Madison Square Garden Sports Corp

NYSE:MSGS

Earnings Call Transcript 2018-Q3

[Operator]

Good morning. My name is [ Christie ], and I'll be your conference operator today. At this time, I would like to welcome everyone to The Madison Square Garden Company Fiscal 2018 Third 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 2018 Third Quarter Earnings Conference Call.

Our President, Andy Lustgarten, will begin this morning's call with a discussion of 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.

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.

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

[Andrew Lustgarten, executive]

Thank you, Ari, and good morning. For the fiscal 2018 third quarter, we delivered strong revenue and adjusted operating income results, a reflection of our continued ability to deliver exceptional live experiences for our customers and partners.

Our commitment to operational excellence and maximizing the profitability of our core assets has played an important role in this success. One area where we've seen steady improvements is in our bookings business.

During the third quarter, we once again benefited from a healthy overall concert industry, the strength of our markets and venues and our ongoing efforts to drive growth through multi-night and multi-market engagements. As a result, our venues hosted a diverse array of concerts, family shows and marquee events, including the 60th Annual GRAMMY Awards, which returned to The Garden in New York for the first time in 15 years.

We're also in the midst of a strong fiscal fourth quarter and remain on track for another year of robust growth in bookings. Upcoming highlights include: The Tony Awards in June, followed by the MTV Video Music Awards in August, both at Radio City Music Hall. Our expertise in attracting premium events will become even more significant as we move forward with our plans to expand our venue footprint.

Our goal is to transform the live entertainment industry through groundbreaking venues called MSG Sphere that will pioneer the next generation of immersive experiences and revolutionize the way artists and audiences connect.

Cutting-edge video, acoustics and connectivity technologies will enable the creation of multisensory environments on an unprecedented scale, making MSG Sphere the platform for anyone who wants to share their vision, including musicians, artists, storytellers and companies.

These state-of-the-art venues will provide a home where like-minded communities can come together to interact, not only with the performance but with each other. They will be the sought-after backdrop for a wide variety of shows from attractions and concerts to product launches and special events. And to help drive content creation for MSG Sphere, we're developing a set of easy-to-use tools that can be used both by us and others.

In addition to developing unforgettable experiences for guests, we also believe MSG Sphere will allow marketing partners to showcase their brands in colorful and innovative ways by leveraging the way -- the venue's unique platform, which includes a fully programmable digital exterior.

The first MSG Sphere will be built in Las Vegas, an entertainment mecca and the perfect debut market for the next-generation venue. We plan to break ground this summer by starting site prep. Meanwhile, we continue to make progress on developing our design for the venue with the goal of opening by the end of calendar 2020.

As you know, we recently purchased a nearly 5-acre site in London, next to Westfield Stratford City shopping center, which attracts 45 million visitors annually. As a cultural powerhouse and the gateway to the U.K.'s extraordinary music scene, London is ideally situated to be the first international location for MSG Sphere. We are working on submitting our planning application by the end of the calendar 2018. And subject to the planning process, our goal is to debut our London venue approximately 1 year after Las Vegas. We look forward to updating you on both projects in the months ahead.

Venue expansion also remains a key focus for TAO Group. Since our acquisition of a majority interest a little over a year ago, the entertainment, dining and nightlife company has grown its portfolio from 19 to 26 venues. In addition, TAO Group continues to have a robust pipeline of contracted venues as it looks to grow its business in both domestic and international markets.

With respect to Boston Calling Events, the entertainment production company's annual namesake festival will take place later this month over Memorial Day weekend at Harvard Athletic Complex. With a terrific lineup headlined by Eminem, The Killers and Jack White, we are looking forward to an exciting festival for music fans in the city of Boston.

Turning to productions. We recently named Victoria Parker Executive Vice President of MSG Productions. Victoria joined us after serving as Head of Creative Strategy for Verizon's Oath Studios, where she utilized her relationship within the entertainment industry to drive content creation and programming for the new platform.

At MSG, Victoria oversees all aspects of our production business, including further enhancements to the beloved Christmas Spectacular and the continued exploration of a second show that would expand the Rockettes and Radio City brands. Victoria is also responsible for the creation and implementation of new proprietary productions and attractions for MSG venues, including our MSG Sphere venues in Las Vegas and London. We are pleased to welcome Victoria to the MSG team.

