The Madison Square Garden Company (NASDAQ:MSG)
Q2 2016 Earnings Conference Call
February 04, 2016 10:00 AM ET
Ari Danes - SVP of IR
Doc O'Connor - President and CEO
Donna Coleman - EVP and CFO
John Janedis - Jefferies
Brandon Ross - BTIG
Alexia Quadrani - JPMorgan
David Miller - Topeka Capital
Ryan Fiftal - Morgan Stanley
Good morning. My name is Christy, and I’ll be your conference operator today. At this time, I would like to welcome everyone to The Madison Square Garden Company Fiscal 2016 Second Quarter 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. [Operator Instructions] Thank you.
I would now like to turn the call over to Ari Danes, Senior Vice President of Investor Relations for The Madison Square Garden Company. Please go ahead, sir.
Thanks, Christy. Good morning and welcome to The Madison Square Garden Company's fiscal 2016 second quarter earnings conference call. Our President and CEO, Doc O'Connor, will begin this morning's call with a discussion of some of the company's recent highlights. This will be followed by a review of our financial results with, Donna Coleman, our EVP and Chief Financial Officer. After our prepared remarks, we will open up the call for questions.
If you do not have a copy of today's earnings release, it is available in the Investors section of our corporate website.
Please take a note of the following. Today's discussion may contain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties, and that actual results, developments, and events may differ materially from those in the forward-looking statements as a result of various factors.
These include financial community perceptions of the company and its business, operations, financial condition, and the industry in which it operates, as well as the factors described in the company's filings with the Securities and Exchange Commission, including the sections entitled Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations contained therein. The company disclaims any obligation to update any forward-looking statements that may be discussed during this call.
Let me point out that on page 4 of today's earnings release, we provide consolidated and combined statements of operations and a reconciliation of adjusted operating cash flow or AOCF to operating income.
I would now like to introduce Doc O'Connor, President and CEO of The Madison Square Garden Company.
Thank you, Ari. Good morning, everyone. For the fiscal second quarter we generated strong top line and AOCF results driven by our continued focus on delivering exceptional live experiences for our fans and partners. The results were driven by the performance of the New York Knicks and Rangers, a very successful run of the Radio City Christmas Spectacular production and our continued ability to attract an exciting and diverse array of artists and events to our venues.
As we look forward, we see ample opportunities to drive organic growth across our existing assets and brands. We're also evaluating opportunities that will enable us to grow our business through acquisition and development. These potential investments include expanding our venue portfolio and extending into adjacencies that strengthen our position in delivering premium live experiences.
As you know, we have over $1.5 billion in cash on our balance sheet which we will utilize to grow our business and for our $525 million share repurchase program. We will be disciplined and opportunistic with how we deploy this capital and are focused on opportunities that will create long-term value for our shareholders.
I'd now like to share some operating highlights with you, starting first with our sports teams. The Knicks led by all-star Carmelo Anthony and rookie phenomenon Kristaps Porzingis have shown significant improvement this year and are currently in the hunt for a playoff position. Meanwhile, following a trip to the Eastern Conference Finals last season, the Ranges are currently in playoff position this season with the fourth best a record in the Eastern Conference and seventh best record in the NHL.
This past quarter we also showcased our Annual Radio City Christmas Spectacular production which was an enormous success. This holiday season we once again sold over 1 million tickets to fans of the cherished production helping to drive revenue and AOCF growth on a year-over-year basis for the New York Show. In fact, both ticket revenue and attendants were at their highest level since 2007, the year in which we celebrated the show’s 75th anniversary.
We attribute this to better strategy, better sales, better and more effective marketing, all examples of the kind of organic growth that can be achieved by improving our operations and operating as efficiently and effectively as possible. The results this season which mark that shows 83rd year are a true testament to the production’s enduring popularity. We now look forward to building on this success and our Radio City Christmas Spectacular and Rockettes brands with our Rockettes New York Spectacular production this coming summer.
We’ve taken what we learned from the Spring Spectacular and are in the process of exploring enhancements to this year’s show including an even greater role for the world famous Rockettes. We'll have more to announce about the show in the coming weeks.
We're also pleased to report that our world-class venues continue to be recognized with industry honors. Billboard Magazine recently named Madison Square Garden Arena and the Forum as the top-two grossing entertainment venues of their size in the US in its year-end rankings while Radio City Music Hall was ranked the highest grossing venue of its size in the world.
