Madison Square Garden Sports Corp (MSGS) 2016 Q3 法說會逐字稿

Good morning. My name is Christy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Madison Square Garden Company FY16 third quarter earnings on this 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.

Thank you, Christy. Good morning and welcome to the Madison Square Garden Company's FY16 third quarter earnings conference call.

Our President and CEO, Doc O'Connor, will begin this morning's call with a discussion of some of the Company's recent highlights. 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 a 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 consolidated and 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. For the fiscal third quarter we generated strong top line growth and, excluding the impact of a non-cash write-off, an increase in total Company AOCF both as compared to prior year third quarter. These solid underlying results reflect our continued success in delivering exceptional live experiences for our fans and partners.

As we have previously discussed, we see ample opportunity to continue growing our business both organically and through acquisition and development. We have been making progress on our venue extension -- expansion strategy, and we have engaged in a number of discussions one of which may come to fruition in the very near future.

Another important area of focus for our Company is growing our portfolio of owned and operated content. And a terrific example of this is our upcoming show the New York Spectacular starring the Radio City Rockettes. We are now in the midst of preparing for the show's June 15 debut, and as you may know, we shifted the timing of the show's run from spring to summer to take advantage of the approximately 30% increase in tourism in New York City during the summer months.

We are also using what we have learned from last year's spring spectacular to build on and enhance this year's show. In addition to reimagining the storyline, we look forward to giving our customers more of what they want to see. This show is a love letter to New York, its landscape, its landmarks and its icons including the Radio City Rockettes, the stars of the show.

As part of this effort we've brought on board a new creative team that includes three-time Emmy award winner, Mia Michaels as director and choreographer; and drama desk award winner Douglas Carter Beane as the show's writer. As you have seen from our results this morning, with the continued evolution of the show we have also incurred a write-off.

Donna will take you through this in greater detail, but I would note we are anticipating a successful summer run and that we continue to believe the show will become an annual New York tradition and a valuable property for the Company. I would now like to share some additional operating highlights starting first with our for sports teams.

The Rangers reached 101 points in the regular season and advanced to the play-offs for the sixth consecutive year and 10th time in the last 11 years. While we are disappointed about the Nicks not making the playoffs, the team had a 15 win improvement this past season. Looking ahead we think the addition of young star Kristaps Porzingis who won three Eastern Conference rookie of the month awards this past season along with All-Star Carmelo Anthony provides the team with solid building blocks for future seasons.

The Liberty, led by 2015 WNBA All-Star Tina Charles and league rookie of the year runner-up Kiah Stokes, had a 2015 regular-season that was the best in team history. And are now gearing up for the start of their 20th season with the team's home opener on May 15 against the Dallas wings.

Meanwhile our portfolio of venues continue to play host to a diverse array of artists and events with highlights for the third quarter including the Nickelodeon Kids' choice awards at the forum for the second consecutive year; Bruce Springsteen for two sold-out nights at the Garden; 140th annual Westminster Kennel Club dog show; the BNP Paribas tennis showdown featuring Serena Williams and Caroline Wozniacki; and the Big East basketball championship for the 34th consecutive year which featured the Villanova Wildcats who went on to win the NCAA championship.

Moving into the fourth quarter, last month we hosted several special events including the I Heart Radio Music Awards at the forum. We were also honored to work with our partner, Tribeca, on this year's film festival as the Beacon Theatre; once again served as the backdrop for festival events including the festival's anniversary screening of the film Taxi Driver.

We also welcomed Governor Andrew Cuomo and the USC to the Garden for a landmark bill signing to legalize professional mixed martial arts in New York. The first USC event in the states will take place this November at the world most famous arena, and we look forward to these world-class athletes becoming part of the Garden's story history.

Earlier this week Pearl Jam took to the Garden stage for two sold-out nights, and in the coming weeks we look forward to hosting Billy Joel's popular Garden Residency which is led to 36 sold-out shows through December 2016. Our latest residency with Jerry Seinfeld at the Beacon, and comedian Amy Schumer, Sting and Peter Gabriel as well as a multi-show run by The Cure all at the Garden.

We also recently announced on August 28, the Garden will host the MTV video music awards for the first time ever. Madison Square Garden is known for inspiring the greatest performance to give their greatest performances, and we have no doubt that the MTV VMAs, celebrated for this exciting and unexpected mix of music and entertainment, will be an unforgettable night.

And this special event will be followed by six more memorable nights in September as Adele plays the Garden as part of her 2016 tour. In summary, we remain focused on delivering excellence across our operations while executing our plan for growth and long-term value creation. With that, I'll now turn the call over to Donna, who will take you through our financial results.