With regard to our sports franchises, last month, the 2017-'18 NBA and NHL seasons concluded. While we didn't make the Playoffs, we believe in where the Knicks and Rangers are headed and remain focused on our plans to reshape both teams. This includes our ongoing search for new head coaches who can continue the process of building and developing our young talent.

Meanwhile, we continue to focus on our ticketing strategy of selling more partial season plans as well as individual and group tickets, which helps us broaden our fan base, establish more direct customer relationships and provide greater flexibility for our fans, all of which should positively impact our ticket sales results in the years ahead.

Later this month, the New York Liberty will return for the 22nd season, led by 5-time WNBA All-Star Tina Charles. This year, the team will make Westchester County Center their home court while playing select games at The Garden.

We are looking forward to an exciting season and remain committed to finding the right new owner to steward this franchise into the future.

With respect to esports, we believe there's great potential for growth as the industry's passionate worldwide fan base, comprised mainly of millennials, continues to deliver its impressive and growing viewership numbers, which we've already seen with League of Legends.

We continue to see opportunity to add value by utilizing our expertise in areas such as marketing partnerships and media rights. In fact, we recently completed new marketing partnership agreements for our esports organization, Counter Logic Gaming, with several companies, including Hewlett-Packard and Kia Motors.

We're also looking forward to the inaugural season of the NBA's 2K eSports League. Last month, Knicks gaming participated in the league's first-ever draft, held at the Hulu Theater at Madison Square Garden. The theater was recently renamed, thanks to a new multifaceted marketing partnership with Hulu that, in addition to naming rights to the theater includes Hulu branding and content integration across the venue as well as across our digital and promotional platforms.

We are pleased to welcome Hulu to the MSG family. This new agreement continues a terrific year for our marketing partnerships group, which has included 3 successful renewals with signature partners as well as the addition of important new partnerships.

In summary, we had a strong quarter with respect to our core operations, highlighted by continued growth in bookings and sponsorship. We have made important strides to the fiscal year towards expanding our portfolio venues and look forward to the first of many important milestones, the groundbreaking for MSG Sphere in Las Vegas.

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. For the fiscal 2018 third quarter, our company generated total revenues of $459.6 million and adjusted operating income of $49.1 million, which represent increases of 19% and 13%, respectively.

Excluding the impact of acquisitions and nonrecurring NHL expansion fee revenue in the prior year third quarter, our company generated robust growth in AOI on a year-over-year basis.

At MSG Entertainment, revenues of $159.6 million increased 106%. This was primarily due to the inclusion of operating results for TAO Group and higher overall event-related revenues at the company's venues, slightly offset by a decrease in revenues for the Christmas Spectacular production.

The increase in event-related revenues was primarily due to higher revenues at The Garden, Radio City Music Hall and the Hulu Theater at Madison Square Garden, reflecting ongoing strength of our booking business. The decrease in revenues for the Christmas Spectacular production was primarily due to lower ticket-related revenue mainly as a result of 3 fewer scheduled performances in January as compared to the prior year period.

As a reminder, for the overall holiday season, we drove a solid year-over-year increase in Christmas Spectacular revenues with higher average ticket prices and over 1 million tickets sold to the production.

MSG Entertainment AOI of $9.4 million improved $10.9 million. This was due to the inclusion of TAO Group operating results and a strong overall increase in event-related contribution, partially offset by lower contribution from the Christmas Spectacular and other net decreases.

At MSG Sports, revenues of $300.1 million decreased 3%. This was primarily due to lower lead distribution, which reflects the absence of $15.5 million in nonrecurring NHL expansion fee revenue recorded during the prior year third quarter.

In addition, we saw lower event-related revenues from other live sporting events and food beverage and merchandise sales. This was partially offset by strong increase in sponsorship and signage revenues as well as higher suite rental fees, regular season ticket-related revenue, local media rights fees and other net increases. The increase in sponsorship and signage revenues reflects the impact of our new signature partnership with Squarespace and other recent renewals.

MSG Sports AOI of $58.6 million increased -- decreased 11%. This reflects lower revenues, partially offset by a small decrease in direct operating expenses. Excluding the impact of the NHL expansion fee revenue in the prior year quarter, fiscal 2018 third quarter MSG Sports revenues and adjusted operating income increased 2% and 16%, respectively, both as compared to the prior year period.

