Q4 2021 Madison Square Garden Entertainment Corp Earnings Call
Good morning, My name is Christie and I will be your conference operator today at.
At this time I would like to welcome everyone to the Madison Square Garden Entertainment Corp fiscal 2021 fourth quarter and year end earnings conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.
If he would like to withdraw your question press the pound key.
Thank you I would now like to turn the call over to Ari Danes Investor Relations. Please go ahead Sir.
Thank you.
Good morning, and welcome to MSG entertainments fiscal 2021 fourth quarter and year end earnings conference call.
Our president Andy Lustgarten will begin today's call with a discussion on the company's entertainment and Tao group's segments.
This will be followed by an update from Andrea Greenberg, President and CEO of MSG networks.
Our EVP and Chief Financial Officer, Mark Fitzpatrick will then review our financial results.
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 on the investors section of our corporate website.
Please take note of the following <unk>.
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.
And managements 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.
On pages six and seven of today's earnings release, we provide consolidated statements of operations and a reconciliation of operating income to adjusted operating income or a non-GAAP financial measure.
And with that I'll now turn the call over to Andy.
Thank you.
And good morning, everyone.
While we're clearly operating in a very fluid environment, we successfully navigated through one of the most challenging times in our company's history.
Cautiously optimistic about the road ahead.
Looking back at fiscal 2021.
We saw a number of positives in.
And I'm proud of the role we played in helping to Shepherd. The return of live Entertainment and New York as.
As our venues hosted the city's first large scale events since the start of a pandemic.
Tao group did their part as well.
Hoping to bring back the critically important hospitality industry.
While returning to profitability in the June quarter.
And with the acquisition of Pakistan Group in April.
We believe.
<unk> is well positioned to build on its track record of success.
We also continued to make meaningful progress on our next chapter MSG sphere in Las Vegas.
Adding toward the venues opening in calendar 2023.
And in early July our acquisition of MSG networks created a company with greater scale and revenue diversity.
As well as enhanced financial flexibility.
This was all accomplished during a very difficult year Warner.
Our performance venues and Tao group properties were largely closed or operating with significant restrictions.
And both the Christmas spectacular and Boston, calling music festivals were canceled.
We've talked throughout the year about the important steps we took during this uncertain period.
Including reductions in our spending lengthening our construction timetable for MSG sphere in Las Vegas, and completed a $650 million debt raise.
These actions strengthened our balance sheet well.
While protecting our core entertainment business.
And while conditions have improved we continue to monitor what's happening in our markets.
This includes New York city's announcement earlier this month, while venues can continue to welcome people at 100% capacity.
All guests, who are dining indoors or attending indoor performances are required to show proof of at least one documentation shop.
Which we think is beneficial for our businesses.
We operate in the New York market.
Which already has one of the highest vaccination rates in the country.
And our research indicates that our fans.
This market prefer <unk>.
Ending vaccinated events.
We saw this firsthand during the fourth quarter, starting with the sold out next playoff games, where we hosted nearly 90% vaccinated crowds.
As well as across a number of concerts.
Which were sold at 100% capacity to all vaccinated audiences.
Looking forward, we have begun to staff up.
In anticipation of what we envision to be a busy year ahead.
While we're mindful of what's happening with the Delta barium.
<unk> the cancellation of certain shows around the country.
We think the vaccination policies that are increasingly being adopted by cities, including New York as.
As well as companies in our industry will be helpful.
We currently expect concert Turing to begin ramping back up in late September.
Leading to a strong concert bookings schedule on a full year basis. In fact fiscal 2022 is currently pacing ahead of fiscal 2020, which as you may recall was slated to be a record bookings year for our company prior to the onset of the pandemic.
In addition, we continue to see enthusiastic levels of consumer demand through strong sales as new shows get announced.
And Christmas in New York is back.
Last month, we announced that tickets are officially on sale for the 2021 season, the Christmas spectacular production.
We are pleased with the early sales for this seasons 163 show run.
And we're looking forward to the productions return.
We also recently entered into a long term lease renewal.
With favorable terms for radio City Music Hall.
Which extends our lease until 2030.
