Madison Square Garden Sports Corp (MSGS) 2016 Q1 法說會逐字稿

My name is Christie and I will be a conference operator today. At this time I would like to welcome everyone to Madison Square Garden Company fiscal 2016 first-quarter earnings conference call.

(Operator Instructions)

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

Thanks, Christie. Good morning and welcome to The Madison Square Garden Company's fiscal 2016 first-quarter earnings conference call.

Our President and CEO Doc O'Connor will begin this morning's called with a discussion of some of the Company's recent highlight. 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 investor 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. Let me point out that on page 4 of today's earnings release we provide combined statements of operations and a reconciliation of adjusted operating cash flow or AOCF to operating income.

I would now like to introduce Doc O'Connor, President and CEO of the Madison Square Garden Company.

Thank you, Ari, and good morning everyone. With the successful completion of our spinoff MSG begins its next chapter as a new publicly traded Company focused on live sports and entertainment.

We believe this transaction accomplishes a number of important objectives. In addition to highlighting the value of our unique assets and brands the completion of our spinoff sets the stage for future growth by providing the Company with the strategic flexibility to continue delivering exceptional live experiences for our fans and partners.

Our growth strategy begins with a strong belief in the growing value of the live experience. The sports and entertainment landscape has become increasingly competitive. In addition to more traditional vehicles such as broadcast and cable we now have over-the-top content, video games, Internet offering, social media and more, all competing for time and mind share.

None of these things, however, can truly replace or compare with the live experience which is unpredictable, engaging and actually draws people together, creating community. MSG has been synonymous with the very best in live sports and entertainment for generations. Our goal moving forward will be to continue to explore new ways to build on this legacy.

We will start with a continued commitment to enhancing and growing our existing assets and brands and to making the customer experience a priority as we also look for ways to improve the efficiency of our operations. We are also excited with the opportunities in front of us to meaningfully grow our business via acquisition and development. We are actively evaluating a number of compelling investments and are anticipating an eventful year ahead for our Company.

One potential avenue for external growth will be the expansion of our venue portfolio. With the Forum in Inglewood, California we created the country's only arena sized venue focused on music and entertainment which has quickly established a strong presence in the market and is generating meaningful AOCF for our Company.

We will look for other select markets both domestically and internationally where we can replicate the Forum's success. We will also explore expanding our portfolio to potentially include new types of venues such as outdoor sheds and smaller venues.

As part of our commitment to creating unmatched experiences, we will also explore adjacencies that strengthen our position in sports, entertainment and the live experience. Examples of possible areas include new types of live events and festivals and new opportunities and hospitality, clubs, and food and beverage.

In fact, earlier this week we announced that we applied for a permit to host a three-day music and arts festival in Queens in 2016. MSG has deep ties to this city and we think this combined with our unmatched relationships with artist makes us uniquely qualified to deliver a world-class festival for New York.

We also believe in the importance of owning content. Our ownership of sports franchises and live entertainment productions gives us control over how we manage our brands, create flexibility in terms of how we monetize our content and allows us to benefit from being both content owner and venue operator.

A great example is how we built our beloved Radio City Christmas spectacular and Rockettes brands through the creation of the recently renamed Rockettes New York Spectacular. Thanks to the audience's overwhelmingly positive response we sold nearly 300,000 tickets to the show in its first year. For 2016 we will present a 75 show engagement from June to August which is when New York City sees a significant increase in tourism, creating the opportunity for even more people to experience this spectacular production.

Looking for similar opportunities in exploring the new licensed or owned and operated experiences that can play across our network of venues will be a focus for the Company as we move forward. We will also continue to seek strategic opportunities to add compelling assets and brands that resonate with our customers and partners, fit with our core competencies and enable us to team with recognized leaders in their fields such as our partnerships with Azoff MSG entertainment and Tribeca Enterprises.

As you know we begin as a standalone public Company with a strong balance sheet that includes over $1.4 billion in cash. We have earmarked $935 million for potential investment in growing our business and we will be deliberate and disciplined with how we deploy this capital. Further, in conjunction with our spinoff our Board authorized a plan to repurchase up to $525 million of our common stock which reflects our confidence in the strength of our businesses and our continued desire to generate greater value for our shareholders.

