Q3 2022 Madison Square Garden Entertainment Corp Earnings Call

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Good morning, Thank you for standing by and welcome to the Madison Square Garden Entertainment Corp.

Oh, 2020, Q3 quarter earnings conference call.

At this time all participants are in a listen only mode.

After the Speakers' remarks, there will be a question and answer session.

Good question during this session.

One on your telephone if you require any further assistance please press star.

Zero.

I would now like to turn the call over to R&D.

Our Vice President Investor Relations. Please go ahead.

Thank you.

Good morning, and welcome to MSG Entertainments fiscal 2022 third quarter earnings Conference call.

David Burns, our EVP and Chief Financial Officer, who will begin today's call with a discussion of the company's entertainment and Tao group segments.

This will be followed by an update from Andrea Greenberg, President and CEO of MSG networks.

David will then conclude with a review of our financial results for the period.

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.

In 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.

On pages five and six of today's earnings release, we provide consolidated statements of operations and a reconciliation of operating income to adjusted operating income or AOI.

non-GAAP financial measure.

And with that I'll now turn the call over to David.

Thank you Ari and good morning, everyone I am pleased to join you today and we'd like to begin by discussing the positive momentum we are generating across our entertainment and Tao group hospitality segments.

Our core live entertainment business is once again thriving and delivering results that are at or above pre pandemic levels in many important areas.

The outlook for this business is bright.

With our unique portfolio of live offerings, we expect to continue benefiting from the pent up demand from artist to score and from their fans together.

This desire for shared experiences also plays to Tao group strength.

Which has seen its business come roaring back since capacity restrictions were lifted last year in its key markets.

In addition, <unk> acquisition of Pakistan last year cemented its place as a global leader in premium dining and hospitality, one that is well positioned for expansion moving forward.

At the same time, we continue to make meaningful progress on our company's next chapter MSG sphere, which we believe will deliver an entirely new medium for immersive experiences.

Our first MSG sphere venue remains on track to open in Las Vegas in the second half of calendar 2023.

We plan to top off the building deal Exosphere later this month, a key milestone in our construction process.

This 366 foot pole spherical steel structure surrounds our venue and will ultimately be covered with approximately 580000 square feet a fully programmable led panels.

<unk> the largest LCD screen on Earth.

It will be an impactful display for partners to showcase their brands.

Unique activations and promote content.

As we make our way towards the opening of the venue we've been energized by the interest we're seeing from potential partners.

This includes discussions with leading filmmakers about the creation of original immersive attractions with.

With global artist for concert residency at the venue.

With promoters of marquee events and with potential corporate partners, who see substantial value in the platform's capabilities inside and out.

In fact, we recently formed an exciting multiyear partnership for MSG sphere with Formula One star.

Starting with next year's inaugural Las Vegas Grand Prix.

S ones entry into Las Vegas, reinforces the market position as the destination for major sports and entertainment events.

And MSG sphere as prime position, along the circuit presents a high profile opportunity for both our company and F. One.

We will be able to showcase the venue to a global audience of entertainment and sports fans, both in person and watching broadcast of the events around the world.

And this integrated partnership will give F. One significant access to the venue and our grounds for thousands of race fans as well as takeovers of our exterior led display for race related content Activations and advertising.

There are also potential hospitality opportunities beyond the MSG sphere to include Tao group.

We are pleased that MSG sphere will be such a prominent part of this global event and believe this type of corporate partnership is just the start for us.

We look forward to sharing more on our overall progress in the months ahead and remain confident that we are positioning our company to drive long term growth and value creation for our shareholders.

With that I'd now like to go through operational highlights from our third quarter, starting with the entertainment segment.

Our venues, where again filled this past quarter with a wide variety of live events, including concerts marquee sporting events in New York Knicks and Rangers home games.

In aggregate, we hosted nearly 170 events and welcomed nearly one 3 million guests to our venues during the quarter.

These results would have been even stronger had it not been for the army cranberry and which resulted in the postponement or cancellation of about 30 events. Originally scheduled in the quarter and also caused the dip in attendance in January .

Still the impact of the variant on attendance was short lived and by February the percentage of ticket buyers attending our event has essentially returned to pre omicron levels.

Administrating the resilient demand for live entertainment.

We were also pleased with the strong level of spending by our guests inside our venues as food beverage and merchandise per caps.

Again exceeded pre pandemic levels by a strong double digit percentage this past quarter.

Looking ahead, we expect to maintain our positive bookings momentum in our fiscal fourth quarter with the overall event count anticipated to exceed results for our third quarter.

