Madison Square Garden Sports Corp (MSGS) 2017 Q3 法說會逐字稿

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's Fiscal 2017 Third Quarter Earnings 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.

Thanks, Christie. Good morning, and welcome to The Madison Square Garden Company's Fiscal 2017 Third Quarter Earnings Conference Call. Our President and CEO, Doc O'Connor, 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 Page 4 of today's earnings release, we provide consolidated statements of operations and a reconciliation of operating income to adjusted 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 2017 third quarter, we again generated strong top line and adjusted operating income growth, a reflection of our continued ability to deliver exceptional live experiences for our customers and partners.

As we look ahead, we see compelling opportunity to drive growth by more efficiently and effectively harnessing the strength of our live sports and entertainment assets and brands. Improving our live entertainment experience by attracting not only more events but also higher-quality events remains a priority and benefits the company in several ways. This includes enhancing the value we deliver to our customers, marketing partners and suite holders as well as enabling operational efficiencies, such as leveraging our fixed cost base across an increasing number of events.

To lead this effort going forward, we recently named Darren Pfeffer , Executive Vice President of MSG Live. Darren will join us after spending the last 2 decades at media and entertainment company iHeartMedia. At MSG, Darren will be tasked with exploring new opportunities to develop signature events, artist residencies and unique experiences for our customers while building upon the success we've had in attracting a wide variety of premium entertainment events to our venues.

For our fiscal third quarter, we had particular success in bringing popular family shows to a number of our venues including The Forum, The Theater at Madison Square Garden and The Chicago Theater while we once again benefited from an increase in the overall number of concerts held at our venues. In fact, we've increased the overall number of concerts every quarter since becoming a stand-alone public company, reflecting a healthy concert industry, the strength of our venues and markets and our continued emphasis on growing our multi-night and multi-venue engagements.

In our third quarter, our multi-night shows, which increased 45% year-over-year, represented nearly half of all concerts held at our venues and included the Red Hot Chili Peppers, The Lumineers and Eric Clapton as well as our resident artists, Billy Joel and Jerry Seinfeld, who recently announced that he has extended his sold-out residency at the Beacon Theatre through December 2017.

We also had an over 20% increase in multi-venue shows, hosting artists at more than one of our venues in New York, Los Angeles, Chicago and Boston. For the third quarter, highlights included Ariana Grande, Wilco, Kings of Leon and Panic! At The Disco.

In addition to strong entertainment bookings this past quarter, we hosted several marquee sporting events, Including the NCAA Basketball East Regional Finals, which returned to The Garden for the second time in 4 years. The world's most famous arena also welcomed the BNP Paribas Showdown for the 10th year in a row, championship boxing as Gennady Golovkin successfully defended his championship titles against Daniel Jacobs and the BIG EAST Tournament for the 35th consecutive year.

And last month, we are proud to have Radio City Music Hall host the opening and closing events at the Tribeca Film Festival, which, for its 16th edition, included a new experience, Tribeca Games, which brought together New York City's passionate gaming community to talk about the current and future state of video games.

Another priority for the company has been to grow our portfolio of premium live experiences through adjacencies that offer strong potential and fit with our core competencies. Last year, we purchased a controlling stake in Boston Calling Events, which owns and operates New England's premier music festival, Boston Calling. The festival will take place this month, over Memorial Day weekend, at the Harvard Athletic Complex, a new location that significantly expands the festival's capacity and content offerings. Tool, Mumford & Sons and Chance the Rapper will headline this 3-day event, which, this year, will welcome 45 music acts. The festival will also feature a brand-new comedy experience with 13 performances by standout comics.

For this year's event, Boston Calling has attracted a strong slate of sponsors, which include MSG signature partner, Delta Airlines, along with Miller Lite, Samuel Adams, XFINITY, Subaru of New England, Dark Horse Wine, KIND and 47 Brand. We look forward to the festival, which will be a great event for a great city.

Another key investment for the company is our acquisition of a majority interest in TAO Group. As we discussed last quarter, we believe this live entertainment dining and night life company has meaningful growth potential as the company pursues additional venue opportunities, both domestically and internationally. TAO Group kicked off its venue expansion plans, opening 4 impressive new venues in Los Angeles over the last 2 months with a fifth venue on the way, which will bring its current total to 24. This marks TAO Groups first foray into the Los Angeles market with a live entertainment and dining hub located in L.A. that is now home to TAO, Avenue, Beauty and Essex and a new restaurant concept, Luchini Pizzeria & Bar as well as The Highlight Room at the Dream Hotel, which will open shortly.

