Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

The Madison Square Garden Company (NASDAQ:MSG)

Q4 2014 Earnings Conference Call

August 20, 2014 10:00 am ET

Executives

Tad Smith – President & Chief Executive Officer

Bob Pollichino – Executive Vice President & Chief Financial Officer

Ari Danes – Vice President, Investor Relations

Analysts

Vasily Karasyov – Sterne Agee

Ryan Fiftal - Morgan Stanley

Michael Morris – Guggenheim Securities

Bryan Goldberg – Bank of America Merrill Lynch

David Joyce – ISI Group

Martin Pyykkonen – Rosenblatt Securities

David Miller – Topeka Capital Markets

Amy Yong – Macquarie Securities

Richard Tullo – Albert Fried & Company

Operator

Good morning, my name is Christie and I will be your conference operator for today. At this time I would like to welcome everyone to The Madison Square Garden Company Q4 and Fiscal Year-End Conference Call. (Operator instructions.) Thank you. I would now like to turn the call over to Ari Danes, Vice President of Investor Relations for The Madison Square Garden Company. Please go ahead, sir.

Ari Danes

Thanks, Christie. Good morning and welcome to The Madison Square Garden Company’s F2014 Year-End Earnings Conference Call.

Our President and CEO Tad Smith will begin this morning’s call with a discussion of some of the company’s recent highlights. This will be followed by a review of our financial results from Bob Pollichino, 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 website at www.themadisonsquaregardencompany.com.

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 or developments may differ materially from those in the forward-looking statements as a result of various factors including financial community perceptions of the company and its business, operations, financial condition and the industry in which it operates; and the factors described in the company’s filings with the Securities and Exchange Commission including the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained therein. The company disclaims any obligation to update any forward-looking statements that may be discussed during this call.

Let me point out that on Page 4 of today’s earnings release we provide consolidated statements of operations and a reconciliation of adjusted operating cash flow, or AOCF, to operating income.

I would now like to introduce Tad Smith, President and CEO of The Madison Square Garden Company.

Tad Smith

Thank you, Ari, and good morning. I’d like to start today’s call by taking a quick look back at some of our key accomplishments in F2014.

During the year we strengthened our foundation in many ways which should benefit our company for years to come. In October, years of planning and execution culminated with the debut of a fully-transformed Madison Square Garden Arena. The transformation project has been a success on all fronts and ensures The Garden’s continued legacy of bringing premier events to New York City.

For example, in March we hosted the East Regional Finals of the NCAA Div. I Men’s Basketball Championship and in 2015 we look forward to hosting The 64th NBA All-Star Game at The Arena. We celebrated another important milestone with the January reopening of The Forum in Los Angeles. The venue has established a meaningful West Coast presence for our company and is already filling a significant need in the greater Los Angeles market for music fans, artists and promoters.

Thanks to the fully transformed Garden and reinvented Forum we also continue to have great success in attracting world-class brands. This past year we added SAP as a new signature partner and formed multi-year partnerships with Lenox Hill Hospital and UPS among others. Meanwhile at the Forum we welcomed J.P. Morgan Chase as our presenting partner along with new partners Toyota, Caesar’s Entertainment, Corona, and The New York Times.

Regarding our teams, this year marked the Ranger’s first season led by coach Alain Vigneault which culminated with the team advancing to the Stanley Cup Finals. Meanwhile, the Knicks welcomed a new President Phil Jackson, who together with Steve Mills has been hard at work putting the team back on the path to success. We also acquired an NBA Development League team named the Westchester Knicks that will begin playing in White Plains, New York, this November.

Other highlights this past fiscal year included our agreement to sell the Fuse Network to SiTV Media with the transaction successfully completed on July 1st and the creation of strategic partnerships including Azoff, MSG Entertainment, Tribeca Enterprises and Brooklyn Bowl Las Vegas.

Since I joined the company we’ve been conducting a strategic evaluation to determine where we should focus our efforts to drive continued growth for shareholders. While this evaluation process is ongoing let me provide you with some emerging strategic themes.

We believe in the importance of owning content. Our ownership of sports franchises, live entertainment productions, and original programming allows us to benefit from increases in asset value, gives us control over how to manage our brands, and creates flexibility to pursue new ways to monetize our content. In addition, we are exploring ways to extend how our customers can consume our content. Product extensions create additional monetization opportunities, and certainly with regard to streaming allow us to live where younger audiences increasingly reside.

With respect to venues, we believe there is a meaningful opportunity to further distinguish ourselves from the competition in the eyes of customers, partners and talent, and drive growth. We created differentiated in-venue experiences with the transformation and Forum reinvention and will look to build upon these efforts both in our venues and potentially in select new markets.

We will strive to create more exciting and tailored live experiences with enhanced marketing and fan activation, the best of the best in terms of live events along with a relentless focus on customer service. In summary, we are optimistic about the opportunities in front of us and believe we can continue to generate attractive growth for our shareholders.

