage over -- TV coverage is over 200 countries and territories globally. And the growth of that business fuels interest, fuels ownership opportunities as demonstrated by the Nets' recent investment and we benefit obviously of being a partial owner of the league as well as our recent All-Star, KP, who's going to allow us to continue to push our business as well as being part of the overall NBA business. We're thrilled to be an owner. We're thrilled to watch what Adam and the league continues to be able to push.

[Operator]

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

[Bryan Goldberg, analyst]

I've got 2 questions, I guess, for Gregg or Andy, both related to recent developments in New York. First, with the New York State accepting the Islanders' proposal to build a new hockey arena and retail complex in Belmont Park, could you update us on how MSG might be involved in this development either as a potential investor or adviser or partner venue given the Oak View Group's involvement? And then my second question is about Penn Station, Governor Cuomo made some comments in January, I think, about needing to work more aggressively on a redevelopment plan for Penn Station including overhauls to the layout of the facility. And I'm not sure how dramatic of an overhaul he's now calling for, but given the positioning of your assets there on top of the station including your air rights, could you update us on what this could mean for MSG and how you might be able to participate?

[Gregg Seibert, executive]

Bryan, I'm going to ask Andy to answer that question.

[Andrew Lustgarten, executive]

Happy to. So let's start with the Belmont arena. So Oak View Group, led by Tim Leiweke, who's our partner who we find an amazing partner to work with, he's probably one of the most talented, if not the most talented, operator of arena development and so we are pleased to work with Tim and Oak View Group as they push forward with the Islanders and the New York area partners to build an area in Belmont. At this time, we have nothing else to say besides we're supporting Tim and we look forward -- and the group and we look forward to more at the right time. In terms of the Penn Station renovation, as you mentioned, the Governor discussed it a few weeks ago in the State of the State. We continually work with all stakeholders and support the Governor's vision for a redeveloped Penn Station and we continue to look forward to making progress towards it. As we said before, we're very receptive to a plan that includes the sale of The Theater at Madison Square Garden as part of the renovation and it's just -- we continue to look forward to it. In terms of the air rights, it's very hard for us to speculate on the value for it. The air rights are complicated, and we look forward to moving forward as we look forward to the whole project and the redevelopment. I think that's all we have to say.

[Gregg Seibert, executive]

Just view it as a long-term proposition. This is not something that's happening tomorrow.

[Operator]

Your final question is from David Joyce with Evercore.

[David Joyce, analyst]

I was hoping you could just map out for us a bit how we should think about the spending on your various major projects this year, the Las Vegas arena, the further TAO openings. And also in the past, you had talked about the New York Spectacular show returning as sort of more like an ad hoc kind of event filler. If you could just update us on those, please?

[Donna Coleman, executive]

I'll start on the spending, and we don't project spending in the future. However, we have spoken before about TAO and their -- and the fact that the way they are efficient with their capital spending and that they're actually self-funded. I don't know, the New York Spectacular, Andy, would you like to comment on that?

[Andrew Lustgarten, executive]

So we continue to believe that there's an opportunity at Radio City and under the Rockettes brand to leverage those 2 assets to drive incremental value. At this time, we've been exploring the creation of a streamlined show that leverages the technology that we put in the venue and to maximize utilization of the venue and the brands. At this time, as we continue to develop, we'll come back with them and impart more at those times. In terms of TAO, just like Donna said there, very focused on using minimal capital to drive tremendous businesses, which could see in how they build it.

[Operator]

With that, I will turn the floor back over to Ari Danes for any additional or closing remarks.

[Ari Danes, executive]

Thanks for joining us. We look forward to speaking with you on our next earnings conference call night. Have a good night.

[Operator]

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