In addition, The Beacon Theatre, the Theatre at Madison Square Garden and The Chicago Theatre all ranked in the top 10 in the world in their respective classes for 2015. The popularity and prestige of our venues plays a significant role in our ability to attract the biggest acts and shows. At the world's most famous arena, Billy Joel recently played his 25th consecutive sold-out show as part of his record-breaking residency and has announced additional performances through September.
In December, we added a second residency with the announcement that legendary New Yorker and comedian Jerry Seinfeld would appear monthly at the Beacon Theatre. Seinfeld kicked off his residency last month and has already sold out all of his 12 announced shows. The Billy Joel and Jerry Seinfeld residencies are excellent examples of our efforts to increase the utilization of our venues. And we continue to explore additional opportunities for high profile recurring events.
Recent highlights at our venues include New Year's Eve with Phish at Madison Square Garden, Dead & Company at the Forum and the Gov't Mule at the Beacon. And very successful multi-show runs of the popular family show ELF at the Theatre at Madison Square Garden and the Wang Theatre as well as Bruce Springsteen at the Garden who returns next month for an additional show. Other events we look forward to hosting in the coming weeks include Billy Joel's and Jerry Seinfeld's continued residencies, 140th Annual Westminster Kennel Club Dog Show, the BNP Paribas tennis showdown featuring Serena Williams and Caroline Wozniacki, the 2016 NCAA Division I Wrestling Championships and BIG EAST basketball championship which MSG will host for the 34th consecutive year.
In summary, we’re pleased with our second-quarter results and remain focused on delivering excellence across our operations while executing our plans for growth and long-term value creation.
With that, I’ll now turn the call over to Donna who will take you through our financial results.
Thank you Doc and good morning everyone. As you know, the Madison Square Garden Company completed its spin-off from MSG Networks on September 30, 2015. The fiscal 2016 second quarter is the first period that reflects MSG's financial results on a stand-alone basis, including the Company's post-spin cost structure and actual corporate, general and administrative costs. Fiscal 2015 second-quarter results reflect the allocation of general corporate I mean, corporate, general and administrative costs based on accounting requirements for the preparation of carved out financial statement. As a result, prior-year second-quarter results do not reflect all of the actual expenses that the company would have incurred had it been a stand-alone public company for that quarter.
With that said, now let’s go to our reported results as compared to the prior year period. For the fiscal 2016 second quarter, the Company generated total revenue of $410.8 million and AOCF of $82.1 million, which represent increases of 4% and 18% respectively as compared to the prior year quarter. However, I would note that the year ago quarter included revenue and AOCF from the final season of the theatrical productions of the Christmas Spectacular presented outside New York. Excluding these amounts, total revenue and AOCF increased approximately 7% and 26% respectively versus the prior year quarter.
At MSG Entertainment, revenues of $183.8 million decreased 5% on a reported basis. Excluding $14.1 million in revenue from the theatrical productions of the Christmas Spectacular presented outside New York, Entertainment revenues increased approximately 2% year-over-year. This 2% increase was primarily due to growth in ad sales commissions, venue-related sponsorship and signage, and suite rental fee revenues as well as higher revenue from the New York production of the Radio City Christmas Spectacular. This was partially offset by a decrease in overall event -related revenues at the Company venues
We were able to grow revenues for the Christmas Spectacular production in New York during the quarter despite having 13 fewer scheduled shows as compared to the prior year second quarter. We played an additional 12 shows this January versus none during January 2015, which will be reflected in our third-quarter results. Looking at the overall holiday season run for the show including the shows which took place in January. We sold over 1 million tickets to the Christmas Spectacular in New York which represents a low-single digit percentage increase over last year. In addition, the average ticket price for the New York production increased by a low-single digit percentage versus last year.
Second-quarter AOCF at MSG Entertainment of $50.1 million decreased by $7.7 million on a reported basis. This reflect an increase in SG&A expenses, including the impact of higher allocated corporate, general and administrative costs and the absence of $4.5 million in direct contribution to AOCF from the theatrical productions of the Christmas Spectacular presented outside of New York, partially offset by other net increases. At MSG Sport, revenues of $226.8 million increased 12%. This increase was primarily due to higher local broadcast right fees due to the impact of the new long-term media rights agreements for the Knicks and Rangers with MSG networks as well as higher event-related revenues from other live sporting events and ad sales commissions and professional sports teams sponsorship and signage revenue.