There has been significant excitement around these new venues as TAO Group proves once again that no one does premium hospitality experiences better. TAO Group is currently in contract to open 9 more venues in New York, Chicago and Singapore, which will bring its total to 33. In addition to benefiting from TAO Group's expansion plans, we are continuing to explore other opportunities, including the creation of premium packaging opportunities using both TAO Group and MSG venues in markets where we overlap. We also look forward to utilizing their expertise in premium hospitality to create new and innovative experiences that can be integrated across MSG's portfolio of live offerings.

This will be especially important as we continue to pursue our venue expansion plans, which is the centerpiece of our investment strategy. As you know, last year, we announced that we are partnering with Las Vegas Sands to bring a groundbreaking new venue to Las Vegas. As we continue to make progress on our plans, we are confident that we will create an iconic structure that will transform the Las Vegas skyline.

Our goal is to employ technologies that redefine the limits of connectivity, video, acoustics and content distribution. Through these next-generation technologies, we'll create entirely new and immersive experiences that enable a much broader community of people to engage and connect in ways they never thought possible, truly transforming how we think about live experiences. And as we move forward, this will become our motto for the venue of the future, which we intend to replicate in other markets.

Turning to our sports franchises. We are obviously disappointed with the outcome of the next season and continue to work towards building a stronger franchise for the benefit of the teams' loyal fan base, which continue to fill The Garden all season long.

The Rangers are also known for their passionate and loyal fans, who, this season, watched the team qualify for the playoffs for the 11th time in the last 12 years. After an exciting sixth game first-round series against the Montréal Canadiens, the Rangers are now in the midst of a second-round series against the Ottawa Senators.

The Liberty, led by 2-time Olympic gold medalist Tina Charles, returns following 2 consecutive years of finishing at the top of the Eastern Conference and is now gearing up for their 21st season with the team's home opener on May 13, against the San Antonio Stars.

The unique value of our live professional sports content was highlighted this quarter by a significant overall increase in media rights revenues. With another 18 years to go in our agreements with MSG Networks, the NBA's national TV deal running through the '24-'25 season and the NHL's national deal running through the '20-'21 season, these media rights agreements represent a significant predictable and growing source of revenue for our company.

While third quarter growth at our sports segment was led by the increase in media rights revenue, we also generated broad-based growth across all other sports revenue lines, most notably in tickets, sponsorship and signage. With the Knicks' and Rangers' regular seasons now complete, we are pleased with the results of our new ticketing policies as we were able to reduce full season subscriptions and increase sales of partial plans as well as group and individual tickets while our teams played to at or near capacity crowds at The Garden all season long. We look forward to building on this success as we plan to thoughtfully increase the sale of smaller ticket packages again next season, which should continue to positively impact revenues while enabling us to further broaden our fan base.

On a sponsorship and signage front, we delivered solid growth for the third quarter and remain on track for another record year for our marketing partnership group. As we discussed previously, we've gotten off to a terrific start in renewing our signature marketing partnerships with expanded multiyear deals with Lexus and Anheuser-Busch. I'm pleased to report that we're making progress towards new agreements with 2 additional signature partners and hope to have more to say in the months ahead.

We also continue to make progress on new agreements for those events, Lexus and Signature Level Suite products that come up for renewal in fiscal 2018 as we work towards new multiyear deals that have solid built-in annual escalators.

In summary, we are pleased with how fiscal 2017 is unfolding with regard to both the growth of our core operations and the strategic expansion of our live experience offerings and remain confident that the company is well positioned to drive attractive long-term growth and asset value creation for our shareholders.

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. I'd like to start by going through our fiscal 2017 third quarter results as compared to the prior year period. For the fiscal 2017 third quarter, the company generated total revenues of $386 million, an increase of 15%, and adjusted operating income of $43.6 million as compared to an adjusted operating loss of $23.8 million in the year ago quarter. Excluding the impact of $15.5 million in nonrecurring NHL expansion fee revenue in the current year quarter as well as a $41.8 million write-off recorded in the year ago quarter, the company generated $370.5 million in revenue, an increase of 10%; and AOI of $28.1 million, an increase of 56%.

At MSG Entertainment, third quarter revenues were $77.3 million, an increase of 6%. This improvement was primarily due to higher overall event-related revenues, led by an increase in the number of events held at The Theater at Madison Square Garden, The Chicago Theatre and the Forum. Excluding the impact of the $41.8 million write-off in the year ago quarter, MSG Entertainment's fiscal 2017 third quarter adjusted operating loss of $1.5 million improved by $10.1 million. This improvement was primarily due to higher overall event-related contribution at our venues, lower SG&A expense and higher contribution from the Christmas Spectacular production, as the decrease in cost for the show outpaced a slight revenue decline due to fewer scheduled shows in the quarter.

At MSG Sports, third quarter revenues were $308.7 million, an increase of 17% or up 12%, excluding the $15.5 million in nonrecurring NHL expansion fee revenue. The 12% increase was led by higher lead distributions, which reflected the impact of the NBA's new national media rights deals. We also delivered higher professional sports teams ticket-related revenue, mainly due to higher average per game revenue. The increase in average per game revenue reflects higher average season ticket prices and the impact of the change in mix due to fewer full season packages and more partial season plans as well as group and individual tickets.

In addition, we experienced an increase in sponsorship and signage revenues as well as an increase in event-related revenues from other live sporting events, which reflects a favorable mix of events. This quarter's results included multiple successful marquee sporting events such as the NCAA East Regional Finals, the BIG EAST Tournament, Professional Bull Riders and the Golovkin versus Jacobs fight. Lastly, we also saw growth in other MSG Sports revenue lines, including local media rights fees from MSG Networks and professional sports teams' food, beverage and merchandise sales.

MSG Sports' third quarter adjusted operating income of $55.9 million increased 55% on a reported basis or up 19%, excluding the impact of NHL expansion fee revenue. The increase in AOI was primarily due to higher revenues, partially offset by an increase in direct operating expenses. The increase in direct operating expenses was led by higher team personnel compensation.

As a reminder, in connection with the NBA's new national media rights deals, the [new] salary cap increased significantly this season. The increase in direct operating expenses also reflects higher net provisions for NBA and NHL revenue sharing expense and higher event-related expenses associated with other live sporting events, partially offset by a decrease in net provisions for team personnel transactions.

Lastly, other adjusted operating loss increased by $8 million to a loss of $20.8 million in the fiscal 2017 third quarter. This increase was primarily due to higher employee compensation and related benefits and higher professional fees, including costs related to the TAO Group transaction, partially offset by a lower provision for the company's New York state and city capital tax.

Turning to TAO Group. As a reminder, we will consolidate TAO Group's operating results in our financial statements on a 1-quarter lag basis. Since we completed our acquisition of TAO Group on January 31, our fiscal fourth quarter will reflect TAO Group's financial results for the month of February and March. Further, TAO's results will reflect the impact of purchase accounting adjustments that include the recording of amortizable intangible assets and inventory at a significantly higher value than its original cost.

Turning to our balance sheet. As of March 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.

In terms of the company's share repurchase program, during the third quarter, we repurchased approximately 421,000 shares for approximately $76 million at an average price of about $180 per share. This brings the total repurchases under our current authorization to just under 1.5 million shares or approximately $254 million at an average price of about $168 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.

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

(Operator Instructions) And your first question is from David Karnovsky of JP Morgan.

Billboard had an article recently claiming that the STAPLES Center was attempting to aggressively win back acts that had gone over to the Forum. Are you seeing a step-up in competition from the STAPLES Center? And then since AEG also manages the Barclays Center, has this translated overall into the New York market?

I wouldn't say that we've seen a step-up in competition overall. I think the competition in the marketplaces, L.A. and New York, have always been there and continue to be there. The fact is we welcome competition. We think competition makes us better at our jobs. Those 2 venues have been in the 2 most competitive markets in the U.S. from the very beginning and we are seeing record results in both venues. So we are not concerned with the competition, we welcome the competition and both of those venues are thriving in the face of that competition.

Okay. And then Doc, I think SportsBusiness Journal recently quoted you saying that eSports was an area of focus for you. I know you probably can't get into any specific potential deals, but can you just give a high-level overview of how you think eSports could potentially fit with Madison Square Garden?