With an option to renew for an additional 10 years.
We are pleased to have worked with Tishman Speyer on this agreement, which is a win win for all parties involved as it ensures this landmark venue remains home of the Christmas spectacular for many years to come.
Turning to Tao group.
Fourth quarter results include the impact of the Hawk Us on group acquisition.
Which created a global leader in premium hospitality with over 60 venues across five continents.
The acquisition expands Taos U S presence in major entertainment markets, such as Las Vegas.
Southern California and Miami.
While providing instant international footholds in destinations like London, and the Middle East.
This increased footprint also provides local expertise to support support further expansion.
Another area, where Hawker Sonne will help drive the business through its expertise in licensing.
Which tau intends to utilize alongside its owned and managed venue models as it continues to pursue growth opportunities.
The easing of capacity restrictions in the fourth quarter helped drive strong results for <unk>.
With a majority of its revenue and AOI generated in the month of June.
In addition, the best performing market for the quarter was Las Vegas, where towers presence, which has significantly expanded with the <unk> acquisition will be important to MSG sphere at the Venetian.
We made meaningful progress on MSG sphere, this past fiscal year achieved.
Achieving a significant milestone in June when we completed the structural steel for the main venue.
Over the next 12 months, we intend to complete the roof concrete and the venues exterior facade as we continue to make progress on the interior build out and the pedestrian bridge.
We also plan to move forward with the buildings with building MSG spheres exosphere Mr.
Historical structure that will surround the venue and eventually be covered with 580000 square feet a fully programmable led lighting.
This impactful exterior display.
As just one of the ways customers will interact with administration of your content.
Inside the venue is where we will use state of the art technologies to create first of their kind immersive experiences and this coming year will increase our focus on developing this content for sphere.
Before I turn things over to Andrea.
I'd like to spend a moment on the emerging opportunity around mobile sports gaming.
New York State's application process is expected to conclude by early January.
Many of the leading online sports betting operators are participating in the process.
Which creates a competitive market that we believe bodes well for us.
From entertainment and media assets that reach millions to potential fixed venue based opportunities that include the garden and Tao locations we.
We believe we're one of the best positioned companies to help partners succeed and connecting with consumers.
We continue to be in active discussions with many of the potential market participants and are increasingly bullish about this opportunity for our company.
In summary.
While we know we're in a fluid environment.
We're optimistic about the year ahead.
Due to the strong pent up demand, we saw at our entertainment and towel businesses and Jim.
Which has continued so far this summer.
Our progress with MSG sphere in Las Vegas.
And the powerful platform, we've created with MSG networks, which brings together, our entertainment and media assets and position positions us well for future opportunities.
With that I will now turn the call over to Andrea.
Thank you Andy and good morning.
Looking back at the past year.
Our regional sports and entertainment networks face their own challenges as a result of the pandemic.
And we rose to the occasion, delivering our programming on all platforms without interruption, while exploring ways to be more nimble and efficient in producing our content.
We will certainly apply our learnings going forward and expect our business to benefit.
During fiscal 2021, we were also reminded once again.
The power and popularity of live sports following the return of the NBA and NHL for their shortened 2021 regular seasons.
We saw ratings strength on our linear networks, including double digit percentage increases in average household ratings for the Knicks Rangers and Islanders regular seasons.
We also saw all time highs for viewership and engagement on MSG go our authenticated live streaming app.
This strong performance continued into the postseason with ratings for the Knicks and Islanders first round match ups well exceeding each team's regular season average as.
We look forward to welcoming our teams back for the upcoming seasons, which we expect will include normal schedules for the regular seasons.
And as we move forward in an evolving media landscape.
<unk> committed to building on our history of innovation to create value for our partners and viewers.
We will continue to experiment with new types of content, including alternative versions of our live game telecast and exploring new ways to monetize our media rights and content library through both new and complementary product offerings.
We also will remain focused on interactivity, where we've seen firsthand with our MSG go app the benefits of interactive games on engagement and frequency of too.
Furthermore, our ability to aggregate data across our linear networks digital products and entertainment venues will provide even richer insights into viewers and customers, which we intend to leverage to drive our overall business.