I will now discuss additional highlights for each of our business segments starting with MSG Media. Our regional sports networks experienced an exciting conclusion to the NHL hockey season with the Rangers’ run to the Stanley Cup Finals. MSG Network was the local broadcast home to the Rangers’ first round series against the Philadelphia Flyers which saw a 13% increase in average total household ratings versus the Rangers’ first round series last year as well as an exciting Game 7 that was the top-rated broadcasting cable program in the New York market in total households that day.

Rangers-related programming continued on MSG Networks for the remainder of the team’s playoff run. This included in-depth post-game shows as well as expanded programming surrounding the team’s dramatic come-from-behind series win against the Pittsburgh Penguins, their victory over the Montreal Canadians in the Eastern Conference Finals, and the team’s matchup against the Los Angeles Kings in the Stanley Cup Finals.

We are now in the midst of our summer programming lineup which has featured the WNBA’s New York Liberty, Major League Soccer’s New York Redbulls, and the Knicks Summer League as well as exclusive coverage of the New York Giants’ training camp. To help drive continued excitement for our Billy Joel franchise we are also airing historic Billy Joel concerts every Saturday night all summer long on MSG Network.

Turning now to MSG Entertainment, our portfolio of iconic venues continues to play host to an exciting and diverse array of artists and events. In fact, Billboard Magazine recently ranked The Garden the nation’s #1 venue of its size based on gross ticket sales in its 2014 Mid-Year Rankings. This was accomplished despite The Garden having fewer available dates than most arenas due to its schedule that also includes three professional sports teams.

The partnership between the world’s most famous arena and Billy Joel continues to be a great success as we’ve sold out all twelve shows that have been announced through December while other headlining acts this past quarter at The Garden included Lady Gaga and Armin van Buuren. The Theater at Madison Square Garden had a very busy Q4 that included audition shows for NBC’s America’s Got Talent and the popular family attraction Disney Live as well as a wide range of special events including graduations, upfronts, and a high-profile product launch.

We’ve been pleased with the response at The Forum which this past quarter welcomed Armin van Buuren, the Backstreet Boys with Avril Lavigne, as well as Chelsea Handler who earned the distinction of being the first artist to play our venues in all four of our markets – New York, L.A., Chicago, and Boston – in a single tour. The Forum was also recently honored with a Los Angeles Conservancy Award and a Los Angeles Architectural Award, both in recognition of our success in reinventing this famed arena.

Radio City Music Hall was recently ranked the world’s highest-grossing venue of its size in Billboard Magazine’s 2014 Mid-Year Rankings. This past quarter the venue saw the much-publicized return of comedian Dave Chappelle who was initially slated to play five nights, but due to tremendous demand doubled the number to ten shows, all of which were sold out. Other highlights this past quarter included Coldplay for two shows at The Beacon Theater and Eddy Izzard who played multiple shows at The Beacon, The Chicago Theater, and The Wang Theater in Boston.

With respect to F2015, The Garden’s summer schedule has been robust and we are excited to have the arena open and available for bookings for the full fiscal year. So far in our Q1 we have hosted Billy Joel, Bruno Mars, Katy Perry, Queen with Adam Lambert and Blake Shelton, and we look forward to welcoming Luke Bryan, The Eagles, Cher and Enrique Iglesias, and Pitt Bull.

The Forum has received a terrific response from artists, promoters, and fans. As a result we are optimistic about the bookings calendar for the venue in F2015 with many artists and events already announced for the first half of the fiscal year. This includes Steely Dan, Queen with Adam Lambert, Aerosmith, Arcade Fire, Luis Miguel, The Black Keys, Five Seconds of Summer, and Justin Timberlake who played The Forum earlier this year and is already coming back.

One major event that has already been booked takes place this Sunday night as the popular MTV Video Music Awards is broadcast live from The Forum. Hosting this high-profile event in The Forum’s first year allows us to showcase this celebrated arena to every major artist, manager and executive in the music and entertainment industry, and we look forward to welcoming more special events like this.

In the coming months The Forum and The Garden will also both host Tom Petty and The Heartbreakers, Hardwell, and Fleetwood Mac, highlighting the advantage of owning two world-class arenas in the top two entertainment markets in the country.

At Radio City we are excited to welcome back America’s Got Talent which began broadcasting live twice a week from the Hall in late July. Other Q1 highlights include Crosby, Stills and Nash for a multi-night engagement at The Beacon, The Voice tour featuring artists from NBC’s popular show at both The Beacon and The Chicago Theater, and Sara Bareilles at the Theater at Madison Square Garden and The Chicago Theater.

On the production side we recently hosted our annual Christmas in August event which kicks off our promotion of the Radio City Christmas Spectacular. In the months ahead you should expect to see a marketing campaign that includes a significant out-of-home presence and the reach of our marketing partnerships as well as more targeted broadcasting cable television campaigns.