Excluding the impact of the new long-term media rights agreements, MSG Sports revenues would have increased to 6% as compared to the prior year period. MSG Sports AOCF of $44.5 million increased by $27.1 million. This was primarily due to the increase in revenues and to a lesser extent, a decrease in direct operating expenses, partially offset by higher SG&A expenses. The decrease in direct operating expenses was primarily due to lower net provisions for NBA luxury tax and NBA and NHL revenue sharing expense. Team personnel compensation costs and net provisions for certain team personnel transactions, partially offset by higher event related expenses associated with other live sporting events.
The increase in SG&A expenses was primarily due to higher corporate general and administrative costs, employee compensation and related benefits and advertising sales expenses, partially offset by lower marketing costs and professional fees. For both our sports and entertainment segment, SG&A expenses for the prior year second quarter do not include all of the actual expenses that the company would have incurred had it been a standalone public company during that period.
With respect to our balance sheet, as of December 31, total unrestricted cash and cash equivalents was approximately $1.56 billion. In terms of the company share repurchase program, through yesterday, we have now repurchased over 375,000 shares for $56.7 million or an average of about $151 per share. This amount represents about 1.8% of Class A shares outstanding.
With that, I will turn the call back over to Ari.
Thank you, Donna. Christy, we would now like to open up the call for a few questions.
[Operator Instructions] Your first question comes from John Janedis of Jefferies.
Yes, hi, it’s John Janedis. Just I had two quick questions. First, you touched on this a little bit, but it looks like the bookings were a little bit lower than we expected. Was that timing related? And can you give us a color on the outlook? And then second, last quarter you talked about being opportunistic around the festival business. With recent news in the New York market, is this something that you’re still pursuing in the future or elsewhere or was just more of a unique opportunity? Thanks.
So I will address the first part. Again, you really should look at the entertainment business quarter-by-quarter. In the first quarter and for the first half, our revenues did increase. As Doc mentioned, we have a lot of exciting events on the horizon and I think we feel really about the second half of the year. So in other words, to answer your question, we do feel that what you’re seeing in the second quarter is largely timing.
On the festival part of the question, I will take one. With regards to the Queens festival specifically, despite our application being denied, we remain optimistic about the potential of an event in Queens and we will continue to work hard to convince the appropriate parties that we can host the festival that the community will love. As I mentioned before, as part of our growth strategy, I talked about our desire to explore new types of live events, including festivals to expand our portfolio outside of our venue footprint. I will remind you that we are already in the festival business by virtue of our ownership of Tribeca Enterprises and the Tribeca Film Festival. So we are looking for compelling ways to expand both the Tribeca portfolio events as well as grow selectively and diligently a festival business that includes large scale music events and large scale lifestyle events.
Great. Thank you.
Thank you. Our next question is from Brandon Ross of BTIG.
Hi, good morning, guys. Thanks for taking the question. Sort of a two-part question here. First you’re sitting on a chunk of air rights above Madison Square Garden. What’s your current strategy for monetizing those rights? And then secondly, with the Governor now focused on the Penn Station renovation again, and seemingly needing your cooperation, do you guys think you can leverage that into maybe getting city approval to sell air rights beyond the borders of the Garden?
Well, first of all, with respect to a strategy around air rights, as I've said before, we own the land, we own the building and we own the development rights, including the air rights on that land. As for monetizing those air rights, we will consider any and all options that make strategic and financial sense for us to maximize those and we’re pursuing that potential, but there is no specific strategy that we can discuss here on this call.
We stand with the Governor and his vision for renovated and Reimagine Penn Station in Moynihan Train Station and their value to all New Yorkers in the region. That's why Jim Dolan was on the podium with the Governor last month. And we’re looking forward to working with the Governor and his staff and any and all developers that step forward on a plan that's beneficial to all involved. We will see if that includes potential for us to monetize our air rights. But the RFP process is ongoing and in process and we have yet to see any specifics on that. So we can't speculate on our ability to monetize our air rights as part of that process.
Thanks Brandon. Christy, we’ll take the next caller.
Thank you. Your next question is from Alexia Quadrani of JPMorgan.
Hi. Thank you. With the state trends [ph] now moving to LA, I guess I wanted to get your thoughts on the impact to the Forum and sort of the surrounding area. Maybe, in terms of branding competition or sort of maybe opportunities down the road for partnerships there?
Well, we believe that the development of an NFL stadium in the surrounding entertainment district will be a great value to us, to the Forum, to The Madison Square Garden Company. The opportunity for revitalization in the district was always part of the initial vision that Jim Dolan and Irving Azoff had in deciding to purchase and renovate the Forum. And we believe these developments further enhance the value of the Forum and our portfolio.
We believe the asset value of the building and the land is significantly higher now compared to what we invested in, in order to purchase and renovate the site. So we believe that there is real value in this. Some of it already realized in this potential new development. We look forward to working with Stan Kroenke and the Rams Organization on synergies between the two properties and between the two organizations in the immediate future in order to further enhance that value.
Thanks Alexia. Christy, we’ll take the next caller.
Thank you. Your next question is from David Miller of Topeka Capital.
Hey, guys. Congratulations on the stellar results. Donna, a question for you, I appreciate the clarity and transparency on the pace of the buyback, the 370,000 shares. Would you be willing to go further and just talk about what the cadence of the buyback will be going forward for the 525 million that you earmarked? Do you expect to use that dry powder within the next year, a year-and-a-half, two years, any clarity on that would be great, and then I have a follow-up? Thanks.
We’re really pleased with how we’re executing on the buyback program right now. We feel that we are buying at a pace that’s the best benefit for our shareholders. We are continuing to monitor the market very closely and we’ll be opportunistic with our purchase. So I’m not really able to give you a specific cadence, but we are being very diligent and opportunistic in the way we’re looking at it.
Okay, fair enough. And then Doc, just a question on the Knicks payroll if you don't mind, and I’m asking this out of -- I'm just trying to get it straight of my head, because there seems to have been sort of conflicting reports that have come out on ESPN and in the sports news media, et cetera. So my understanding, when Tad Smith was the CEO is that the Knicks were a full luxury taxpayer as per their payroll at the time. And then you guys restructured some things, you restructured Carmelo’s contract and you became a partial luxury taxpayer. Now, it feels like you want to not be a luxury taxpayer any more, but you're not quite there yet. Is that the right way to gauge it and what are your plans going forward to kind of streamline the Knicks payroll? Thanks.
Well, you're partially incorrect there. We're not a taxpayer now. And we're not going to speculate on whether we will be in the near future. We like the progress that the Knicks have made so far this season and we're confident in Phil Jackson and Steve Mills’ leadership there. And we'll have to evaluate the risk-reward of each individual situation as it arises and as the season unfolds.
Thanks, David. Christie, we have time for one last caller.
And your final question is from Ryan Fiftal of Morgan Stanley.
Great. Good morning. I have two questions, if I may. So first maybe broadening out on the prior buyback question, I mean there are variety of private market value estimates out there including our own and we can all kind of quibble about the details, but with the stock down where it is, it’s pretty clear that your assets are trading at a pretty deep discount to your private market value. So I guess in light of that, I am curious what kind of urgency do you feel to close that gap with the private value? Would you be willing to lean more aggressively into the buyback, would you be willing to consider any other measures? Thanks
Well, I am not sure I can say much more than we’ve already said. We are very attuned to the market and the values and we're trying to be as opportunistic as possible. As I said, we're really pleased on how we're executing on the program so far and we will continue to do so. And I don’t really think there is much more I can really say right now.
Okay. And then my second question is on the venue acquisition strategy. So I guess starting by looking at the business you - the live events business that you have now, I am sure the Christmas show is nicely profitable so if you back that out, I mean, I would guess ballpark the entertainment segment is running more or less AOCF neutral on an annual basis. So give or take, but the minimum I think that suggest a pretty low historic return on capital. So can you kind of talk about why investments in additional venues and expanding the portfolio would have a meaningfully different return on capital? Thanks.
Well, we think that when it comes to the venue business increased scale matters, more venues will enable us to leverage our fixed corporate costs across increased revenue and increased number of venues. More venues increases our leverage to attract more high-end premium talent and shows. More venues increases the number of shows, the number of people attending our shows and therefore the number of eyeballs that we capture, all of which translates into more potential sponsorship revenue for us. More venues increases our ability to grow our content business. And I guess with the Forum, as an example, more venues has the potential of increasing our long-term asset value overall. So we believe very much in venue expansion strategy.
Thank you. With that, I'll turn the floor back over to Ari Danes for any closing remarks.
Thank you for joining us. We look forward to speaking with you on our next earnings call. Have a good day.
Thank you. This does conclude today's conference call. You may now disconnect.
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