Thank you, Doc, and good morning, everyone. As you know, the Madison Square Garden Company completed its spin-off from MSG Networks on September 30, 2015. Results for the FY16 third quarter reflects MSG's financial results on a standalone basis, including the Company's post-spin cost structure and actual corporate general and administrative cost.

FY15 third quarter results reflect the allocation of corporate general and administrative cost based on accounting requirements for the preparation of carve out financial statements. As a result, prior-year third quarter results do not reflect all of the actual expenses that the Company would have incurred had it been a standalone public Company for that quarter.

With that said, now let's go through our reported results as compared to the prior-year period. For the FY16 third quarter, the Company generated total revenue of $336.3 million an increase of 12% and an AOCF loss of $23.8 million. Excluding the impact of a $41.8 million non-cash write-off which I will discuss in greater detail shortly, AOCF would have been positive $18.1 million an increase of 8% as compared to the prior-year quarter.

At MSG Entertainment, revenues of $73.2 million increased 19%. This increase was driven by higher event related revenues at all of our Company venues led by The Garden and Radio City Music Hall as well as higher Christmas spectacular revenue and sponsorship signage and suite rental fee revenues. As a reminder, 12 Radio City Christmas Spectacular performances played during the FY16 third quarter versus none during the prior year third quarter.

Partially offsetting the overall increase in revenue was the impact from our decision to shift timing of the New York spectacular from spring to summer. Last year the show debuted on March 12 with 18 Shows taking place during the fiscal third quarter. As Doc stated earlier this year the show's run will start on June 15.

On a reported basis third quarter AOCF at MSG Entertainment was a loss of $53.4 million. Excluding the impact of the $41.8 million write-off the AOCF loss at entertainment would have been $11.6 million an increase of 4% versus the prior-year quarter. This small underlying increase in the AOCF loss at the entertainment segment reflects higher SG&A expense and to a lesser extent higher direct operating expenses mostly offset by strong revenue growth.

Let me spend a few moments on the write-off. As we have talked about we were pleased with last year's spring spectacular and have taken what we learned from the show and made some important changes and enhancements to this year's production including a re-imagined storyline and an expanded role for the Rockettes.

This evolution in the production resulted in a number prior scenes no longer being included on the show, and, therefore, we wrote off any deferred production costs related to those scenes. I would note that this write-off is based on our decision to make creative changes to the production and is not driven by last year's results or financial projections. As Doc stated we are looking forward to a successful summer run and continue to believe the New York spectacular will become an annual New York tradition and a valuable property for the Company.

At MSG Sports third quarter revenues of $262.9 million increased 10%. This increase was primarily due to higher local broadcast rights fees, due to the impact of the new long-term media rights agreements for the Knicks and Rangers with MSG Networks. In addition, segment revenues increased due to the new advertising sales representation agreement with MSG Networks and higher professional sports teams sponsorship, signage and ticket related revenues.

Excluding the impact of the new long-term media rights and advertising sales representation agreement, MSG Sports revenues would have increased 2% as compared to the prior-year period. MSG Sports AOCF was $42.5 million increased by 37%. This was primarily due to the increase in revenues and to a lesser extent a decrease in direct operating expenses partially offset by higher SG&A expenses.

The small decrease in direct operating expenses was primarily due to lower net provisions for certain team personnel transactions and lower event related expenses associated with other live sporting events. This was partially offset by higher net provisions for NBA and NHL revenue sharing expense and NBA luxury tax, team personnel compensation costs and other team operating expenses.

For both the MSG Entertainment and MSG Sports segments the increase in SG&A includes the impact of higher corporate general and administrative costs. We would again note for both segments SG&A expense for the prior year third quarter do not reflect all of the actual expenses that the Company would have incurred had it been a standalone public Company during that period.

Other AOCF which primarily includes unallocated corporate G&A expenses increased by $9.8 million to a loss of $12.8 million in the FY16 third quarter. This mainly reflects higher professional fees related to potential growth opportunities for the Company as well as an increase in New York franchise tax, a result of a change in New York State corporate tax legislation.

Turning now to a few housekeeping items for our fiscal fourth-quarter, I would remind you that during last year's fourth quarter are Sports segments benefited from the Ranger play-off run to the Eastern Conference Finals which included 11 home playoff games as compared to 2 home playoff games this year. The prior-year fourth-quarter also benefit from a shift in the timing of certain player compensation costs which were accelerated from the fourth quarter to the third quarter.