Please note that the year-ago fourth quarter for MSG Sports benefited from $15 million in nonrecurring league distribution revenue, while our fiscal 2018 fourth quarter will include the impact of recent team personnel transactions.

Corporate and other adjusted operating loss of $18.9 million improved by 9%, primarily due to lower professional fees and the impact of a management fee earned for providing management strategic services to TAO Group. This was partially offset by the inclusion of Obscura Digital costs associated with our business development initiative.

Lastly, purchase accounting adjustments of $6.2 million reflected in operating expenses are primarily related to the TAO Group acquisition.

Turning to our balance sheet, as of March 31, total unrestricted cash and cash equivalents was approximately $1.2 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 facility. As a reminder, there also remains outstanding in approximately $110 million 5-year term loan at the TAO Group level.

In terms of the company's share repurchase program, our fiscal year-to-date repurchases continues to stand at approximately 56,000 shares for $11.7 million. Total repurchases under our current authorization are approximately 1.6 million shares for $255 million at an average price of about $170 per share. This amount represents 6% of total shares outstanding as of our spin date.

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 Bryan Goldberg of Bank of America Merrill Lynch.

[Bryan Goldberg, analyst]

I've got a few questions. On the Spheres, they seem like significant projects, both strategically and financially. And I was wondering if you could talk us through your latest thoughts on how you intend to finance the buildouts above and beyond your cash and existing revolvers. For example, will you be considering construction loans or borrowing against future contractual income streams? Would appreciate any thoughts you can share, and then I've got a few follow-ups.

[Donna Coleman, executive]

Sure. Well, we're still developing our plans for both the Las Vegas and London venues. And as you noted, these are clearly significant capital projects, and we're considering all sources of liquidity. As you mentioned, we currently have a very strong balance sheet with $1.2 billion of cash. We have not drawn down on our $365 million in revolver capacity against the Knicks and Rangers, and we generated significant amount of operating cash flow. As we continue to progress in our plans, we will, of course, consider all of our options. It could include construction financing or project financing once we have some contractual revenue streams. I think we're fortunate that our strong balance sheet allows us to have some flexibility and be deliberate and thoughtful and opportunistic about our financing positions -- decisions. But as we move forward, we will be making some of those decisions.

[Bryan Goldberg, analyst]

And just to follow up on that, I mean, in terms of borrowing capacity, thinking about the entire company and its portfolio of assets, how should we think about your ability to borrow against your other real estate? And I'm really thinking about the Madison Square Garden Arena. Can you borrow against that?

[Donna Coleman, executive]

Well, the league reviews all of the financing on team assets, which includes the arena and any entities with ownership interest in the teams. And as I mentioned, we do have the $365 million revolver against the teams, which had -- which was approved by the leagues. And anything further, we would need approved by the leagues as well.

[Bryan Goldberg, analyst]

Okay. And then I just had a couple housekeeping questions on your joint venture with Irving Azoff. First, I saw in the press that AMC Networks acquired an interest in Levity Entertainment. And I was wondering, did the JV sell Levity to AMC Networks? I was wondering what you could tell us about that transaction. And secondarily, following the press around Silver Lake's $100 million infusion or investment into the Oak View Group, could you clarify what your ownership interest or the JV's ownership interest is in Oak View Group now following the Silver Lake transaction?

[Donna Coleman, executive]

Sure. So yes, we can confirm that the sale took place in April to AMC Networks. I don't have additional detail other than to say that the Azoff MSG management is very pleased with the terms of the transaction. I'd also add that the proceeds from the sale were used to pay down a portion of the outstanding loan between Azoff MSG and our company. As far as the percentage ownership post-Silver Lake's investment, what I can say is that we accepted a modest dilution with the Silver Lake transaction happening in exchange for what we think is a great opportunity for Oak View Creek -- the Oak View Group as they move forward with their plans to grow their business. So there was a modest dilution there.

[Operator]

Your next question is from Brandon Ross of BTIG.

[Brandon Ross, analyst]

I have 3 actually. First, a follow-up to Bryan on the Spheres and the financing. Do the capital need for the Spheres or the build-out of the Spheres influence at all how you think about whether these sports and entertainment businesses should be together or eventually separated? And then I have 2 follow-ups.

[Donna Coleman, executive]

Well, I -- as I said, we -- we're in -- we've got a lot of capacity. We're reviewing all opportunities, but I'm really not going to comment on any speculation.