Before I turn the call over to Donna I'd like to share some operating highlights with you starting with sports franchises. The Rangers led by goalie Henrik Lundqvist have gotten off to a fast start the season with a record of 8-2-2 and are looking to build upon last season's trip to the Eastern conference finals.

Meanwhile the Knicks returned with a significantly revamped roster through draft selections and free-agent signings along with a healthy Carmelo Anthony. We look forward to exciting seasons for both teams.

Turning to our entertainment productions, we are now busy preparing for the 83rd Annual Radio City Christmas spectacular in New York which debuts a week from Friday and runs through January 3. We're looking forward to a very successful holiday season run.

Our storied venues continue to play host to an exciting array of events. In recent weeks this has included NBC's popular America's Got Talent at radio city, the sold-out world middleweight championship title unification bout at the Garden that saw boxing superstar Gennady Golovkin defeat David Lemieux, and of course his Holiness Pope Francis who celebrated mass at Madison Square Garden as part of his historic US visit.

This past weekend for Halloween MSG also welcomed Dead & Company who will take the forum stage again in November before heading to the forum for a series of shows around New Year's. Other events we look forward to hosting in the coming weeks include Billy Joel's continued landmark and record-breaking residency at the World's Most Famous Arena, Z100's annual Jingle Ball and a diverse array of additional artists including Stevie Wonder, The Weekend and Phish, along with exciting college basketball tournaments featuring top-ranked teams including Duke, Maryland, Virginia and Wisconsin.

I'd like to end by saying that I'm extremely pleased that Donna Coleman who has been serving as interim CFO has agreed to stay at MSG as our Executive Vice President and Chief Financial Officer. Over the last several months I as well as many others have had the great fortune of working with Donna who has proven to be an invaluable member of our team. We look forward to her continued contributions as we remain focused on delivering excellence across our operations while executing our ambitious plans for growth.

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

Good morning everyone and thank you very much Doc for your kind words. This is truly an important time for our Company. I'm extremely excited to work with Doc and all of my colleagues as we pursue strategic growth initiatives that expand our leadership position and create long-term value for our shareholders.

As you know the spinoff of The Madison Square Garden Company from MSG Networks was completed on September 30. Results for both the fiscal 2016 and 2015 first quarter are presented as the combined results of the sports and entertainment businesses which had been consolidated with MSG Networks prior to our spinoff.

On a reported basis for the fiscal year 2016 first quarter, the Company generated total revenue of $150.4 million, an increase of 26% and total AOCF of $23.8 million, an increase of $22 million, both versus the prior-year quarter. Both fiscal 2016 and 2015 results reflect the allocation of corporate and administrative costs based on accounting requirements for the preparation of carveout financial statements.

These allocated corporate and administrative cost do not reflect the level of expenses that we expect to incur in future periods. Had MSG operated as a standalone public Company for the fiscal 2016 first quarter, we estimate that these expenses would have been higher for the quarter by approximately $10 million.

Let's now go through a reported segment results as compared to the prior-year period. At MSG Entertainment revenues of $77 million increased 18% primarily driven by higher event related revenues at the Garden, the Beacon Theater, the theater at Madison Square Garden and the Forum as well as higher venue related sponsorship and signage and suite rental fee revenue.

First-quarter AOCF of $3.1 million improved by $4 million due to the increase in revenue partially offset by an increase in direct operating and selling, general and administrative expenses. The increase in direct operating expenses was largely due to higher event related operating expenses at the Company's venues while the increase in SG&A expenses was primarily due to higher corporate general and administrative costs.

At MSG Sports revenues of $73.1 million increased 37%. The increase in revenues was primarily due to higher local broadcast rights fees due to the impact of the new long-term media rights agreements with MSG Networks as well as higher professional sports teams, ticket related revenue and sponsorship and signage revenue and higher suite rental fee revenue. Excluding the impact of the new long-term media rights agreements MSG Sports revenues would have increased 13% or $7 million as compared to the prior-year period.