With respect to the Christmas Spectacular theatrical productions outside of New York, we will present the show in Nashville for the 13th year at The Grand Ole Opry House during this upcoming holiday season. We will also present the show in Omaha in Houston and look forward to a successful holiday season run.

Finally, we are excited about bringing our new large-scale theatrical production featuring The Rockettes to Radio City Music Hall. We expect this one-of-a-kind show to debut in the Spring of 2015 and look forward to sharing more details with you about that in the near future.

Turning to MSG Sports, the Rangers brought home the title of Eastern Conference Champions as the team reached the Stanley Cup Finals for the first time in twenty years. Since then the Rangers have completed a number of player transactions including re-signing key members Derick Brassard, Matt Zuccarello, and Chris Kreider and adding Defenseman Dan Boyle.

With respect to the Knicks, in June Derrick Fisher, a five-time NBA Champion became the team’s new Head Coach. The Knicks also re-signed seven-time NBA All-Star Forward Carmelo Anthony, and completed several player transactions including acquiring Point Guard Jose Calderon. We look forward to the 2014-2015 seasons for both our teams.

As you know we announced that we did not raise Knicks season ticket prices for next season, while Rangers season ticket prices increased by an average of 3%. To date we’ve renewed 91% of tickets for the Knicks and over 93% for the Rangers, and expect to be sold out of season tickets for the fifth straight year for the Knicks and the eighth straight year for the Rangers.

Meanwhile, MSG Sports continued to host a variety of memorable sporting events in our F4Q including the return of boxing to The Forum as four Division World Champion Juan Manuel Marquez defeated former Junior Welterweight World Champion Mike Alvarado, as well as a night of Championship Boxing at the world’s most famous arena as three Division World Champion Miguel Cotto won the WBC Middleweight Championship.

F2015 will again include the very best in professional and collegiate sports. At The Garden we recently hosted boxing’s fastest-rising superstar Gennady Golovkin as he successfully defended his WBA and IBO Middleweight World Titles. This year will also include the 64th NBA All-Star Game, the BNT Paribas Showdown for the eighth straight year, professional bull riders and a full slate of college basketball featuring such powerhouse teams as Duke, Syracuse, and of course St. John’s along with the National Invitational Tournament and the Big East Tournament for the 33rd consecutive year.

Before turning the call over to Bob Pollichino I would like to take a moment to welcome Sean Creamer who we recently announced will become our new Executive Vice President and Chief Financial Officer effective September 1st. Sean, who most recently served as President and CEO at Arbitron, a leading media research company, brings considerable financial and operating experience along with a proven track record of creating value for shareholders.

We are confident that he will play a valuable role in helping to drive our successful operations and growth strategy, and on a personal note I am very pleased to say that he actually took a day off from his vacation to come be with us here today. Thank you, Sean.

At the same time, on behalf of the entire company I would like to thank Bob for his numerous contributions during his long and very distinguished career at MSG. This includes his critical role in our spin-off from Cablevision and in guiding our company through the transformation project. Bob’s thoughtful judgment and wisdom have played a very important part in helping establish the company’s reputation as an industry leader. We wish him well as he moves towards the next chapter in his life.

And with that I will turn the call over to our friend Bob Pollichino.

Bob Pollichino

Thank you, Tad. I’d like to start by noting that results for F2014 and our Q4 are inclusive of the results of Fuse.

For F2014 we generated total revenues of approximately $1.56 billion, up 16% and consolidated AOCF of $312.8 million, down 12% - both as compared to the prior year. Excluding the impact of the exercise of an NHL-compliance buyout in our Q4 as well as increased expenses related to executive management transition costs, and the postponement of the company’s new large-scale theatrical production in Q3, F2014 total company AOCF would have been $363.7 million.

With respect to Q4 results versus the prior-year period, total revenues were $371.7 million, up 10%, and consolidated AOCF was $55.0 million, down 40%. Excluding the impact of the exercise of the NHL compliance buyout, AOCF would have been $84.6 million.

With respect to our business segments, MSG Media generated $176.4 million in revenue, a slight decrease versus the prior-year quarter. Advertising revenue decreased $5.8 million, primarily due to lower New York Knicks related advertising revenue, mainly a result of the absence of playoff telecasts versus the prior-year quarter, as well as lower advertising revenue at Fuse.

Other revenues decreased $1 million, primarily due to the expiration in April, 2013, of a short-term programming licensing agreement. The decrease in advertising and other revenues was mostly offset by higher affiliation fee revenue which increased $6.4 million primarily due to higher affiliation rates, partially offset by the impact of a small decrease in MSG Network subscribers.

Q4 AOCF of $84.3 million increased 3% primarily due to a decrease in operating expenses partially offset by an increase in SG&A expenses and to a lesser extent the slight decrease in revenues. The decrease in direct operating expenses was due to lower programming expenses at Fuse.