This data also makes us an even more valuable marketing partner, including in the emerging world of mobile sports gaming with a significant number of opportunities for MSG networks, including everything from branded content to integrations on our mobile apps.
We're excited about the future and are confident in our ability to continue to innovate and effectively monetize our content, which we believe will ultimately help us drive robust ongoing adjusted operating income.
With that I will turn the call over to Mark.
Thank you Andrea.
Let me start by reviewing our fourth quarter financial performance.
Which as a reminder, does not include the results of MSG networks.
The acquisition was completed on July 9th.
That said I haven't seen networks Standalone results can be found in our press release.
Beginning next quarter.
We will speak to this segment's results in detail.
In the fiscal fourth quarter, we generated revenues of $99.8 million.
Had an operating.
Adjusted operating loss of $70 million.
In terms of revenue.
Tao group generated $69.7 million.
These results included the addition of <unk> at the end of April.
And as Andy noted were driven by strong be opening in our key markets, especially in Las Vegas.
Revenue also included the impact of.
Of our various commercial arrangements with MSG sports, including $8.3 million in arena license fees.
The Knicks and Rangers concluded the regular seasons at the garden in EMEA.
I would buy three sold out next home playoff games.
In addition revenue was positively impacted by both live events and AD sales commissions from MSG networks.
Looking ahead to fiscal 2022.
To highlight a few items.
First we started to hire across our entertainment segment.
To support the anticipated ramp up of live events starting in late September.
We also are working to fully staff, our Tao venues to match three opening momentum at restaurants and nightclubs.
Second we plan to increase our content development and technology investments.
That's related to our sphere initiative.
And finally at MSG networks, we're anticipating.
<unk> NBA and NHL seasons, and therefore.
Back to return to more normalized levels for certain expenses such as rights fees.
And normalized advertising revenue.
Now, let's turn to capital expenditures.
We had $135 million of capital expenditures in the fiscal fourth quarter, which primarily related to the construction of MSG sphere in Las Vegas.
Through June 30th project to date construction cost incurred were approximately $850 million, which includes $98 million of accrued costs that were not paid as of June 30th.
And is net of $65 million received from La Las Vegas Sands.
As a reminder, last quarter, we announced that the cost estimate for the venue was approximately 10% higher than our previously announced estimate of $1 six $6 billion.
As planned during our recent annual budget process.
We thoroughly reviewed the cost scope and timeline of the project.
<unk> refined our project cost estimate estimate to be approximately $1.865 billion.
As construction manager, we will continue to aggressively manage all aspects of the project and are excited for the venues opening in calendar 2023.
Finally, turning to our balance sheet.
We had approximately $1.17 billion of cash as of June 30th.
And $1.52 billion. If you include MSG networks $348 million of cash.
In terms of that the combined company's debt balance was approximately $1.74 billion as of year end.
As previously noted we believe that the merger allows us to optimize our capital structure.
Including the potential opportunistic refinancing MSG entertainments $647 million term loan.
Which was put in place during the pandemic last November and carries an interest rate of 7%.
With that I will turn the call back over to Ari.
Thank you Mark can we open up the call for questions.
Certainly and as a reminder to ask a question press Star then the number one on your telephone keypad and.
And your first question is from Brandon Ross of light shed partners.
Hi, guys. Thanks for taking the question.
Andy You mentioned your optimism around sports betting in the near term was wondering what your thoughts are on the change in Governor and if you believe that could further.
Open up competition and perhaps even additional.
Ways to monetize better than I have a follow up.
Okay, great. Thanks Brendan.
So look.
Now going to pine on the politics of what's going on in Albany.
Can talk about is the mobile gaming legislation and how it impacts impacts us.
So at a minimum.
It's going to be for skins for operators.
This is a tremendous opportunity for us because that's competition.
That said, that's the minimum there tend to be more so when we looked at some of the application processes that went in just real confidence one group.
And their application talked about nine operator model with a 51% tax rate and that one they thought they would be over $900 million of wet gross tax revenue is generated for the state and that includes money for marketing.
Another group, which only had four operators as a single consortium.
<unk>.