First-quarter AOCF increased by $16.6 million to $24.4 million primarily due to the increase in revenue and to a lesser extent lower direct operating expenses partially offset by higher selling, general and administrative expenses. The increase in SG&A expenses was primarily due to higher corporate general and administrative costs, marketing expenses and employee compensation and related benefits partially offset by lower professional fees.

With respect to our balance sheet, as of September 30, total unrestricted cash and cash equivalents was approximately $1.47 billion which primarily reflects the cash contribution from MSG Networks that took place right before the spinoff. With the successful completion of our spinoff from MSG Networks Doc and I are looking forward to meeting with many more of you in the investment community in the weeks and months ahead to discuss our plans for the Company.

With that I will now turn the call back over to Ari.

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

(Operator Instructions) Brandon Ross, BTIG.

Hi, good morning guys. Thanks for taking the questions.

I have one for Donna and then a few for Doc. For Donna, can you tell us how much stock you've bought back since the spin occurred? And would that be a good run rate to think about for the rest of the year in terms of repurchase activity?

Well, we've not yet repurchased any shares so probably it's not a good run rate. You know, it's been just a little over a month since the spinoff and we really wanted to let the stock season a bit and have the share price settle. That said, we plan to put our share authorization to work and we intend to be opportunistic about it.

Is there any idea about how much you plan to buy back in this fiscal year?

I would just say to you that we're planning to put the authorization to work but we will be opportunistic. And so I really don't want to give guidance on that right now.

Okay and then for Doc we're just thinking about the ways to grow revenue organically and it seems like there's a big opportunity in terms of filling the white space at your venues. Can you tell us how you think about the amount of extra nights you could fill potentially at the Garden and at the Forum and what the financial opportunity could be from that? And then on the per cap side how do you plan to improve technology in your venues to potentially improve per caps or get to know your customers better?

Well, I think we see tremendous opportunity for our organic growth across the entirety of the Company. We're looking at every aspect of our business with fresh eyes. We're looking at how we book, how we sell, how we staff, how we operate in general and we see significant opportunity to drive organic growth through operating better in all capacities.

You know I'll get to your question regarding the number of events in a minute but we're ensuring that the Company is structured properly for this growth. We've created centers of excellence with new leadership in marketing, ticketing, venue operations and marketing partnerships and sponsorships. It's all designed to create efficiencies as well as new opportunities for best-in-class innovation across our business.

We do think that there's tremendous opportunity for increasing the number of events at our venues. This quarter we saw an increase in events across nearly all of our venues as compared to this same quarter last year.

And we believe we have continued material availability in capacity across our venues, very material availability. And we'll continue to leverage the innovations that we've created in terms of booking those availabilities, with multi-night events, with new and innovative residencies that we're going to be announcing in the near future and with the packaging and creation of shows; Dead & Company as an example of that, and some of the things that we're going to be announcing in the comedy space in the not-too-distant future.

As far as leveraging technology, we're looking to transform the guest experience through technology, making things easier and more fluid in buying tickets, in buying merchandise, in food and beverage. We expect to introduce this year mobile point-of-sale in our venues and outside our venues. And we're going to use technology in the world of data and analytics so that we know better who's in our venues night in and night out, where they live, how to market to them more directly and more effectively.

I think the other area of growing of organic growth that we've touched on is growing our content business. We want to own more of the content that we're pushing through our venues and we're going to develop and create new content in that endeavor. Again, it allows us to benefit from being both venue operator and content owner.

Rockettes, Rangers, Knicks, Liberty are all examples of that phenomenon. And we're going to further develop our festival business. We own the Tribeca Film Festival and we're looking to increase that as a capability of the Company as evidenced by our application for a permit at Flushing Meadows.

John Janedis, Jefferies.

Thanks. Doc may be a good segue here. So I was hoping to hear more about your thoughts on the festival business.

Is this something you'd build from scratch or buy given some of the assets potentially for a sell out there and oftentimes they tend to not make money for a couple of years. So what is your appetite for festivals that would be dilutive in the near-term but could generate strong cash flow margins over the longer-term? Thanks.