In addition our Entertainment segment benefited in the prior-year fourth-quarter from a non-recurring insurance recovery of $3.6 million related to Christmas spectacular production. Turning to our balance sheet as of March 31, total unrestricted cash and cash equivalents was approximately $1.45 billion.

In terms of the Company's share repurchase program, during our fiscal third-quarter we repurchased over 418,000 shares for $62.3 million at an average price of about $149 per share. This brings the total under our current authorization to nearly 519,000 shares for $78 million or an average price of about $151 per share. This amount represents about 2.5% of Class A shares outstanding.

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

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

(Operator Instructions)

Ryan Fiftal, Morgan Stanley.

Thank you. Good morning. I wanted to ask on the write-down, last fall you laid out your growth strategy, and one of the four pillars was to expand owned IP and expand into new content. The new Rockettes show has obviously been the flagship example of, that clearly facing challenges there culminating in this write-down today.

Given the challenges you have seen there over the last couple of years, does that give you any pause on the broader strategy? Does it influence your thoughts on risk tolerance for investing in new IP or any other learnings you have from that?

I think we have a great deal of learnings from this process, but I do not believe that it changes our belief that our content strategy involves a great long-term asset play. Any creative endeavor of any kind, any content play of any kind has inherent risks. Just ask any of our colleagues who make movies or television shows or Broadway shows.

But when you create something that works and something that excites, entertains or transports an audience, you create incredible value. Look at the value of the 83-year-old Christmas spectacular franchise and the Rockettes brand to our Company. Is there some risk in trying to create a second Rockettes franchise? Absolutely.

But we do not take that risk lightly in any way whatsoever. Does it take time and experimentation to develop a sustaining show in a perennial event? Definitely. Is it worth the risk? Undeniably. Absolutely. We feel we have given this show its best opportunity for success.

We put together a fantastic creative team starting with our new Executive Vice President of productions, Colin Ingram; three-time Emmy award-winning director choreographer Mia Michaels, and drama desk winning writer Doug Carter Beane. I had the pleasure of week ago of witnessing a rehearsal, and we are very excited about what we have. From a creative -- creativity and a quality perspective we think we have a winner with this new show.

We have moved the show to summer to try to capitalize on the huge increase in tourism in the city. A 30% increase is substantial. Understanding that Radio City Music Hall and the experience of that incredible and one of a kind theater are the types of experiences that people traveling to this city want to access. We think the market is there as well as evidenced by the success of last year's spring show, 300,000 tickets sold.

And we have improved our marketing internally with great talent to ensure that we reach that marketplace. We feel we have a real opportunity here with this new show to build a very valuable long-running and sustaining franchise, a better date, a better product, and a better team to execute.

As we have said recently, this is part of a larger strategy to grow our content business, and if you look at the M&A landscape even in the last few days, it continues to highlight the long-term value of original content and the live experience.

That is very fair. Just one clarification on -- you mention there was an opportunity potentially in the near-term. I am sorry if I missed it. Did you indicate if that was a venue acquisition or any other type of opportunity? Any color there would be helpful. Thank you.

I was referring specifically to our venue expansion strategy.

Brandon Ross, BTIG.

Good morning. Thanks for taking the question. First a follow-up on the $42 million write-off for Donna. Can you tell us how much cash spend you are going to have to outlay to rebuild the elements that you are writing down of the show, and how much cash you have spent in total on the development of the spectacular spring, now summer I guess?

And then secondly, I think the RFPs for the Penn station renovation where due a few weeks ago. Have you learned anything since that time, any clarity on your ability to sell the theater at MSG or potentially unlock some value from your air rights? Thanks.

I am not sure this is in the order that you gave them but we in total, over the years, we have spent approximately $77 million building up to the New York spring spectacular show. Of that amount about $7 million has been amortized and at December 31, we had $70 million of deferred production costs that remained on our books. We have taken the best of what was created during that process, and we have made some enhancements.

We've reimagined the storyline. As Doc mentioned we have expanded the role the Rockettes will play. There's obviously some additional investment required for those enhancements, but we believe it is being done in a very efficient and effective way to add the most value.

On the second part of the question, the RFP. The RFP deadline was April 22. And we are still awaiting information and updates from the Governor's office on those proposals. We have no specifics that this time.

As the Governor said, from the outset of this, there are a number of different possibilities on Penn station renovation. Some of them include us and some of them do not. Like everybody else, we are waiting to hear the results of those proposals. And associated with that with respect to our air rights again, we do not have any new information on how this plan might help us monetize or give us an opportunity to monetize our air rights.