Albeit with a greater skew towards our theaters given the Knicks and Rangers have now completed their regular seasons at the garden.

We're also looking forward to the return of the Boston, calling music festival in a few weeks and.

And I am pleased to share that ticket sales have been performing well as we head into this final stretch performed memorial day weekend.

In addition to benefiting from strong consumer demand. We've also been pleased with the activity, we're seeing in marketing partnerships as companies look to reconnect with consumers.

With the launch of mobile sports betting in New York earlier. This year, we were thrilled to play an important role in helping our first gaming partners that MGM and Caesars sports books hit the ground running and capture meaningful market share.

During this past quarter, we took another significant step forward by entering into a multiyear agreement with draft Kings in a deal that leverages assets across our entire portfolio and through our representation agreement the assets and brands of MSG sports.

We have spoken before about how meaningful the opportunity in sports betting would be for us and I'm proud to say with these three partnerships in place that our sponsorship revenue is now firmly exceeding pre pandemic levels on a go forward basis.

Increased corporate demand has also extended into premium hospitality, where our sweets business has also returned to pre pandemic levels.

And as more employees return to the office and corporate entertaining makes them more complete comeback. We believe there will be a renewed drive towards best in class premium offerings, which plays to our strengths.

Moving now to Tao group, which has also benefited from the return of live experiences, particularly in key markets, such as Las Vegas, and New York.

Although omicron had a temporary impact on operations and demand at the start of the fiscal third quarter How's business started to pick up again in February .

And in March Tau posted its highest monthly revenue total since capacity restrictions were lifted in key markets last summer.

Which we believe sets the stage for a strong fourth quarter.

Similar to our entertainment business continues to benefit from robust guest spending with average check sizes, continuing to attract meaningfully above pre pandemic levels.

And since the acquisition of Pakistan last year, how continue the strategic expansion recently launching Lovell in Los Angeles and celebrated the Grand reopening of our completely renovated Tau Beach in Las Vegas.

<unk> also has a robust pipeline of new venue openings over the next 12 months, which we expect to be a key growth engine for the business.

So as we look back on the quarter for our entertainment and Tao group segments. We're proud of the resiliency of our business has shown and we're excited about the road ahead.

Particularly as we prepare to open MSG sphere in Las Vegas next year.

With that I will now turn the call over to Andrea Thank.

Thank you David and good morning.

While the operating environment has been a dynamic one this year. We are pleased with how we've adapted successfully delivering full regular season telecast schedule.

Five NBA and NHL team.

And with the started the NHL post season last week, we are now airing live on MSG networks every Rangers first round playoff games.

<unk> pre and post game coverage for each Rangers game and I'll play a friend.

With regard to our fiscal third quarter financial performance.

Well its affiliate revenue in the period continued to reflect the impact of our non renewal with Comcast.

Once again delivered exceptionally strong advertising results.

Which puts us on a path to a record year in advertising revenue.

Our NBA and NHL teams.

This strong advertising results, we saw this past quarter reflect double digit percentage growth in per game advertising revenue.

Driven by increases in both rate and.

Sell through has been.

Paired to the year ago quarter.

In addition, we continue to have success with our non ratings based advertising initiative.

With significant year over year increases in branded content as well as outdoor digital boards and MSG go south.

In fact revenue from these initiatives have doubled year over year and represented a meaningful percentage of total advertising revenue for our fiscal third quarter.

While demand has been broad based across categories.

Both sports betting remains an important driver.

Through both traditional spot buys.

Innovative ways in which we have incorporated betting related content into our programming.

We produced five bed cats this past quarter.

Each sponsored by drafting with a rotating cast a curated experts can guests providing embedding insight.

Strategies and updated odd throughout each time.

And as the NBA and NHL regular seasons were winding down.

Betting shows expanded coverage and some other score.

Cleaning baseball golf tennis soccer, MMA and boxing.

We also continued to see growth from clients in a wide range of other categories, including among them technology retail and fast food.

Amazon, Indeed, carvana, Procter and Gamble Duncan and new balance.

I'll either increase their spend versus last year.

<unk> joined us as new advertisers.

On the programming front in addition to our live professional sports and gaming related shows.

Other highlights this past quarter.

Look around black history month and women's empowerment.

With original content pieces celebrating local heroes iconic athletes and pioneer.

Each built to complement our lives gained coverage and expand daily length of tune with unique interesting and important story.

As we look ahead to the final quarter of the fiscal year and beyond.

We're named confidence and the uniqueness of our content and in our creativity.