With respect to F2015, year-over-year comparisons will be impacted by the sale of Fuse, with MSG Media results on a go-forward basis solely reflecting the results of MSG Networks. Please note that Fuse generated meaningful revenues in F2014 but did not have a material impact on MSG Media or total company AOCF. In terms of MSG Networks, we expect continued revenue and AOCF growth led by increases in affiliation fee revenue.

Our MSG Entertainment segment generated $56.5 million in revenues in our Q4, an increase of 62%. The increase was primarily due to higher event-related revenues at all of the company’s venues, led by the Theater at Madison Square Garden, The Madison Square Garden Arena, The Forum, and The Chicago Theater, as well as higher venue-related sponsorship and signage and suite rental fee revenues.

Q4 AOCF loss of $11.4 million improved by $3.2 million due to the increase in revenues mostly offset by an increase in direct operating expenses and to a lesser extent an increase in SG&A expenses. The increase in direct operating expenses was primarily due to higher event-related operating expenses.

With respect to F2015, we expect MSG Entertainment to benefit from The Madison Square Garden Arena, the Theater at Madison Square Garden, and The Forum all being available for events for the full fiscal year; and to also reflect the results of our new large-scale theatrical production at Radio City Music Hall.

Our MSG Sports segment generated $156.8 million in revenues in Q4, an increase of 11%. The increase in revenues was primarily due to higher playoff-related revenues, inter-segment media rights revenue, professional sports team regular season ticket-related revenue, and suite rental fee revenue.

Q4 AOCF decreased by $38.7 million to a loss of $10.3 million, primarily due to an increase in direct operating expenses and to a lesser extent higher SG&A expenses, partially offset by the increase in revenues. The increase in direct operating expenses was primarily due to a $37.3 million increase in net provisions for certain team personnel transactions, mainly a result of the exercise of the Rangers’ second and final compliance buyout, as well as higher net provisions for NBA luxury tax and NBA and NHL revenue sharing expense, other team operating expenses, and team personnel compensation expense.

With respect to F2015, as the transformation project is complete and The Garden is once again open year-round for events, we will host a full slate of Knicks and Rangers pre-season home games at the Arena this year. We also expect MSG Sports to benefit from continued growth in other key revenue categories, such as suite rental fee revenue and sponsorship and signage revenues.

Please keep in mind that although we benefited in F2014 from hosting the East Regional Finals of the NCAA Div. I Men’s Basketball Championship, the tournament is not returning in F2015 as it rotates sites each year.

As always our teams’ performance in the playoffs is a key driver of MSG Sports segment results. This past year, the Rangers played a total of twelve home playoff games which generated meaningful playoff-related revenues and AOCF for our MSG Sports segment. In addition, MSG Media benefited by telecasting five of the Rangers first-round playoff games in Q4 as well as extensive coverage surrounding the team’s run to the Stanley Cup Finals.

Finally, the total net cash and cash equivalents was approximately $92 million. This does not include the proceeds from our sale of Fuse which closed on July 1st. In addition, our new $500 million revolver was undrawn with our borrowing availability at $493 million as there remains approximately $7 million in letters of credit outstanding.

Before turning the call back over to Ari I would like to say that I am grateful to have had a career working for companies with world-class brands, from Cablevision to AMC Networks to The Madison Square Garden Company. I consider myself fortunate to have been able to work with so many talented people and I could not be more proud of the company’s accomplishments and of its position today as a world-class media, sports and entertainment company with unique assets and enormous opportunities.

As I start to work through a transition period with Sean I am confident that the company is poised to continue its excellent performance in the years ahead and I wish MSG every success. I will now turn the call back over to Ari.

Ari Danes

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

Question-and-Answer Session

Operator

Sure. (Operator instructions.) And your first question comes from Vasily Karasyov of Sterne Agee.

Vasily Karasyov – Sterne Agee

Thank you, good morning. Tad, I wanted to ask about the Network subscriber trends. I think last quarter you highlighted for the first time that you saw a decline in subscribers and it seems like it happened again. So I was wondering if it also is down sequentially quarter-on-quarter and what is the impact on the revenue – how much of a drag on a revenue growth year-on-year it was.

Tad Smith

Vasily, thank you for the question and good morning. Let me tell you what we’re seeing in that area. First, I think we stated affiliation fee revenue increased about $6.4 million in our Q4 primarily due to higher rates partially offset by the impact of a small decrease of subscribers at the networks versus the prior-year quarter.

Similar to last quarter we continue to observe that there has been no real change in basic subscribers amongst the affiliates that carry MSG Networks in our marketplace over the trailing twelve months. I should point out that the way we do that is we have an in-arrears estimate – so we’re reasonably confident but that still remains an estimate as we say that. As such we do believe that the small year-over-year decrease in MSG Network subscribers is due to a small migration of subscribers to lower-priced tiers that do not include MSG Networks, and we do have various contractual protections in that regard.