Thank you for the questions, Brandon. Christy, we will take the next caller.

Alexia Quadrani, JPMorgan.

Thank you. More broadly on your venue strategy sort of referring back to earlier comments of closing in on something. I guess what do you feel are the primary benefits of having scale in the space, or is it more about cost synergies and the ability to scale corporate costs and negotiate lower vendor fees, et cetera? Or is it the opportunity more on the revenue side, being able to drive higher sponsorship dollars and bringing in more acts?

We think all of the above. As I have said before in previous calls, we think that scale in the venue business matters. As you mentioned, it does give us the ability to leverage our fixed costs across increased revenue and number of venues. It also allows us to leverage our capabilities across different venues.

But it also gives us the ability to leverage -- it gives us greater leverage to attract more high-end premium talent and shows. When you increase the number of venues and you increase the number of shows that happens under those roofs, you increase the number of people that you touch and therefore the number of eyeballs that we capture all of which translates into more potential sponsorship revenue for us.

It gives us greater ability to grow our content business and to control our own destiny better. New buildings, if done right, and we have a history of doing them right, create great long-term asset value. The Forum is a perfect example of that. Yes, we believe that a greater scale in the venue business is a great strategy for us to pursue, and we will continue to pursue our venue expansion strategy.

Would you consider a venue which specialized in conventions or trade shows or non-entertainment or do you think you will stay with your core expertise in entertainment sports event area?

We will stay with our core expertise of sports and entertainment, but our new venues will likely focus on and be directed toward entertainment only venues. The exhibition business is not in our current plan.

Thank you very much.

David Miller, Topeka Capital Markets.

Hello guys. Donna, just a question on the buyback, appreciate the clarity on the $78 million so far. I am just wondering, my understanding was, when you got the separation from the mother Company and you had the $1.47 billion that was transferred over, that $525 million would be used to buy back stock.

And I'm just wondering why the pace hasn't increased since -- there is a just a massive disconnect between the intrinsic value of the Company and the market price of the stock. So I am wondering why you have not been more aggressive so far this year, and should we -- can we give any kind of timeline -- can you give any kind of timeline on when you would complete the $525 million? Thank you very much.

You are completely correct. When we did the spin we earmarked $525 million for the repurchase of shares, and we do remain committed to that program. We are being thoughtful and diligent about the way we are repurchasing shares. I think that is evidenced by our average share repurchase price which is about $150 -- $151 per share.

We are pleased with the way we have executed on our repurchase program. We have a lot of confidence in the value of our assets and the growth of the Company, and we plan to continue our strategy which is to be opportunistic about the way we do our repurchases and diligent in our execution.

Thanks for the question, David. Christy, we will take the next caller.

Michael Morris, Guggenheim Securities.

Thank you and good morning, guys. A couple of questions on advertising and sponsorships. First, advertisers are clearly dealing with a more fragmented marketplace in television and online. In venue sponsorships seems to be immune or offer some stability there.

Do you expect the revenue on that side of the business or demand for that to grow at a faster rate than overall industry advertising growth, and how do you capture that? Can you share any plans for what you can do incrementally from here that we would ultimately see come through the financials?

And then second, there has been a recent announcement by NBA that you will be able to sell jersey sponsorships. Can you talk about your thoughts on what that means for the business and maybe what type of partner you would be looking for? Thanks.

Okay. On the first part, we have a terrific portfolio of globally recognized Marquis and signature partners. I cannot comment on the pace of growth relative to the ad market, but I can say we think that there is a lot of opportunity to expand our partnerships first off as they come up for renewal, and we are very optimistic about our prospects here.

Most of our signature partners and Marquis partners came aboard as part of the Garden transformation, and we think, and they will say, they have seen real value in partnering with us. For this reason we are optimistic that the significant sponsorship revenue stream we created as part of the transformation is not only sustainable, but we can grow it going forward.

We are confident about that based on our conversations with those same partners. We are very confident we will see growth there. We hope to share more on that with you shortly.

There are other ways of growing our sponsorship portfolio. There still remain unsold categories for us to pursue. We can create and increase our premium inventory, and we are looking with our existing partners and with new partners on how to increase our premium inventory in that way. Also as we -- as I alluded to earlier with venue expansion new opportunities are created with every new venue that comes online.

On the jersey sponsorship opportunity, the league only recently approved the sale of jersey sponsorships, and I will remind you that sponsorship starts with the 2017, 2018 basketball season. So it is early days yet. We are still evaluating the size and scale of the opportunity and what potential partners might be a fit for that if we -- if and when we pursue.

Great. Thanks, Doc.