This includes our ongoing efforts to develop new programming and products to drive value for affiliates.

Advertisers.

<unk> partners and viewers.

Including with regard to a direct to consumer offering on.

Which we continue to make good progress.

With that I'll now turn the call back over to David.

Thank you Andrea Let's now review, our third quarter financial performance for the quarter, we generated total revenues of $461 million and adjusted operating income of $46 5 million a cigna.

A significant improvement over last year's Covid impacted quarter.

The entertainment segment had $194 $6 million in revenue, primarily reflecting the impact of our arena license agreements with MSG sports and are busy schedule of events during the quarter as.

As well as strong performance across suites and sponsorships.

Adjusted operating loss for the Entertainment segment was $10 $7 million.

This result reflects the strong performance of our core entertainment business offset by expenses related to the MSG sphere content development and technology as we prepare for the opening of MSG sphere at the Venetian and the second half of calendar 'twenty three.

As well as the impact of severance related costs in the current year period.

Excluding sphere and severance related costs. The entertainment segment would have delivered positive NOI for the quarter.

Turning to MSG networks, the segment generated $167 $6 million in revenue.

A decrease of $10 3 million year over year and $58 million in Hawaii.

As Andrea discussed the decrease in revenues reflects lower affiliate revenue, partially offset by strong growth in advertising revenues.

The decrease in NOI also reflects the impact of increased direct operating expenses as MSG networks has returned to normalized levels of programming and production costs <unk>.

Including rights fees with full NBA and NHL regular season telecast schedules this year.

Finally, Tao group generated revenues of $108 $6 million and adjusted operating income of $6 5 million.

As I mentioned before the early part of <unk> third quarter was impacted by the omicron barriers.

While ally.

Also reflected preopening costs related to both recent and planned new venues.

And while food and beverage costs continued to see some inflation. The team has been working hard to mitigate the impact.

Turning to our balance sheet as of March 31, we had approximately $1 billion of cash on hand, and our debt balance was approximately $1 7 billion.

With respect to MSG sphere, our project to date construction costs through March 31 were approximately $1 3 billion.

Which includes $178 million of accrued costs that were not paying as of March 31, and is net of the $65 million received from Las Vegas Sands.

As a reminder, our previously disclosed cost estimate for MSG sphere is approximately $1 86 5 billion.

We are continuing to aggressively manage costs as we work toward the planned opening of the venue and the second half of calendar 'twenty three.

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

Thank you David operator can we open up the call for questions.

Thank you. Our first question comes from the line of Brandon Ross.

Your line is open.

Good morning, Thanks for taking the questions.

I wanted to talk a little or ask a little bit about the spheres and you noted youre seeing some third party interest in what Youre doing with content and I know, it's early days, but can you dig a little deeper on the content that we as investors and consumers should expect to see inside the sphere.

From your production sorted those daytime productions that you've spoken about for artists who may do residents he's there and for brands like Epsilon.

Sure Brandon it's Dave.

You've heard us say before that the MSG sphere will introduce an entirely new entertainment media.

It'll be the first large scale venue to deliver immersive experiences for up to 20000 people at once and.

And it's going to use multi sensory technologies for example, it'll have a high resolution display plane, which is larger than three football fields.

The worlds largest beam forming audio system.

With more than 160000 speakers and it'll deliver crystal clear sound to every seat in the house. So think of it as head headset quality sound without the headset no matter, where you are sitting in the house and other <unk> technologies, which will complete the immersive experience.

We are currently having discussions with potential partners, including leading filmmakers and global artists to create content that will be specifically designed for the MSG sphere.

And this does include original attractions, which which we.

We'll be able to run multiple times, a day year round and the attractions will really drive the high utilization of the venue.

As well as concert residencies.

Which one which will help build out our our recurring base of events.

And to create and produce this concept, we're close to completing our studio in Burbank MSG sphere Studios.

And this is for our creative production and engineering teams as well as artists and partners to develop optimized and preview. These unique content experiences that are being developed for sphere.

An important added benefit of the studio as it will enable us to keep higher utilization at the Las Vegas venue.

We will be able to fully test content without having to pause the attractions that are running in Las Vegas.

So we're really energized about the possibilities and we fully expect to have more exciting news to share with you in the future across original attractions concert residencies other marquee events and additional corporate partner events like the Formula one deal.

As we advance towards the towards the venues opening next year, we will share more as we go forward.

Sure.

Alright, and then in the press release, you called out additional sphere cost in the quarter can you help us just understand the nature of those expenses and maybe give us a timeline on how the cost base is going to ramp as we get to the opening of the venue or construction costs.

Operating costs going to come off and be replaced by something else. How do we think about the cost structure for sphere going forward.

Sure.

First off looking at the entertainment segment results for the quarter.

The AOE loss reflects.

Strong and profitable performance for our traditional core live entertainment business and also has the results also include expenses related to sphere.

These sphere expenses in the results primarily.

Primarily related to content development.

Including head count as we are building out the folks that are responsible for these initiatives.

As I mentioned earlier the entertainment segment would have had positive AOI this quarter, excluding sphere cost as well as some severance related expenses that hit us earlier in the quarter.

As we get closer to the Las Vegas venue opening we do expect head count to increase.

Both for continued content development.

And I am getting some kind of feedback and to make sure. The venue is appropriately staffed and ready to go.

So this would include areas like venue management security food and beverage and merchandise.

That we will we will staff as we gear up to open the venue.

In the second half of 'twenty three.

We'll also leverage a lot of the expertise and infrastructure that we currently have in place.

And with all of that said, we fully expect to generate substantial levels of revenue and AOI and at attractive margins. Once we once we opened the biggest venue.

And this would be inclusive of the overhead that we're carrying now.

So.

Well, we're 100% focused on the successful execution of of MSG sphere at the Venetian.

Las Vegas is just our starting point.

As we've talked about before we anticipate because we anticipate pursuing.

Capital light opportunities to extend the MSG spheres venue footprint to other markets around the world and this this could include a managed venue model for example.

So what this does is it will allow us to efficiently leverage the upfront investment, we're making in things like content technology, and construction and design expertise across a broader network of venues.

And we see this global expansion of the sphere is a compelling opportunity to create substantial long term value for our shareholders.

And we will and we look forward to updating you further as we get into our progress.

Great. Thank you very much.

Thanks Brendan.

Our next question comes from the line of David Karnofsky from J P. Morgan Your line is open.

Alright. Thank you Andrew I wanted to see if you could update further on the potential DTC model for networks.

To be in talks with distributors about this and is there any early framework you can provide around that.

Asphalt market or upfront costs, and then just given valley sports has put some pricing around there are S. N business any views, whether you see that $20 price point is kind of viable for the NYSE market. Thanks.

Hi, David.

Well I'm not going to comment on Sinclair, but what I can tell you is that since we've spoken on the last call. We continue to make good progress in evaluating a potential product.

Tight pricing our technical staff, we have other considerations. We're looking forward, we're looking at but yes. As you mentioned you know as I.

I mentioned last quarter in developing any plan of ours.

Mindful of our traditional linear business and we're very very mindful and focused on the partnerships that we have with our major distributors.

And grateful and focused on the value that we derive from those relationships. So as we worked through our plan.

We continue to look to ensure that any DTC offering of ours continues to take that into consideration I don't have any more specifics for you other than to say that we continue to make good progress on our plans and we'll have a we'll have more in the months ahead.

Okay, and then just for David more broadly across the entertainment or towel businesses are you seeing anything in kind of forward bookings or current per caps that would indicate signs of softening demand due to the economy or inflation.

And that question would be for either at the consumer level or corporate level. Thanks.

I would.

This is Dave I'll take it and.

I'd say the answer is no at this point in time, we're not seeing any slowdown in.

In spending overall.

As we spoke about earlier our venues continue to fill up with events, we mentioned how strong our fiscal fourth quarter looks.

With overall event count anticipated to exceed the results for the third quarter.

We will have a robust 22 in terms of events and in la.

Looking out into 'twenty three right now we're also seeing our bookings schedule fill up earlier than usual so.

I'd also say on the broader market front arena concerts in New Yorker on track for significant growth in calendar 'twenty two versus the pre pandemic.

With the garden is set to be the market share leader by a wide margin there.

We've seen strong consumer demand and spending across our businesses we have.

Numerous sellouts recently at our venues for night Phish run the Katie Taylor Amanda Serrano fire at the Garden was great with two nights of Olivia Rodrigo Rodrigo at radio city and many others.

Our recent on sales have remained strong.

Overall spending at our venues are up double digit percentages, both F&B emerge per caps as we've said as well as average check sizes of Tau.

So.

And even on the corporate side.

As we've talked about we've returned to pre pandemic levels on a go forward basis for.

Sponsorships with suites, and MSG networks advertising is headed towards us towards a record year. So overall positive and we are not seeing any slowdown at this point.

Thank you.

Okay.

Thanks, David Operator, we will take our next question.

Question comes from the line of Paul Golding from Macquarie Capital. Your line is open.

Great. Thanks, so much I was wondering as a corollary to the prior question if you could help us understand the.

Current or historical mix of corporate revenue as part of the business or Contra.

Contracted revenue just to understand sort of what's the.

The underpinning of the backstop is on on the consumer going forward.

There were to be any weakness there because that should develop thanks so much.

Sure Paul.

I guess the question is that.

To answer your question, we have significant contractual revenue so.

Julian revenue suite sponsorship and signage revenue.

Our significant percentages of our of our total.

And they are all part of multiyear agreements, which are staggered in terms of the timing of when they come up for renewals.

And as you've heard us talk about our team has done a great job of renewing marketing partners.

And suite holders as well as adding adding new partners.

We also have long term arena license agreements with MSG sports with over 30 years remaining on those deals so.

Ultimately the backdrop is.

People are willing to spend on experiences that they find valuable and if the last few quarters has shown us anything that's spending with us.

Got it thanks.

Thanks, Paul Operator, we will take one last caller.

You have a question from David Katz from Jefferies. Your line is open.

Hi, good morning, everyone. Thanks for taking my questions.

Wanted to just circle back on the networks business.

For us anyway, there is just so much.

Clarity and understanding around experiential leisure about.

The leisure ash outs for the development of those assets in the sphere et cetera with respect to the networks. If you could talk a bit more about what the long term vision or expectation is for that business and I I know an earlier question was sort of one underpinning of that but just a little longer term perspective would.

Helpful.

Sure.

Well.

We clearly understand that things are changing but you know as an organization we remain firm believers in the power and popularity of live local professional sports we've always.

<unk> invested in and believed in live professional sports.

We have what we believe is a unique asset we broadcast hundreds of these games each year, we have exclusive long term rights to these this premium product.

And unique to us we operate and the number one TV market.

So apropos to that.

As we've been discussing we've seen exceptional advertising demand for our content. This year and we expect that to continue.

Across broad categories.

We also have you know we have a long history of innovation, which we believe is going to serve us well as the model evolves just over the last couple of years, we've capitalized on new opportunities to monetize our content.

We've introduced new programming.

Including new sports betting programming and as you've heard mobile sports gaming is a big contributor to our and SaaS and advertising revenue. This year, we've created new and continue to create new interactive products.

With MSG go we've experimented with and will continue to produce alter.

Alternative broadcast that calf.

And other unique.

Productions that are geared to specific demographics.

And we've been doing more and more on branded content with our.

Advertising partners. So when when you step back we believe that our rights.

Provide us with a really valuable opportunity to continue to create new products and to activate our customers and our partners and new and innovative ways and one of the ways that we're looking at now that we've talked about as you touched on is our direct to consumer product.

Rich.

We've said we continue to.

To work on and on which we continue to make good product.

Progress so at the end of the day.

Things that where we're.

We're very well suited to continue to capitalize on these very unique rights that we have.

Understood and if I could follow up with just one detail question with respect to the sphere.

Just an hour flow a lot of the discussion does revolve around supply chain availability and cost as well as labor.

Caution availability.

As it relates to the spear developing and getting that completed on time and on budget as it stands today.

Could you just talk about your comfort level, there as well please.

Sure Thanks, David as Dave.

First off we made great we have made great progress.

The building is really coming along nicely and we're excited about what's ahead for MSG sphere.

So we've said previously of MSG sphere is a complex construction project.

We continue we're continuing to aggressively manage every aspect of it.

The team has been very focused on supply chain and managing lead times really since the construction began.

Which includes working with our closely with our suppliers continually evaluating timelines and developing alternatives, where we can.

And progress wise pre pandemic, we had already purchased a lot of the larger items, including securing the majority of the main structural steel for the project.

Other areas such as concrete of the main structure is all essentially complete.

As I've mentioned in my prepared remarks, we're also planning to top out the steel exosphere that surround the building that will be done later this month.

I will say of course, we're not immune to what is happening on a macro level and there continue to be some things that we're working through regarding certain electronics for example, but our team is doing all we can to manage through the project and every single detail and we continue to make great progress on that.

Construction.

And we're excited about opening the venue in the second half of calendar 'twenty three.

Perfect. Thank you very much.

Yes.

Youre welcome.

Now I'll turn the call back over to Brian .

For any closing remarks.

Thank you all for joining US we look forward to speaking with you on our year end call in August have a good day.

Goodbye.

This concludes today's conference call.

You may now disconnect.

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