Well, as I said our festival business is an important part of our growth strategy. As for the New York Festival we have deep roots in the city. We have over 5,000 employees who live in the city.

We bring more than 5 million people each year to our events and venues. We know New York, we know New Yorkers. And our application is an attempt to build a festival that celebrates the culture and diversity of New York. If that if we look at this as an investment and we're building we're hoping to build a festival for the long term so we don't intend to lose money from the beginning but if it takes investment to build a long-term brand and a long-term festival so be it.

Alexia Quadrani, JPMorgan.

Good morning guys. This is David Karnovsky on for Alexis.

I was hoping you could talk broadly about your investment plans for the $935 million of cash. Are you looking to deploy the capital primarily into a venue strategy? Or if more broadly is there a set of criteria that you look for in any potential investment including ROI?

Well, we don't have specific allocations for our $935 million. Our focus is on building long-term asset value and shareholder value. And we have a proven track record of thoughtful and innovative growth investments.

Perfect examples are the $1 billion we invested in the transformation of the Garden which has created great ROI and grade long-term value. I think likewise with the Forum we have it's again a great investment and has established a leading position in the LA market. We look forward to deploying this capital in the areas that we have already discussed from venue expansion to content ownership to exploring adjacencies in the live experience business that strengthen our position in sports and entertainment.

We'll weigh many variables when evaluating these opportunities including strategic risk and reward and how we enhance shareholder value. We'll be deliberate, opportunistic, disciplined in how we invest and again the goal is to grow long-term shareholder value.

Okay, and then just switching gears a little bit, can you give us any indication on how advance ticket sales for the Christmas Spectacular are going so far this year? Are you seeing any pricing power? And then on the New York Spectacular which you guys moved to the summer, do you guys see a timetable for turning this property into a profit generator?

Well first of all on the Christmas Spectacular I won't get specific but we're very, very pleased with the on sale of tickets for the Spectacular. I'm sorry, what was the question on the New York Spectacular?

Do we have a timetable for when we expect to turn a profit.

Okay. With the Rockettes New York Spectacular we're trying to build a long-term second franchise for the Rockettes brand. Building franchises takes time.

However, our first year with the New York Spring Spectacular we saw terrific results. We sold nearly 300,000 tickets and we had a very positive audience response to that offering.

We're presenting a 75 show engagement from June to August. The timeshift has to do with taking advantage of the time period when New York City sees a significant increase in tourists and we see that as an opportunity to give those tourists access to the experience of Radio City Musical Hall and the Rockettes. The timeshift also creates more space between the Christmas show and the summer show allowing us to effectively market and prepare the second show.

And it better optimizes the utilization of Radio City Musical Hall by filling some of these slower summer concert months. It also takes us out of the peak selling season for Broadway for Tony consideration. So we expect that this will take time to build a long-term sustainable franchise but we are very encouraged by where we sit now and are eagerly anticipating what happens this summer on our path to building that second franchise.

Ben Mogil, Stifel.

Hi, good morning and thank you for taking my question. So I think one for Doc and one for Donna. Doc, you're sort of talking a little bit about outdoor sheds and amphitheaters and festivals and I think in the past your commentary has been sort of more on larger venues like the Forum, like the Garden.

So I'm wondering if you're seeing that those are tougher opportunities to get done and you're looking at these? And you know better than all of us that those are tougher businesses in some ways, so I'm sort of curious how you think about them given you can see Live Nation's numbers, the concert business on an ex-sponsorship is not a great business. So I want to get your sense of how you view the economics on that?

And then I think for Donna just on the unconsolidated affiliates maybe you can walk us through big swing in profitability year over year in the quarter, sort of talk us through when you should be expecting some cash to be returned from these entities, how we should be thinking about them on a full-year basis if you will? Thank you.

Sure. I will answer the second part first. The swing that you're seeing really reflects some nonrecurring items as well as the timing of revenue in one of our joint ventures.

We're very pleased with the progress our joint ventures are making including Azoff MSG and Tribeca. We believe they provide opportunity to create long-term value for our shareholders. So I think that we're looking at them more as long-term contributors at this point.