John Janedis, Jefferies.

Hi, this is actually Mike Russo on for John. Doc, with no new -- with no festivals announced for the summer of calendar 2016, how should we think about your interest in pursuing any new opportunity going forward and additionally are you supporting anything outside of New York? Thank you.

We are evaluating the Festival business and our potential place in it. I will remind you that we are in the Festival business because of our partnership with Tribeca enterprises and the Tribeca Film Festival. They just recently completed a successful run of that Festival, and we are looking for ways to expand their portfolio of events as well as selectively and cautiously growing a Festival business.

But we are not only looking at the Festival business as solely a large-scale destination music events. We are looking at those to be sure, but we are looking at different types of festivals. We are looking at different sizes of festivals, and we are indeed to your last question, looking at new markets. We are evaluating various ways of entering more robustly this business, and we haven't found the right fit to this moment, but we are constantly looking at new opportunities.

Thanks, Mike. Christy, we will take the next caller.

David Joyce, Evercore ISI.

A few questions, a couple of housekeeping. Could you please break out the amount of team personnel compensation expenses? And secondly on CapEx seemed bit elevated there. I was wondering what you are investing in there. Is anything from the New York spectacular recognized in CapEx? And then I have a couple of others.

Sure. We have this quarter we had team personnel transactions of approximately $6.6 million. In terms of CapEx, the -- no, there is not real spending associated with the New York spectacular in our CapEx. I guess when you're talking about CapEx, are you talking about our year-to-date or our quarter?

Just trying to back into the quarter.

Okay. We did have CapEx in the quarter. It really was not elevated. I think year-to-date we were a little bit higher than last year. Earlier in the year, but this quarter we did have some expenditures related to some facility improvements, et cetera, but it was not anything significant. We had about $4 million I think in the quarter.

And then could you remind us how the economics work for the Rangers play-offs? What revenue do you share from the home games with the league and with the other team and vice versa for away games? And is the contribution still around 50% or so?

I think it is a good rule of thumb is that the first round games are just over $1 million in contribution to us. Then the third game amounts for each home game gets significantly higher as you move into the later rounds. Last year the Rangers had 11 home games in the fourth quarter, and this year we only have two. Hopefully that gives you some sense of scale.

Thanks. Finally, if you could discuss the Bowery Presents which perhaps being acquired by AEG. Is that something that would be of interest to your business model, or do you have to stay away from artist management in case there are any non-competes? Thanks.

We are looking at opportunities in the marketplace constantly. We are seeing numerous opportunities and great potential deal flow. But we look at these opportunities through the lens of strategic value and long-term asset value.

On the Bowery specifically, we were aware of the Bowery opportunity. We did not feel it met our criteria. The Bowery like other opportunities that -- and a number of the opportunities that we have seen, we concluded it did not fit our strategy or our threshold for long-term asset value. We did not pursue on those bases.

Thanks, David. Christy, we will take the next caller.

Ben Mogil, Stifel.

Thanks for taking my question. Mine are more about the broadcasting side, and I realize that obviously the RSN is on the others out of the house, and that it is not your business. But when you're a team owner and you see these protracted disputes that you have seen in New York around Comcast and obviously LA in year three now.

As an owner, obviously this is not what you want. Can you talk about what you think is going on in the marketplace as owners not just you but the league in general, what they can kind of do to smooth over these issues?

We really have no comment on those negotiations and potential conflicts. Not in our control and not something that we're going to comment on in this call.

Okay. Fair enough. On sort of the larger -- when you look at the deals that the NFL has done. They have obviously been the most proactive in terms of slicing up broadcast deals in many, many different ways. When you look as an owner, obviously for the NBA and the NHL, do you see a lot of not untapped opportunity, but do you see a lot of opportunity where going forward there are increment rights, incremental packages that can be sold, maybe talk very, very broadly about what kind of options are out there if you will in terms of greenfield opportunities.

I am not sure I fully understand your question, but we have long-term media deals with our media partners, and we are very happy with the deals that exist.

Yes, so I (technical difficulty)

Christy, we have time for one last caller.

Amy Yong, Macquarie.

This is Rachel Arrowood on for Amy. As you look for growth opportunities going forward, is ticketing an area you would be interested in, and aside from that what characteristics would you look for in any potential opportunities?

We have an agreement with Ticketmaster, and it is a partnership that we are quite happy with. Currently we are not evaluating any new business opportunities in the area of ticketing and do not imagine that we will be acting on any potential opportunities in the near future.

Thank you. With that, I will 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 year-end conference call. Have a good day.

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