If you are trying to reconcile the difference between reported affiliation fee revenue growth in Q3 2014 of $10 million and the growth in Q4 2014 of $6.4 million, the one thing I would add, Vasily, is that there was a $2.3 million in-kind marketing and promotional consideration that affected both periods; and if you normalize for that the remaining small difference in revenue growth between Q3 and Q4 vis-à-vis the prior-year quarters is explained by the change in the number of subscribers.

You know, if you step back, look – we continue to monitor our subscriber base very closely and frankly looking ahead we expect to drive continued affiliation fee revenue growth at the networks. We have conversations with MSOs all the time. The strength of our sports franchises and the attractiveness of those networks is robust. We have done some very interesting things with networks and looking at the penetration of our networks in months among subscribers, and we have seen not only wide variations which yields growth but also a substantial area to improve – and frankly a remarkably high degree of penetration each month across multiple households inside the MSOs where we have visibility. So we see that the sports thing has a great deal of strength and that’s a real positive.

Finally, if you look at sequential quarter-over-quarter, it turns out our subscribers in our service area were actually a teeny, tiny bit up versus Q3.

Operator

Thank you. Your next question comes from Ryan Fiftal of Morgan Stanley.

Ryan Fiftal – Morgan Stanley

Great, good morning – two questions if I may. First on the strategic assessment that you’re conducting, you talked about extending how consumers access your content. Presumably that means you’re looking pretty hard at how you leverage your digital rights? So can you give us any more color on how you think about the revenue opportunity there from expanding your digital offering versus balancing any risk to the existing pay ecosystem in your distribution partners there? And also I’d be curious if there’s anything you’ve seen at other RSNs, that other RSNs are doing that’s interesting or if you’re looking to innovate yourself there?

Tad Smith

Thank you for the question. We’re definitely looking to innovate in the area. I would say that with respect to the digital opportunity your inference is correct, that we are exploring it actively and we’re excited about the opportunity there. It’s too early to talk about specific monetization but I will say you shouldn’t infer that we like over-the-top strategies as opposed to TV-everywhere strategies if that’s helpful.

Ryan Fiftal – Morgan Stanley

Okay, that is. And then a second one again on growth opportunities. Tad, I believe a lot of the work that you did over at Cablevision was reforming the way they sold local advertising there across the cable business, the networks, and Newsday. So I was wondering, having been at MSG for a few months how would you compare MSG’s advertising sales process and techniques compared to what you implemented over at Cablevision, and do you see that as another source of opportunity?

Tad Smith

Yes, I do see it as an opportunity to improve our advertising effectiveness on the networks, and we are working assiduously in that regard. Cablevision has a number of things that are very powerful in the marketplace, and one of the things they do really well is not just sales process but they use data very effectively. And so insofar as we can copy some of those techniques and skills that they have really frankly pioneered – I mean they’re so far ahead of everybody else I marvel at them sometimes, and we’re going to try to copy as much of what they’re doing over there as we can here.

Ryan Fiftal – Morgan Stanley

Okay, thank you.

Operator

Your next question comes from Michael Morris of Guggenheim Securities.

Michael Morris – Guggenheim Securities

Thank you, good morning guys. I have a couple questions on the Knicks payroll. The first one with respect to the luxury tax which is a somewhat complicated calculation, given that you guys have a couple of larger player contracts that are approaching their final season and the fact that you now have the long-term agreement with Carmelo Anthony, what are the circumstances that would keep you over the luxury tax threshold beyond the upcoming season? And then secondly, I guess somewhat more broadly, how do you think about the Knicks payroll costs from a business perspective or how much do the cost considerations impact how the team leadership thinks about building the roster going forward? Thanks.

Tad Smith

Yeah. You know, our company is very firmly committed to having championship-caliber team and particularly with the Knicks, and as you note we will incur a luxury tax in the 2014-2015 fiscal year. Nevertheless, management will certainly do whatever is feasible to have a championship-caliber team without incurring the repeat offender tax after 2014-2015.

Michael Morris – Guggenheim Securities

Okay, so I guess I mean is there anything you can say specifically with respect to the contracts? How would you even stay over that luxury tax threshold with the contracts that are expiring? Would you have to extend those existing contracts? Would you be able to bring in free agents that would keep you over that level? I’m just trying to think of what the circumstances would be. I understand you’re not guiding to what the payroll’s going to be, I understand that, but can you help us at all with the decisions that could be made to keep you over that level? I guess that’s kind of what I’m getting at – as we analyze it what should we be looking for with respect to any players you do sign in the future?

Tad Smith

Well, I’m not going to get into anything about specific Knicks player transactions or specific Knicks players, or specific Knicks period. But I think I was pretty clear just a minute ago that management will do whatever is feasible to field a championship team after F2014 without incurring the repeat offender tax.

Michael Morris – Guggenheim Securities

Okay. That’s great, thank you.