And as for the first part of your question, I'm not entirely clear what it is you're asking but I will say this. We like the big arena business a lot. It's been very successful for us both with Madison Square Garden and with the Forum in Los Angeles.

It's driven great revenue and profitability to our bottom line and they are good businesses because they are big markets and big audience capacities and you have the ability to attract top level acts and content into those arenas. So we continue to be bullish on the big arena strategy in additional markets domestically and internationally. And we'll be very thoughtful and strategic when it comes to developing those types of venues with a number of different potential financial models as to how we approach that development.

We also like -- we are looking strategically at likewise in big markets creating new and different types of venues. We see opportunities in the markets we're in and in markets we are not in to develop different venues and smaller venues in some circumstances.

Ryan Fiftal, Morgan Stanley.

Great, thank you. Good morning. Two if I may.

First, Doc, we're all trying to think through the potential returns on the venue expansion strategy and you pointed to the Form as a template for that. So I'm curious how replicable you think that is?

Specifically to me I think success there has been a function of two things. One is unmet demand in LA the you guys identified and two an ability to buy a property at a reasonable discount. And I guess on both of those I'm wondering if you think those were unique or if you see other similar opportunities out there?

Well, we see similar opportunities out there. I'll repeat some of what you said because I agree with what you said and I'll repeat myself in other answers.

We think the Forum works because LA is a big market, second-biggest market in the country. That was certainly one criteria and likewise as you said it was the right deal structure for that market. We found an opportunity with a venue that we could renovate rather than build and it had real brand value.

But we also saw other opportunities that you didn't mention. The Forum is an entertainment and music focused venue and because we have no sports tenants and no other anchor tenants it offers real enhanced date availability. But beyond that beyond just date availability and flexibility we also found with our booking muscle that we were able to actually increase the overall market in LA which is meaningful and we think we can replicate that in other markets.

The other strategic element to the Forum is there is a commitment to quality in the renovation at the Forum. The fan experience with acoustics and amenities, and the artist experience has created a real reinvention of the big arena for the music landscape. And we think all of those things are replicable.

It's hard to be specific. You have to be focused on each individual market, each individual opportunity in order to capitalize on that opportunity. But we believe that in other large markets opportunities exist and we can employ this model to be successful.

That's very helpful. Thank you.

And then if I could squeeze one more in either for Doc or Donna, can you help us better understand your air rights to the Garden, like maybe what they are rights you have, any major restrictions around them and if you see any path to monetize those? Thank you.

Well, we own the Madison Square Garden building. We own the property on which it's built and we own development rights including air rights associated with that property.

We can't speculate now on an estimated value of those rights. But we continue to look for ways to unlock the value of our air rights, though we have nothing specific to report in that regard on this call. We would always consider options that make strategic and financial sense for the Company in terms of our air rights.

David Joyce, Evercore ISI.

Two questions please. First I was wondering how we should think about any luxury taxes this year, how that might phase through given the new roster?

And then secondly I think you alluded to potentially adding some comedy events. I was just wondering if that's related to the Azoff venture and if there's anything else in your event pipeline that's tied to that JV? Thank you.

On the luxury tax issue we remain firmly committed to fielding championship caliber teams. Winning is good for our business. It supports many of our key revenue streams across the Company.

We're confident in the leadership of Phil Jackson, Steve Mills, Derek Fisher and their plan. Right now we are not a luxury tax payer and it's impossible to know and we're not going to speculate on whether we will or won't be a taxpayer going forward. We have to evaluate the risk and reward when faced with that decision in the future.

So there you go. In terms of I alluded to comedy events. Azoff MSG is deeply involved in the comedy business in a number of different capacities both as managers and as operators of an integrated comedy business.

So yes, the announcements that are forthcoming with respect to comedy generally do relate to the Azoff MSG venture whether it's through relationships or its overall strategy. But we see real potential for new events and new exciting developments in the world of comedy and our network of venues.

Thank you. I will now turn the floor back over to Ari Danes for any closing remarks.

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

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