The opportunity is $1.3 billion in tax revenue for the state by the third year.
And that's at a 50% tax rate.
So for us it.
It doesn't.
Four are above all it's going to be great and theres going to be.
There is significant and it's clear there is a significant takeaway for these operators.
Bring home.
And the way, they're going to do that by driving their business and there is one.
We believe one company best suited to help and work with them and Thats US right. We blank at the market, we always had a great opportunity between our relationship with MSG sports and the teams are fixed asset here at the arena.
Tao.
For hospitality premium hospitality, but then with the addition of MSG network, we're able to add linear and digital online content, we can blend to the market in a way no. Other company can be a partner for whoever wins.
Before or more we look at we're looking at different deal structures exclusive deals nonexclusive deals we're talking to everybody who is in the market and we think this is a great opportunity for us and a great opportunity for New York State.
Thanks, and then just your stock's been down pretty significantly.
Since the MSG hadn't deal or.
The original press articles surrounding the MSA G hadn't deal and.
<unk> networks is a real cash flowing asset I was wondering if you would ever consider using the cash flow from that works for a stock buyback to be opportunistic with where the stock is.
Thanks, Brandon it's mark.
Start by saying our number one priority is always to protect and invest in our core assets.
As you saw during the pandemic that meant preserving our liquidity to position the company to return to business.
We are focused on the MSG sphere initiative, which we continue to see is a unique opportunity growth opportunity for our company.
Finally, we plan to explore refinancing our term loan and MSG Entertainment, which we put in place in the pandemic as an insurance policy and carries a 7% interest rate.
So while those represent our near term focus areas, we regularly review our capital allocation priority.
And over time, we will consider all options and determining the best use of capital. Thank you.
Thanks.
Thank you. Your next question is from John <unk> of Wolfe Research.
Got it. Thanks I had two first on the sphere as the Bill continues can you give us more color on how inflation is impacting our cost versus budget, you know given the $40 million or so increase can you give us the puts and takes behind hitting that call. It that revised target of the 165 and in your plan and no update on that every quarter versus budget and then separately.
Just on the network side can you give us an update on the direct to consumer offering where are you in the process and timing will there be a gaming component with it that launch and are there any more rights that you need or have they all been negotiated thanks.
Thanks, John It's Mark I'll take the sphere cost estimate as I mentioned earlier, we recently reviewed the cost scope and timeline of the project as part of our annual budget process.
This included looking at current inflation trends and the impact to our cost estimate.
We've also taken certain actions to manage our costs.
First we secured the majority of the main structural steel for the project with approximately 90% now fabricated and.
In addition, we poured approximately 95% of the concrete.
Second we're also watching our supply chain and.
And accelerating the purchase of high risk items.
And where possible identifying identifying alternative and manufacturers for certain components, such as semiconductors to minutes minimize any potential delays.
And finally, we continue to evaluate all aspects of the diet to identify opportunities to reduce costs.
By substituting one product with a comparable one.
With that I'll turn it over to Andrea for the question on our networks.
Uh huh.
While direct to consumer is certainly a developing market opportunity for us.
As you know for the RF industry in general.
DTC performed criminal towards business.
And not as a replacement for distribution through our current partnerships.
And while we all acknowledge that subscribers to Mvpds have declined.
At MSG networks still serve approximately five and a half million subscribers throughout our region and that's a substantial business.
However, when we think about direct to consumer we do recognize that there are millions of homes throughout our region that do not receive our networks. So for US. The question has been how can we best serve this portion of the market.
And we believe there are a number of ways. We can do it do that all of which we're currently in actively exploring we could potentially cooperate with our existing distributors just a SEC.
Tumors throughout our market.
We could offer a pure DTC product ourselves.
Could allow for I D.
Army or we could license certain of our content to other market participants. So let me say, we recognize the market opportunity and we're actively engaged in evaluating it.
You know as far as white.
We had indicated in our previous earnings call that we could offer a direct to consumer product.
Now we're just in the process of renewing our agreements with the NBA and NHL, which we've renewed so many times in the past in the ordinary course.
Thank you.
Thank you. Your next question is from Paul Golding of Macquarie capital.
Great. Thanks, so much.
A couple of questions first one around Hawk us on is there any color you could give around the pre pandemic performance of that business just to understand sort of what.
Our run rate could look like as its integrated into this how are under more normal operations and then I have a follow up thanks.
Sure. Thanks, Paul.
As Andy so.
This is actually the first earnings call that we've had to discuss this acquisition with you.
I will say that we're really excited about it.
It's pretty transformative for Tao <unk> home business.
In terms of size.
Rough order and nearly doubled tower's revenue base based on 2019 results.
And it expands <unk> footprint.
Here in the U S and key international markets, such as the UK, London, specifically middle East.
And it's just this is a transformative foretell.
I will add.
Historically.
<unk> has had a lower standalone margin Intel so that's part of the opportunity we see here.
We think <unk> management team is the best in the industry.
And they built up a great infrastructure for growth.
Both of those will help drive the operational efficiencies that we expect to achieve your thoughts.
This will be buoyed or attitude by the economies of scale as we see across both businesses working together marketing efforts procurement.
To drive this business.
And in addition, horizontal tile wall very similar in terms of operating there was some nuances in how they do and deal structure. Both have leased venues, but in addition talent really is more of an expertise in managed venues, which means managed for somebody else higher little bit lower revenue, but a big piece of profit in Ohio.
So we look we will look to those structures at the right time for <unk>.
Brands and vice versa, <unk> very strong in licensing and so we will look for Tao to to capitalize on <unk> licensing expertise to enter markets that we may never would have entered on our own as operator.
So we think this is a great opportunity for both businesses to come together.
What you've seen it's.
It's been a great fourth quarter that was included in our results. The headline the robust has been demand so far it's been across all of our all of our markets, particularly in Las Vegas.
I'll add that the momentum hasn't stopped in July and August we're feeling really good.
I will note that.
The current the most recent performance has been helped by a few factors one as we ramped up pretty quickly some of our competitors have not opened or just first entering the market.
Second as we add staff, we've been rolling slowly into it as we reopen so as staffing levels come back on and more competition, we expect margins to come back more towards the historical normal but that said, we feel really good about this business and its future in this opportunity.
Hey, Andy it's Mark I thought I, just jump in and add a little bit more color on <unk> results in the quarter.
During the quarter HOKA and contributed approximately $28 million of revenue, which represented 40% of Tau is total revenue of approximately $70 million.
So clearly it was a significant contributor for the quarter I'd also point out that we completed the acquisition on April 27, So thats about two months of contribution in the quarter.
While we're not providing historical financials that hackathon tower's business, including Hackathon is currently performing above the historical run rate for AOE.
And while we expect that to normalize over time, we also see a lot of opportunity now that <unk> is under the Tau umbrella.
In areas, such as expansion and brand development as well as potential cost savings and functions such as marketing and procurement.
I hope that's helpful.
Okay.
Thanks, Paul.
Take the next caller.
Your next question is from David Katz of Jefferies.
Hi, good morning, everyone. Thanks for taking my questions.
Okay.
I appreciate all of the outlook information.
Given if we take a qualitative longer term look.
<unk> fiscal 'twenty two.
What can you share with us about up down or sideways as we go out just a little bit longer term.
In a recovery.
Yes.
Hey, Dave It's Andrew Thank you mhm.
Uh-huh so so as we look.
I think we should start thinking you are starting to beginning right and so.
As we've talked about our booking calendar for 'twenty two as we think is very strong.
Or it could be very strong no. This is driven by two factors as we've discussed before right. First is we've had all the shows that we're supposed to be played off our scheduled rescheduled into this year as well as all the new assets coming online. So starting September we're going to see a pretty big ramp up in our shows what that's done is.
The rest of the artists who wanted to be on the road. This year are now we're going to have to look for data for longer further out so while historically, we would've been make it six months nine months, maybe a year to start seeing holes were seeing a much longer than we've ever seen historically.
This is across all of our venues.
But particularly at the arena, where our holds are up 50% versus the last pre pandemic here.
So it gives us this tells US there is real demand, Florida to be on the road.
We are we feel even further confidence in us by after listening to live nation's recent public comments, where they talk about the core of the touring business on it for the years to come live nation is a different per view than we do because they are buying global tours and mapping them out the right time, so while we speak directly or they are speaking to a whole.
Source together between what we're seeing and what we're hearing from artist amongst sherrington elimination, we feel really good about not only this fiscal year about what the future could be for.
For the next deal.
Thank you perfect perfect.
And if I can just follow up I know you've talked about the sports betting or the mobile gaming opportunity and I just want to be clear.
Clear about.
Where you are or how you're positioned I mean, it's obvious what assets you bring to it but it sounds as though you're sort of having discussions with a wide range of people. So that you have you know irons in as many as many irons in the fire as possible rather than sort of joining a group and formally submitting a bid.
Is that is.
Is that a fair characterization.
So.
Well, it's twofold, one we didn't submit an application to be in the operator, right So and that's.
For a few reasons on it.
One of them just simply certain lead roles restrict your ability if your direct operator to put up Knicks and Rangers games on their platform. So we didn't think that made sense.
In addition, as you've talked about like we were talking to everybody. We think we are the best ways to any for any operator or operators to reach the market, we've got great relationships with the.
Current market leaders through our current partnerships as well as ones that we do.
The new entrants that are coming in so we think we're in the best position. Once we know who the who has been with <unk> who's been selected to help drive those business as we've talked about the assets. We have we are going to be able to blend to the market and we'll be able to do it better than any other partner cut. So we think that that's the right position for us to begin over the next short term as well.
The state works through the application process.
Got it I agree thanks.
Christie, we have time for one last caller.
Certainly your final question is from David Karnofsky of J P. Morgan.
Hi, This is Anna on for David Karnofsky. Thank you for the question.
First I was wondering if you could please quantify any cost synergies post merger and what the timeline to realize this would be.
Sure. Thanks for the question.
As we've talked about before we expect to realize savings in three categories taxes operating expenses and interest payments.
First in terms of taxes the merger file the merger allows for more efficient use of MSG entertainment tax attributes.
With MSG networks near term cash flow.
As of June 30th MSG Entertainment at an NOL of approximately $505 million.
And the company expects in calendar 'twenty three to accelerate the depreciation of approximately 35% of the capex related to the MSG sphere in Las Vegas.
Second we anticipate anticipate realizing approximately $10 million in annual savings primarily related to public company costs.
And finally, we believe that the merger enhances our ability to optimize our capital structure and lower interest payments. For example, we plan to explore refinancing refinancing MSG entertainments term loan which is callable in may.
As of June 30th there was approximately $647 million outstanding on the loan.
And it carries an interest rate of 7%.
So we think there are some really attractive financial aspects of the transaction.
Thank you and for the Las Vegas sphere is there any update you can provide in terms of how you're thinking about original content for the venue.
Sure family.
Let me start at the top right.
We've talked about it before but I think it's really important to lay the groundwork the sphere can be an entirely new medium.
It'll be the first of its kind large scale venue to be fully immersive for 17500 people all at the same time.
Then you're going to use multi sensory technologies.
A high resolution display plain.
Then the size of three football fields will come up wrap around and in.
In golf the whole audience.
We'll use the worlds largest beam forming audio system.
That will utilize more than 180000 speakers to deliver a truly unique listening experience for the for our guests.
In addition, haptic seating, which will enable the audience to feel what's happening.
There'll be other 40 technologies to really complete the immersive experience.
As you know we lengthened our construction timeline.
We've taken that time to really work on developing both our technologies as well as our original content.
So in terms of the content that will be played at the sphere there'll be multiple different types of events.
It'll be our original attractions.
Just mentioned concerts corporate events and slipped sporting events.
And right now we're taking the time to speak with key creative as we think about what our first show will look like.
We look forward to sharing more as we get closer to our opening date in 2023.
Thank you.
Yes.
Yes.
Thank you I will now turn the call back over to Ari Danes for any additional or closing remarks.
Thank you all for joining US we look forward to speaking with you on our next earnings call have a good day.
Goodbye.
Thank you. This does conclude today's conference call you may now disconnect.