Operator

Thank you. Your next question comes from Bryan Goldberg with Bank of America Merrill Lynch.

Bryan Goldberg – Bank of America Merrill Lynch

Thanks, I’ve just got a couple – one on costs, one on the JVs and a bigger picture one on value enhancement opportunities. So first with the divisional heads now out of your management structure, I’m just curious as part of your ongoing strategic review of the company are there future opportunities with respect to the company’s overall cost structure? We can exclude the sports teams because I think we just addressed that, but if there’s any color you can provide for how we should be thinking about that we’d be curious. Thank you.

Tad Smith

Well, we just went through in Q4 a reorganization and there is in fact some severance expense in each of the divisions. So we have and continue to be focused on making sure our resources are deployed in the areas where we think they will bring growth. With particular respect to the organization I would say that the main effect of that has been to bring the top management closer to customers and the source of the revenue and the front line across the business and we view that as a real positive.

Bryan Goldberg – Bank of America Merrill Lynch

Okay, thanks. And then I was wondering, can you update us on the major activities at your non-consolidated JVs? It looks like the carrying value that you have for these assets was up about $38 million in the quarter so any color as to the drivers there would be helpful.

Tad Smith

Well yeah, you know, it’s interesting. I believe the Azoff/MSG venture is about a year old and it’s had a very exciting first year. The management business at the venture is growing and thriving and has been a big leg up for us in driving our entertainment market share, which is very strong across the group. The investments from the venture and marketing services business such as Burns and DBA and Pop2Life I think place our company at the intersection of growth areas that include brands, digital services, social media and more importantly talent.

The venture also recently invested as you may know in a comedy business that smartly positions us in my view within the comedy sector with talent again, intellectual property and venues. The venture has also begun to create what I consider to be enduring shareholder value in the critical area of music rights, and frankly the venture’s management has been a really thoughtful strategic partner to the company and has been frankly really helpful, not just in the entertainment business but also in helping to shape our strategy and thinking through ways to position the company in places where the puck will be as opposed to where it currently is.

Bryan Goldberg – Bank of America Merrill Lynch

If I can just quickly follow up on that, is it safe for us to assume that the uptick in the carrying value was attributable to activities at the Azoff/MSG venture?

Bob Pollichino

Yeah, what you’re seeing is that the loan of a full $50 million to the venture, so that’s what you’re seeing happening in the quarter.

Bryan Goldberg – Bank of America Merrill Lynch

Okay, thanks. And then finally just a bigger picture question – with the sale of the Clippers recently there’s been a lot of focus rightfully so on the sum-of-the-parts value of your company. It’s a very compelling data point. I guess from your perspective is management more focused now at all on the sum-of-the-parts story as well and are you considering any ways structural or otherwise of unlocking this value for shareholders?

Tad Smith

Yeah, I don’t really want to comment on any of that other than to say management continues to be very focused on creating enduring shareholder value for the shareholders, and enduring value for the shareholders. But beyond that I don’t really want to say anything.

Bryan Goldberg – Bank of America Merrill Lynch

Okay, fair enough. Thank you.

Operator

Thank you. Your next question comes from David Joyce of ISI Group.

David Joyce – ISI Group

Thank you. I’ve got a couple technical cash flow questions for Bob and then one for Tad. On the contracts, player contracts, that was mostly just a GAAP hit to the P&L, correct? If you can please explain how that affects the cash flow going forward, and then secondly on the transformation and The Forum, is the company done paying for those now?

Bob Pollichino

Sure. With respect to the compliance buyout we had to recognize in the period all the costs associated with that player contract; but under the collective bargaining agreement what we are able to do is pay over 2x the remaining balance of that contract. So cash will go out over a longer period but we recognize the expense in the current period.

With respect to the transformation as of June 30th we’ve paid $1.025 billion of the transformation costs, and if you remember we’ve said we expect that the total transformation costs will not exceed $1.50 billion. And with respect to The Forum we’ve basically paid all the costs associated with that transformation.

David Joyce – ISI Group

Okay, thanks. And then in terms of the growth acquisition opportunities, Tad, do you have any preference or can you update us on your opinion on whether the fully-owned acquisitions make more sense or would you look to more JVs? Is there any difference in how you would like to fund or own any potential assets?

Tad Smith

Well, I think they both have their place and they both have their advantages. In the case of fully-owned consolidated things obviously you get the benefit of the cash flow rolling through the enterprise and you control the enterprise. In the case of unconsolidated joint ventures you get access to creative units and ecosystems if you will that maybe you wouldn’t get if they were consolidated in a larger enterprise – it might not be the right cultural fit. So I think they both have positives and it’s situation-specific as to which one makes sense in which case.

Operator

Thank you. Your next question comes from Martin Pyykkonen of Rosenblatt Securities.