Well, we see eSports as a growing opportunity in the live events space, and it remains of significant interest to us and we continue to explore opportunities to enhance our exposure to the growing category. As you may have seen, NBA 2K eSports league today was announced and there are 17 NBA teams participating in that league, including us with the Knicks. And that season is set to debut in 2018. We think that the league is an excellent opportunity to engage the eSports community and to help grow the game of basketball. And we're excited to be involved with the NBA on the development of the league. But we are also aggressively looking into opportunities in the space. We had great success with a number of live events at both the Forum and The Garden with League of Legends. So we see a lot of opportunity in the space, and we're aggressively pursuing opportunities in the space.

Your next question is from Brandon Ross with BTIG.

Two questions. The first one, you have had some successful ticketing initiatives, such as pulling back tickets from brokers, which have been a growth driver for you guys this year. Thinking more about future ticketing, does it make sense to have continued exclusivity in the retailing of your tickets going forward? And Amazon is pushing its ticketing initiative into the U.S. Would you like to see them sell your tickets? And then just on the buyback, a pretty strong quarter there on -- with the 10b5. Is that 10b5 still in place now?

I'll let Donna to handle the 10b5 question. On your question regarding ticketing, we have a long-standing and beneficial partnership with Ticketmaster, which we're very happy with. That said, we are always -- we always have an eye on innovations in ticketing that can provide us with more efficient direct connection to our customers and also one that improves the customer experience. So we're continuing to monitor various companies and developments in the ticketing space, all in an effort to drive a better customer experience as well as revenue and profitability. And that effort will be -- will continue where we're engaging with Amazon and many other ticketing platforms on an ongoing basis.

Yes, as for share repurchase, we did have a good quarter. We made good progress on our authorization. Our 10b5-1 program expires tomorrow and we're currently assessing how to best execute on our buyback program going forward. As I said before, we remain committed to our program and that reflects the confidence in our growth and our long-term asset value. So we're looking at every opportunity there.

Thanks, Brendan.

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

I had a question on the venue expansion strategy. The press has reported that the Oak View Group has been on Seattle's -- I think it's the KeyBank arena redevelopment opportunity. And I was just wondering if you'd be able to share with us how this might fit within your venue expansion strategy and what MSG's potential involvement could be in this initiative if Oak View is successful.

Well, that bid is being led by Oak View, not by MSG. So we fully support OVG and their development objectives with the Key arena redevelopment. And we think that, that actually is the most compelling and realistic plan to transform that arena into a viable and thriving entertainment destination in Seattle. And we think that the leadership at OVG, namely Tim Leiweke and Irving Azoff, are some of the most talented and capable executives to go execute that plan. So we fully support what they're doing, but they are leading that bid and that process and we await the city's response.

I had a follow-up, I guess, on your festival strategy on Boston Calling. It's coming up in a few weeks. I was hoping if you could just give us a little more color in terms of what's changed with the festival since you bought it -- bought into it and how we should think about its effect to the entertainment segment P&L in the fiscal fourth quarter. For example, I know you talked about capacity increases. I mean, roughly how much incremental capacity does this year's festival feature? Has the cost structure changed materially given the content enhancements?

Well, everything is -- basically everything is new with the Boston Calling event this year. And so we're looking at it as really the festival's first year. And we're very happy and feel good about the -- where ticket sales are today and about the lineup that they've put together, and we feel very good about the critical and financial success of the first year of this festival overall. What has changed is, most importantly, is the location. They have an incredible location in the Harvard athletic field, which dramatically increases the capacity opportunities we have. We have far more content offerings with the festival. So we believe that this is a complete change. And as I said, this is, in many ways, the first year of the festival. This is also the first year that we've had the synergies with MSG, particularly in the sponsorship area. We've seen a nice uptick in sponsorship given the synergies there and we've had success selling sponsorships with our help. So we think that with the new location, new content and new support provided by MSG, we think there's going to be significant upside with this festival, and we look forward to sharing more specifics in the coming months.

Your next question comes from John Janedis with Jefferies.

This is Mike Russo on for John. Just real quick, in February, you announced plans to put the New York Spectacular on hiatus until 2018. Can you speak to your motivation in delaying the production? And what sort of incremental investment are required ahead of the re-release?

Okay. We felt that last year's production was successful on many fronts, but we felt that there was additional work needed on the production itself. And we felt that we didn't have the time to do that work to make the show better before the start of this year's show. We just felt we ran out of time. So that was the rationale behind the hiatus. We are currently reviewing the production, both from a creative content standpoint and the timing of the show, and we'll have more to say about that in the coming months. We're not going to comment on the cost associated with that. As I said, we're currently reviewing all elements of the show, both creative and financial, and we'll have more to say about that coming up.

Got you. And in the interim, what are your plans for this calendar year to replace the Spectacular with other concerts or shows?

Well, the booking lead time is not optimal. It's short given the timing of this decision. But in spite of that, we're booking the hall with a few events, and we're aggressively looking to, as the calendar year unfolds, aggressively looking to fill further events down the road.

Your next question comes from David Miller with Loop Capital Markets.

Doc, I just wanted to ask you about any progress you're making on establishing a residency concert in the Los Angeles market. Obviously, these residencies, particularly Billy Joel, Seinfeld, et cetera, have done very well by you in the New York market. It would seem to me that Los Angeles is very similar in terms of the talent that might be available. My guess in asking the question is that I'm probably not thinking about complexities in establishing something like this. So just want to understand any roadblocks from your side with regard to establishing a Los Angeles residency?

There aren't any specific roadblocks to establishing a residency in Los Angeles other than the right fit, the right artist, the right opportunities in the marketplace. We're looking aggressively into the possibilities of a residency in Los Angeles, but I would also say that residencies take different forms. The Seinfeld and Billy Joel residencies are one type of residency. But with the 13 shows that we've announced with Phish this summer at the Arena, we consider that a residency as well. And there have been many multi-night, long-standing shows in Los Angeles, and we hope to have some announcements on that front in the not-too-distant future that will look similar to our Phish residency. So it's -- residencies are something that we innovated and that we are continuing to look to innovate and create in new markets. I would also say that as we look forward towards Las Vegas that residencies will play a very important role in the utilization of that venue. So it's something we have an eye on. We have nothing specific to report at this moment in time in Los Angeles, but we hope to have something to say in the not-too-distant future.

Thanks for the question, David.

Your next question is from Amy Yong with Macquarie.

So 2 questions. There's been a lot of speculation around MSG Networks being acquired. So I was just wondering if you could talk to that. If MSG Networks is acquired, can you talk to any change of control provisions you might have that might protect you financially? And also, any other maybe strategic impacts that might have on the core business? And my second question is, at this point in time, what are your priorities of cash as you balance with buybacks and also some growth opportunities?

On the MSG Networks question, I'm not going to comment or speculate on rumors about another company. But to answer your specific question about our rights deal, I can confirm that MSG Networks does not have a change in control termination right under our rights agreement.

Yes. I mean, in terms of our balancing of -- our use of cash, I think that we've kept our strategy in place pretty much the same since the spin. We think we've done a good balance of share buybacks and investment in growth, and we're continuing down the path of that strategy. I think thoughtfully, that a lot of opportunities we're looking at, we're just pretty much staying on course with that.

Thanks, Amy.

Your final question comes from David Joyce with Evercore ISI.

This is John Belton on for David with 2 quick questions. So first, can you update us on the phasing of CapEx for both TAO and the Las Vegas Sands project? And secondly, how should we think about the live entertainment lineup and how it factors into the model for the next few quarters? Like how broadly should the number of events compare on a year-over-year basis moving forward?

Could you repeat the second part of that question? Sorry.

Yes, sure. The second part is, how should we think about the -- how the live entertainment lineup factors into the model for the next few quarters? Like how the number of events compare on a year-over-year basis?

Well, we don't generally give guidance going forward on any of our segments or financial information. I think we are pleased with the growth in our entertainment segment this year, not year-to-date. We've had an AOI of $61 million, which is a double-digit margin and good growth over the last year. But we generally don't give guidance on number of events or financial information going forward.

What was the first part of the question? I'm sorry.

The first part of the question was about the CapEx at -- for both TAO and the Las Vegas Sands project, how should that phase moving forward?

I guess, I would only say that, as we've said before, the TAO strategy -- the TAO methodology is CapEx light. So we are not looking at large allocations of CapEx towards TAO.

Okay. And anything on the Las Vegas project?

We'll have more to say. We're in concept design at this moment in time, and we'll have a whole lot more to say. You'll be hearing from us most definitely when we have design completed and we have something to announce.

Thank you. I'll now turn the call back over to Ari Danes for any additional or closing remarks.

Thanks, Christie. Thanks for joining us, and 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.