[Brandon Ross, analyst]

Okay. And then recently, Steve Ross -- or Roth, I should say, wrote in the Vornado annual letter that he had a plan to combine, I guess, Vornado's air rights and yours above Madison Square Garden and to build a new Two Penn. Do you support that plan? And what's sort of the latest on Penn Station? Then I have one more.

[Andrew Lustgarten, executive]

Well, Brandon, thank you. Well, I'll start with saying we really don't have much more to say related to Penn Station and Steve's plans. We're -- we have said we're very supportive of the Governor and the plans to renovate Penn Station, and we continue to work and be supportive of those plans.

[Brandon Ross, analyst]

Okay. And then finally, as part of the Trump tax plan, entertainment expenses are now -- no longer deductible for corporate taxes. Has this affected any suite sales or ticket sales that you've seen? And do you expect it to do so in the future, if it hasn't already?

[Donna Coleman, executive]

Yes, I don't know who came up with that one. So we're certainly mindful of that change in the tax law. I would just note that companies have seen a significant reduction in the corporate federal tax rate, which they will likely balance against the loss of deductibility on the entertainment expenses. It's a relatively recent event and we're going to monitor it. But we believe in the strength of our assets and brands and the importance of entertainment to our clients. So we're hoping companies will view it as a balance.

[Operator]

Your next question is from John Janedis with Jefferies.

[John Janedis, analyst]

Maybe a couple for me. One is, as I guess we're kind of lapping a year from the TAO transaction, and I know you touched on this a little bit, but can you give us an update on where the business stands today? I know you launched some new locations already with plans to add more this year. But do you expect this pace to slow? Or do you continue to see new opportunities going forward? And then separately, can you talk a little more about the rationale for London as the first international market? Why does London make sense for the Sphere in terms of location?

[Andrew Lustgarten, executive]

Happy to answer. So let's -- starting with TAO. We began our partnership in 2017, so a little over 1 year ago. Since then, TAO Group has opened 7 new venues, 5 in Los Angeles, 1 in New York and 1 in Singapore. Very pleased with those openings. I can tell you, the partners at TAO Group have a lot more and a robust pipeline of contracted venues, both domestically and internationally. We're very happy with how the combined assets of MSG and TAO Group have worked together to drive additional value. For one example, on a corporate hospitality perspective, we've had great success integrating TAO's assets. So early this year, we reached a deal with a -- multiyear, multimillion-dollar deal with a Fortune 500 company that enabled us to consolidate their entertainment spend with us and with the portfolio of assets, including TAO Group. I really think nobody else has an offering like that in the market, and we've been able to continue to that success through our renewal process with other companies. TAO Group also opened the Suite Sixteen here at The Garden that marries their hospitality with our premium sports entertainment offerings. The demand for that has been very robust, and we continue to look forward to how they integrate in our expansion with the MSG Spheres. So very happy with them so far. I think your second question was related to London and why London as our first international location.

[John Janedis, analyst]

Yes.

[Andrew Lustgarten, executive]

So we've thought about many markets. When you look at London, London is the same size as New York City in terms of number of people, a massive entertainment market. There -- you can argue there's somewhere between 1.5 and 2 venues in the market, O2 is a fabulous venue, but the market is incredibly underserved. When we come, what we expect to see is very much what we saw in L.A. when we added The Forum or as venues here in New York got added. The market is going to grow and grow substantially. Every time we speak to artists, they talk about date availability and their lack thereof of availability, and we just expect this to really grow the entertainment market in an amazing entertainment setting.

[Operator]

Your next question is from David Karnovsky of JP Morgan.

[David Karnovsky, analyst]

Can you just update us on where you stand in your renewal cycle for both suites and sponsorship? Maybe what you've renewed so far, how has that trended and what you have left to renew? And then separately, is there any update you can provide on the Spring Spectacular? Does MSG, at this point, remain fully committed in the long term to doing an additional show with the Rockettes?