Martin Pyykkonen – Rosenblatt Securities

Yeah, thanks. Tad, a question for you, and you kind of followed up this quarter I felt as you did last quarter, but just to put anything in maybe not numbers necessarily, but large cap M&E stocks historically have been very buyback, dividend-driven and several of those obvious names have reloaded recently. You didn’t say buybacks and you know, Hank Ratner before you had I think been pretty clear about opportunistic growth as really a priority. Is that the way investors should still think about it going forward, that while not ruling out buybacks or dividends, they may or should likely be a fairly minor piece because you have a lot of growth investments that you can pursue – first question.

And then secondly on the L.A. Forum, I don’t know if you’d hazard a guess at this for F2015 but obviously you’ve got some favorable comps just because it wasn’t open in the early part of last year, but a percent capacity utilization you might forecast for The Forum because it certainly seems to be something that could lead to a positive, sustainable entertainment segment AOCF with or without taking share from Staples Center which certainly seems to be a part of it for big multi-night shows but also just an underserved market. I’m just trying to scope if that’s really a key swing factor on the entertainment segment for F2015?

Tad Smith

Well, let me start with The Forum. I’m very excited about how The Forum is doing. If you look at Pollstar which as you probably know very well tracks concert market share, from January to June, and frankly if you did the January to June through October period, The Forum in its class – and class includes arenas and amphitheaters – based upon committed, announced and also already-had events, continues to have the #1 market share in the Los Angeles metro area. And given that it opened January 15th I think that’s just positively astonishing.

The spring quarter obviously got a little bit more market share from the amphitheaters due to seasonality but really The Forum is doing a great job in filling it up. And once again, let me reiterate what I mentioned in the upfront remarks – I think that the Video Music Awards which I can’t wait to see on Sunday night – should only enhance the penetration and positive feel that both the talent and music fans have for The Forum. So I’m very optimistic about The Forum. I feel very good about it in the current fiscal year, meaning the one not that we’re reporting on but the one we’re actually in, and I believe the future for that property is very bright.

Gosh, with respect to your first question about capital allocation, we’ve spent so much time on that in the last earnings call I really don’t have anything to add.

Martin Pyykkonen – Rosenblatt Securities

Okay, and if I can just get a clarification on one thing that Bob said, I want to make sure I got the numbers right. Bob, when you talked about the Knicks being a drag and MSG ad revenue down for the full year 5%, did I get that right for F2014? And were the Knicks’ lack of playoffs a key factor? If I got that right going back to a year ago, was MSG ad revenue up and the Knicks not very deep but in the playoffs – was it up partly due to Knicks ad revenue a year ago?

Bob Pollichino

Yeah, in the quarter, sure.

Martin Pyykkonen – Rosenblatt Securities

Right, okay. Thanks.

Tad Smith

By the way, I want to add one thing on Knicks ad revenue, and frankly Rangers ad revenue. One of the interesting analyses I saw last week took the ad revenue that we did through the season, this is regular season only; divided it by the number of games and further divided it by the actual Nielsen GRPs for the points. And so you would get an average revenue per game per point, and even in what was a tough year for the Knicks during the regular season there was growth in the average revenue per point per game for the Knicks.

There was sharp growth in the Rangers but it shows the real strength that advertisers have for the franchisers there, and moreover, in a world where people are increasingly fast forwarding through commercials they’re not doing it for sports. Sports continues to be very strong; the ad revenue market is shifting share increasingly to sports and I’m optimistic about the future in both areas.

Operator

Thank you. Your next question comes from David Miller of Topeka Capital Markets.

David Miller – Topeka Capital Markets

Yeah hi, good morning. Tad, a lot of us who have been following MSG for a while kind of looked philosophically on F2015 as sort of a free cash flow explosion year just because The Forum’s done, The Garden’s done and CAPEX would theoretically be diminimous. It sounds like that’s not the case just given the strategic review that you have going on currently although you haven’t concluded it yet. So I’m just wondering if there are any drivers of CAPEX, specific drivers of CAPEX that you can cite going forward in the new fiscal year? I know you guys don’t give specific guidance but any loose guidance you’re willing to give us would be very helpful, thanks a lot.

Tad Smith

Well I don’t think I really want to give guidance on free cash flow but I have a question for you: what gave you the inference you drew?

David Miller – Topeka Capital Markets

The inference for what, for…

Tad Smith

I’m inferring first of all that “explosion” is a positive thing in the way you say it there, so I’ll take it as a positive. And then you said you inferred that there would not be free cash flow growth in the current fiscal year and I’m just wondering what gave you that inference.

David Miller – Topeka Capital Markets

No, I didn’t say that. I said we all assumed, a lot of us assumed that there would be free cash flow growth in the new fiscal year. We’re trying to model that out, so I’m wondering what kind of drivers. I know you’re not going to issue specific guidance, you’re not going to issue that kind of granularity – I’m wondering what kind of drivers you’re willing to cite that would allow us a little bit more specificity in modeling that free cash flow number for the new fiscal year.