[Andrew Lustgarten, executive]

Sure. Happy to answer. So in terms of our renewals with both marketing partnerships and suites, we've had overall success in reaching new deals and expanding agreements with our current signature partners and renewing with our current suites. Over the past 2 years, we've renewed agreements with Anheuser-Busch, Lexus, Delta Air Lines, Kia and Charter Communications. This fiscal year alone, we added Squarespace as the new signature partner and the first-ever jersey patch sponsor for the Knicks. And we expect the other renewals to keep on going well. In terms of our suite renewals, we are in year 2 of our renewal cycle that was part of when we finished the transformation. And as we previously discussed, we've had great success in renewing those suites. And we continue to explore the creation of new -- of premium products that fit with our customer needs, so we feel very good. In terms of a second show for the Rockettes, when you use the Spring Spectacular, I think that was the term, but we think about a second show. We just brought in, as we mentioned, Victoria Parker. She just recently joined, who's heading up our production business. She is focused on leveraging Radio City Music Hall and the Rockettes to create new brands. What I can tell you is we're exploring the creation of a streamlined show that leverages the investments in technology in Radio City that we've made already. And then as of right now, we've really nothing else to share, but we'll come back to you as our exploration continues.

[Operator]

Your next question is from Michael Morris of Guggenheim Securities.

[Michael Morris, analyst]

I have a couple more on the Spheres. First, could you share with us any more detail on the cost of construction for the Spheres? And if maybe you don't want to talk about the budget explicitly, maybe some order of magnitude relative to The Garden transformation or the investment in the Forum, other things we're aware of. And then also, can you talk at all about the expected return profile of the Spheres and whether that differs at all from sort of your existing venues? And finally, I guess, maybe bigger picture in terms of ambition for that format, I guess, I'd say like how many Spheres do you think the world needs? Do you see this as sort of really special unique destinations that people travel long distance for? Or do you think that this could be something that would be more common in large metropolitan areas?

[Andrew Lustgarten, executive]

So I think the question started with how much. So I'll tell you, we're continuing to work through our plans for both venues and we'll expect to share more at the appropriate time. In terms of return profile of the Spheres versus our venues, what I can tell you is we expect the Spheres to be groundbreaking new venues that will deliver new types of immersive experiences. The Spheres will disrupt the live entertainment business. They will be the greatest live performing venues in the world, and they will drive new enhanced revenue streams for the company. We expect the new technologies will drive a wide variety of events, both standard bookings as well as new forms of attraction, product launches and special events, which -- all will drive utilization and revenue of those Spheres. We also anticipate sponsorship being very meaningful given what we're developing, and we think there's many innovative ways to work with partners to drive -- to really drive revenues. In terms of the number of Spheres, what I can tell you is right now, we're focused on the 2 that we're developing, right? That is number one and two of what we're working on. That said, we believe MSG Sphere will transform the entertainment industry. We know we will be able to leverage our technology and know-how for future opportunities. These opportunities will scale to the size of markets, that they don't need to all be 18,000 and 20,000. And as we look at other markets, we will -- there will be multiple types of transaction structures, some owned, some operated, some joint ventured, some managed. But as I said, right now, we're focused on Vegas and London.

[Operator]

Your final question is from David Joyce of Evercore.

[David Joyce, analyst]

A couple follow-ons. First, on the venues. If you could connect some dots for us with the Silver Lake investment and MSG as well as their interest in other venues and venue operators. What can they bring to the table? Is it something that they like in the technologies that you're deploying at the new Spheres? Is it something that they're looking to leverage more globally? And then second, if you could just give us some more color over the next couple of quarters on any particular phasing of event activity given that you've run TAO Group now for a year. Is there anything new in the seasonality or anything else on the comparability front on the number of events that you could talk about?

[Andrew Lustgarten, executive]

So in terms of Silver Lake, let me just start. We talk with all of our large shareholders on a regular basis, but I don't speak on behalf of Silver Lake and on their investment thesis. So I -- it's hard for me to have any point of view. In terms of seasonality...

[Donna Coleman, executive]

Yes, so I'll just address. I think the question -- so on the entertainment business, probably the biggest driver of our seasonality is the Christmas Spectacular production, which runs mostly in the second quarter. As Andy just mentioned, we're also exploring a second show, which would feature the Rockettes and would play throughout the year to -- which would smooth that out a bit. With respect to TAO Group, the history would indicate that the June quarter and the December quarters are stronger for TAO Group in the New York market and that the June quarter is stronger for TAO Group in Las Vegas, with corporate business being the key driver there. But keep in mind that we record TAO on a 1-quarter lag basis. So for example, our third quarter right now, includes the December quarter for TAO. And as TAO Group expands its revenue portfolio, its venue portfolio, the seasonality could shift depending on the market. But those are the main seasonality issues for us.

[Operator]

Thank you. With that, I will turn the call 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.