Tad Smith

I don’t know, Bob, do you want to take that one?

Bob Pollichino

Well, you know, the one thing I think you mentioned that you have to think about is the severe reduction in capital expenditures due to the transformation being over, The Forum being over and returning back to sort of a normal level of capital expenditures to operate the company. So that’s one of the key things to think about.

Tad Smith

Thanks for the question, David. Christie, can we take the next caller?

Operator

Your next question comes from Amy Yong of Macquarie.

Amy Yong – Macquarie Securities

Thanks. Two questions: first, can you talk about, I mean as you’re gaining scale in [New York DMA] with your few JVs and I guess Tribeca Film and as you expand your presence out on the West Coast, can you give us a better sense of sort of the sponsorship pipeline and has it opened up any new opportunities that you didn’t see a year or two years ago? And I guess the second question is just on the entertainment side, can you just lay out some of the bigger puts and takes on the expenses? It seems like you’re done ramping up spending on some of the startup fees for The Forum and also [Harden Light]. If you can just give us a better directional sense of expenses that would be helpful, thanks.

Tad Smith

Yeah, well I mean in the upfront remarks we talked about both new sponsor signings at The Garden in New York in the last fiscal year as well as a significant number of new ones at The Forum, and I think those are evidence of the growth opportunity with sponsors. As you turn towards the future, one of the things that’s exciting about sponsoring live events or sponsoring venues, or frankly sponsoring teams – all of them – is that again, in a world where the attention of the consumer is hard to retain, live events are really attractive to brands. And insofar as we can continue to innovate and create attractive inventory for them I think you’re going to see that growth continue and the pipeline continue to be pretty strong.

Amy Yong – Macquarie Securities

Great. And on the entertainment side with expenses?

Tad Smith

Bob, do you want to add anything on entertainment expenses?

Bob Pollichino

I’m not quite sure what you’re getting at with expenses, but remember the things we have talked about is The Arena, the Theater, The Forum will all be open for a full year.

Tad Smith

I don’t know, Amy, is it helpful if Bob talks a little bit about the cash conversion on incremental revenue in the quarter for entertainment? The incremental revenue went up; the flow through on it was relatively low. There were a number of things in the quarter…

Bob Pollichino

Yeah, if you’re just talking about the quarter, the issue in the quarter really is the way we account for different types of properties. So if you account for an event that is a promoted or co-promoted you record revenue and you record all of the expenses. So in a quarter where you have one of our large shows where we’re co-promoting you’ll see tremendous revenue from that event and tremendous expenses, so the margin will look like it’s compressed.

But going back to what you’re thinking about year-over-year versus the quarter, I think those are some key drivers, just the availability of the business. There is nothing on the CAPEX side that is dramatic that we can think of. And the other thing that we had which was sort of a one-time issue is all of the management changes that affected the current period where we booked that severance, and you won’t see that, we don’t think you’ll see that in each period – so a couple of things to think about.

Amy Yong – Macquarie Securities

Great, that’s helpful.

Tad Smith

Christie, we have time for one last caller.

Operator

Thank you. Today’s final question will come from Richard Tullo of Albert Fried.

Richard Tullo – Albert Fried & Company

Two quick things: one for Sean – welcome aboard, looking forward to talking with you soon. Bob, I hope you have a great retirement and thank you very much for all your help over these years. And you know, so my one question here is there’s a lot of puts and takes reflected over the last two quarters, and as a result what are we looking at in terms of one-time items versus items that are going to be recurring? Did I get dropped from the call again?

Tad Smith

No, we heard your question, we were just pausing to reflect on it and there are really two dimensions to the reflection. One is how to answer it and two is whether to answer it [laughter] to be frank about it. Listen, in my view my first two quarters had some things moving up and down in them. I think in a business that is dynamic and changing you will continue to have things that move up and down a little bit so I’m cautious to give any sort of forward-looking view on it. But that said I can continue to be hopeful that that’s settling down.

Richard Tullo – Albert Fried & Company

Okay great. And so one other question: when you talked about content, is that going to be along the lines of the current content offering and bringing those onto digital platforms? Or are you going to bring new forms of sports or sports that you haven’t carried before and bring those onto digital as well as to the channels?

Tad Smith

It’s a very astute question. What I said was we like owning content and I also said that we’re exploring ways to extend how our customers consume our content. I don’t think I went quite as far as to what you inferred but I appreciate the question.

Operator

Thank you. With that I would like to hand the call back over to Ari Danes for any closing remarks.

Ari Danes

Thank you all for joining us. We look forward to speaking to you on our next earnings call in November. Thank you.

Tad Smith

And thank you very much, Bob, we really appreciate your service. [Applause]

Bob Pollichino

Thank you, I appreciate it.

Ari Danes

Have a great day, everyone.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: The Madison Square Garden Company's (MSG) CEO Tad Smith On Q4 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts