Madison Square Garden Entertainment Corp. Q2 FY2021 Earnings Call

Good morning. My name is Theresa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Madison Square Garden Entertainment Corp Fiscal 2021 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. I would now like to turn the call over to Ari Danes, Investor Relations. Please go ahead, sir.

Thank you. Good morning, and welcome to MSG Entertainment's fiscal 2021 second quarter earnings conference call. Our President, Andy Lustgarten, will begin today's call with an update on the company's operations. This will be followed by a review of our financial results with Mark Fitzpatrick, our EVP and Chief Financial Officer. After our prepared remarks, we will open up the call for questions. If you do not have a copy of today's earnings release, it is available in the Investors Section of our corporate website. Please take note of the following. Today's discussion may contain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties, and that actual results, development 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. On Pages 5 and 6 of today's earnings release, we provide consolidated statements of operations and a reconciliation of operating income to adjusted operating income, or AOI, a non-GAAP financial measure. And with that, I will now turn the call over to Andy.

Thank you, Ari, and good morning, everyone. Let me start by saying that we are thrilled with Governor Cuomo's announcement on Wednesday that arenas in New York can reopen with limited capacity. This comes on the heels of the governor's reopening New York City restaurants for indoor dining at reduced capacity starting today. We believe this is the beginning of our path back to normal operations, and we look forward to returning to what we do best. We've been preparing for this moment, working with state and local health officials to develop a comprehensive plan with rigorous safety protocols for our reopening. In addition, thanks to the NBA and NHL, we've learned best practices as a number of teams have been playing with limited in-arena fan attendance this season. We think the time is right to welcome back fans, and we've been encouraged by the tremendous demand for live events we've seen recently. From the success of the Buffalo Bills playoff games to the crowds at the Super Bowl this past weekend, it's clear that people are eager to gather again. And we expect to see the same enthusiasm once we're able to reopen our doors to fans, which we intend to do on February 23 with the Knicks and February 26 with the Rangers for roughly 2,000 people per game. These types of events will be taking place not only at The Garden, but also in arenas across New York. And we believe this push forward, coupled with the ongoing vaccine rollout, will pave the way for our other assets and brands to participate in a broader reopening. With this week's news, we've taken the next step and started talking to artists and managers to gauge their interest in playing The Garden to reduced capacity crowds. While the economics may prove to be more challenging for concerts, if there's one thing we know, it's that there's an intense desire by the entire industry for the return of live music. Nowhere is this more apparent than the impressive bookings schedule we've lined up for the second half of calendar 2021, which has the potential to be one of our busiest ever if we are able to fully reopen. And although it's still early, we're also seeing artists hold dates during the first half of calendar 2022. Demand from fans is also strong as evidenced by our rescheduled shows where 73% of ticket holders have chosen to hold on to their tickets instead of requesting a refund. We've also continued to see strong engagement with our Rockettes and Christmas Spectacular brands, which we believe bodes well for the productions' continued success. Traditional broadcast media still reaches the widest audience for the Rockettes. And their feature performance at Macy's Thanksgiving Day Parade and the Rockefeller Center Christmas Tree Lighting were seen by more than 29 million viewers. We also partnered with MVC to televise a Christmas Spectacular special, which became one of the season's most watched holiday shows with nearly 9 million viewers over 2 airings and led to a noticeable bump in ticket sales around those areas. Social media platforms have become another key tool we're using to stay connected with our existing audience as we also engage the next generation of fans. This fall, we relaunched the Rockettes' presence on TikTok and during the holiday season shared a video highlighting fun facts about the Rockettes that generated more than 5 million views, significantly exceeding our average viewers. This enthusiasm from a younger demographic has only reinforced our strong belief in the enduring popularity of the Christmas Spectacular and the Rockettes. Turning to Tao Group, Tao entered the quarter with a number of its venues, including in New York, Las Vegas, and Chicago, opened at reduced capacities. However, as a result of government mandates, select restrictions were reinstated in late fall. For example, in Las Vegas, nightclub capacity was reduced from 50% to 25%. And while venues in New York City were again closed, as I noted earlier, that changed today with indoor dining now reopened at 25% capacity. In this fluid environment, we are pleased with the Tao Group's creativity and flexibility, which will help ensure they're able to reopen their venues quickly as restrictions are lifted. We truly believe that this is a significant moment for the company. And until we can fully reopen, we are confident that the steps we have taken over the past several months to cut costs, raise additional capital, and strengthen our balance sheet have provided us with sufficient liquidity to weather this period. While protecting our core business is, of course, our top priority, we are also making important progress on the construction of MSG Sphere on state, a venue that we believe will create significant long-term value for our shareholders. We recently announced that we have assumed the role of construction manager for MSG Sphere. AECOM has transitioned from its role as general contractor to a new service agreement that facilitates their ongoing support through the project's completion. This new structure enables us to continue benefiting from AECOM's experience while also giving us greater transparency and control over the construction process. Jayne McGivern, who joined us in 2018, has been named President of Development and Construction and will continue to lead our construction efforts. As many of you will recall, she has spearheaded a number of large development projects, including her work on Wembley Stadium and leading the development of the O2 Arena. Jayne has taken significant steps to build out our internal construction team, which played an important part in enabling us to assume the construction manager role. Our internal team now has direct responsibility for strategic planning and the construction timeline and also currently oversees 30 AECOM employees who continue to support key areas, including specialist roles, such as health and safety. On the construction front, we remain focused on several of MSG Sphere's critical path elements, including structural steel work, and we anticipate starting to build the steel frame for the Venue's Group in the coming months. In closing, we are excited to see the start of live entertainment return to New York. We have already been hosting Knicks and Rangers games at The Garden without fans. And we're now thrilled that later this month, those teams will play in front of crowds at the arena for the first time since last March. With this reopening, we believe that we've started down a path that aided by vaccinations and better health and safety protocols will lead to the return of normal operations. And when that day comes, our premier collection of assets and brands places us in a prime position to capitalize on the significant pent-up demand for live entertainment. I'd like to thank our employees, partners, fans, and shareholders for their continued support.

Thank you, Andy, and good morning, everyone. I will start by discussing our second quarter financial performance, and then I will review our liquidity position. For the quarter, total revenues were $23.1 million, and our adjusted operating loss was $64 million. This compares to $394.1 million in revenues and adjusted operating income of $108.5 million in the second quarter of fiscal 2020 as the vast majority of our operations remained impacted by COVID-19. Also as a reminder, our results are not directly comparable on a year-over-year basis as the second quarter of fiscal 2020 is based on carve-out financials and does not include the impact of the various agreements between our company and MSG Sports. In terms of our revenue, I wanted to spend a moment discussing the arena license agreement with MSG Sports. We were happy to welcome the Knicks back to the Garden in the second quarter. And as a result, we started to recognize our real license revenue and AOI related to these agreements, although at a substantially reduced rate this year given the current environment. As a reminder, while cash payments from these licenses grow at 3% per year, we recognize the revenue on a straight-line basis over the 35-year term of the agreement. As a result, in this quarter, approximately $1.2 million of the $1.6 million of revenue recorded was noncash. For the purposes of determining adjusted operating income, we exclude the noncash portion of the arena license fee revenue. This adjustment can be seen in the reconciliation of operating income to adjusted operating income on Page 6 of our earnings press release. So turning to our liquidity position. As of December 31, we had $1.45 billion of cash and short-term investments, which represented an increase of approximately $487 million compared to our September 30 balance of $965 million. This increase was driven by the net proceeds from our $650 million debt raised in November, $6.5 million of drawdowns under our Tao revolving credit facility, and $20.6 million from the partial sale of our equity position in DraftKings. As a reminder, we invested approximately $10 million in DraftKings. And as of quarter-end, we have sold shares for total proceeds of approximately $28.2 million while retaining approximately 894,000 shares. These inflows were partially offset by $64 million of operational cash burn for the quarter or about $21 million per month, which was slightly better than our previously disclosed expectations. We also had $107 million of capital expenditures, which primarily related to the construction of the MSG Sphere in Las Vegas. Through December 31, project-to-date construction costs incurred were approximately $645 million, which includes $73 million of accrued costs that were not paid as of December 31 and which is net of $65 million received from Las Vegas Sands. In February 2020, we announced a cost estimate for the MSG Sphere, inclusive of core technology, and self-costs of approximately $1.66 billion, but this is subject to uncertainty given the project's complexity and more than 2 years remaining until the planned opening and the ongoing impact of the global pandemic. That said, we continue to aggressively manage costs. We're happy with the progress we made on the construction so far this fiscal year and look forward to opening the venue in 2023. Finally, I would note that our cash balance as of December 31 included approximately $190 million in deferred revenue and collections due to promoters, which was roughly unchanged since September 30.

Thanks, Mark. Operator, can we open up the call for questions, please?

Maybe one for Andy, one for Mark. Andy, starting with your opening remarks, on a practical level, can you talk about what being able to operate a 10% capacity actually means? And to your point, is talent toward that level? And for other teams or concerts, does 10% translate to positive cash flow? And then for Mark, just wanted to follow up on the cost of the Sphere project. I'm not sure, but your comments suggest some incremental uncertainty around the cost side and as moving away from AECOM impact, again, the cost or timing of the project.

Thanks, John. Regarding the 10% capacity, we are absolutely thrilled by this development, which came sooner than we anticipated. We've been preparing for a long time and collaborating with the government and health officials. For 10% capacity, we should consider different types of events. For instance, with sports teams, as MSG Entertainment, we have a licensing agreement that includes rental fees, as well as shares of ticketing, suite revenue, food and beverage revenue, and merchandise revenue. Since the events are already happening and are produced by the sports teams, they are automatically marginally profitable, except for the small number of staff we need to make the operation worthwhile. This falls into one category of events. On the other hand, the touring business presents more challenges. Organizing a tour is a big undertaking involving many components, including talent and associated risks. While we’re excited about moving towards capacity, I don’t expect a significant portion of the touring market to operate at 10% capacity. However, we hope this is just the beginning. We believe it will mark the start of the governor's efforts to reopen the economy, and as capacity increases, we anticipate greater interest. We've already seen a lot of interest at 10% because it's recognized as the starting point. Additionally, we are somewhat unique compared to most venues in the U.S. due to our location and relationships. It is feasible to have occasional events where an artist comes directly to us, utilizing our equipment or bringing in something small. But these will be rare, not the norm. Overall, we see this as a positive step toward returning to normalcy, with 10% being just the beginning, not the end.

Thanks, John. This is Mark. I want to address your question about the cost estimate. First, I want to clarify that the transition to AECOM has not affected the cost or timeline of construction. We still plan to open the basic Sphere in 2023. Last February, we announced the initial cost estimate of $1.66 billion. Since then, like the rest of the world, we were impacted by COVID, which led us to announce last August that we extended our construction schedule by two years, making it six years in total. We've gained a lot of experience and made significant progress on construction. However, I want to highlight that there is uncertainty surrounding the cost estimate due to the pandemic's added complexities to this unique project. We've transitioned to the construction manager, which enhances our control over the project's progress. We continue to actively manage all aspects of the project, and we are looking forward to opening the venue in 2023.

I have follow-ups, I think, on each of John's questions. First, I was hoping to dive a little deeper into the decision to become the construction manager on the Sphere's project. Maybe if you could walk us through the rationale and benefits for taking that over? And is there anything to glean about your plans for future venues from that decision?

As I mentioned, we took on the role of construction manager. It's important to recognize that we chose a cost-plus structure with AECOM for a specific reason. We believed this approach would enhance the quality of work and provide us with better transparency regarding costs and the materials being used by the subcontractor. This change allows us to take on a more digital approach in managing overall costs and improving the final product for a better consumer experience. Given the impact of COVID and the extended timeline, we had the opportunity to reassess our direction and how we could deliver in the best possible way. Consequently, we decided to restructure our relationship with AECOM, which grants us the benefit of their expertise—retaining 30 of their top professionals on site—while also providing us with greater transparency and control. Over the past seven to eight months, this restructuring has allowed us to bolster Jayne's team with the necessary staff to effectively manage the project, including both the timeline and cost structure. This also enables us to consider what we need in terms of personnel and infrastructure as we plan for the future. Ultimately, when the right time comes and we have the right team and infrastructure, we will be even better positioned for our next project.

Cool. And then on the partial reopening, can you just walk us through the health and safety protocols that are now in place? Maybe share the fan experience from when we arrive at The Garden to when we take our seats? And how you see that 10% capacity evolving? What have been the discussions maybe with Cuomo and others about milestones for further reopening from that 10%?

I’ll start by emphasizing our commitment to enhancing the guest and customer experience. The safety of our guests, staff, and employees is our top priority, a focus we upheld even before the pandemic, and we will be more attentive to it now. We have been preparing for this situation for some time, and while we can put preparations in place, the information is constantly evolving, requiring us to make adjustments as we learn more about the disease and its effects. At a broader level, our venue, which was built less than seven years ago, includes excellent health and safety features. We have made enhancements by changing filters and adding touchless sinks, among other changes. Regarding the customer experience, we will implement health protocols which include COVID tests prior to the event, health screenings inside the venue, limited types of food and beverages in certain areas, and restrictions on eating in hallways. We are committed to providing the safest and best experience possible, including social distancing measures throughout the venue. We have collaborated with numerous medical professionals to ensure the use of state-of-the-art technology. Additionally, face masks and temperature checks will be mandatory at the entrance. The governor's office has been supportive, and while we don't have a specific number for when the next capacity increase will occur, a roadmap has been outlined for other sectors of the economy based on decreasing infection and hospitalization rates. As we continue on our current path, we expect to incrementally increase capacity. However, it’s essential to acknowledge that the situation may change in the coming months, potentially in either a positive or negative direction. Overall, we are optimistic about moving forward as we approach reopening.

Andrew, I wanted to follow up on some earlier comments. How reliable should we consider the bookings for the second half of the year, given the potential for ongoing capacity restrictions? At what level do you think artists and promoters, or in the context of their own residencies, would find it feasible to hold a show?

It's a challenging question to answer straightforwardly. We're definitely operating at full capacity, and that's clear. There are some additional costs associated with safety protocols, but most of that is already accounted for. Estimating a specific percentage is tough, as it varies, but as we approach full capacity, it becomes much easier. I believe the latter half of our calendar looks promising, considering the artists who have rescheduled since COVID and the many artists eager to tour. However, I can't provide a precise figure like 50%, 60%, 70%, 80%, or 90%. It really depends on the individual artist and promoter, based on the level of risk they are willing to accept. With our strong relationships in this venue, we are confident that we will lead in this market, which is distinct from others. We have consistently demonstrated our ability to create exceptional experiences for both artists and our customers. Therefore, we are optimistic about the future and where this is heading.

Sure. This is Mark. I can take that one. We want to emphasize that we still believe MSG Sphere will generate significant long-term value for shareholders, and that has not changed. We have previously discussed the venue's unique platform, which will foster compelling growth opportunities in various areas, including events, sponsorships, and hospitality. We anticipate this will result in substantial revenue and AOI. While I mentioned there are uncertainties due to the pandemic, we have also highlighted positive indicators, such as the strong demand for live entertainment that Andy has pointed out. Overall, we are confident the pandemic will come to an end, that Las Vegas will bounce back, and that we are developing a venue that will cater to people's strong desire to gather and engage in new experiences. Furthermore, our extended timeline has allowed us to conserve cash in the near term and has provided Las Vegas time to recover. We believe this will be beneficial, with tourism and the convention business fully operational by 2023. Regarding your second question about when we will provide more information, with two years remaining, we are not ready to give specifics yet. However, I want to reiterate that we remain very optimistic about the opportunity.

So I had a question on Christmas Spectacular and the Rockettes. Thank you for all that color regarding engagement and social media. I'm just curious it sort of dovetails on what you've already talked about with respect to reopening. At what point will you need to make a go, no-go call on the Spectacular? And what are some of the contingency plans you have in place for that production this year?

We are very pleased with the engagement we’ve had through social media and our special NDC. As I mentioned earlier, we are already on sale, planning to have our show. We benefited from the exposure during the past Christmas season. Currently, we have about 200 shows for the 2021 holiday season. We will need to keep an eye on developments, but we are really excited about this week's decision and believe it marks the beginning of opening up. So, we are planning on a show.

Great. And just to be clear, at any capacity level, you'll be having a show?

I didn't say at any capacity level. But as I said, we think this is the beginning of an opening, not the end of an opening and very much are planning on a higher capacity by next November. Let me begin by saying that we typically don't discuss mergers and acquisitions that are not specifically planned. Our current primary focus is on the Sphere, which is significant for our growth, particularly in the entertainment sector. There are numerous opportunities, especially considering the current financial conditions of venues in both entertainment and our hospitality sector. On the Tao side, we have a strong management team dedicated to growth, whether that be organically, like our new restaurant opening at Mohegan in three weeks, or through new leases and other opportunities. However, I want to emphasize that while we are exploring options, our main priority is to concentrate on our core business, get back to operational normalcy, and drive growth.

Number one, with respect to the Tao Group, can you just talk about whether you can be profitable at this initial stage or where that pivot point is? And my second question is really around New York sports betting, which has become topical. What your interest level is, what your expected engagement might be, and how you see yourselves playing a role in that?

On the Tao side, operating restrictions have been quite variable. We have both dining and nightlife, and each has different capacity restrictions that can vary by city, state, and even within the same city. Because of this, it's difficult to pinpoint a specific number for profitability. However, I can say that momentum is improving. New York City has recently reopened dining at 25%, but it's primarily outdoor dining, which isn't ideal. This is a first step toward higher capacities, although there's still a 10:00 p.m. curfew on entertainment that will impact long-term performance. We're optimistic that these restrictions will change as conditions improve. In other markets, indoor and outdoor dining restrictions differ, so it's very much a case-by-case situation. Overall, we believe most of our locations are heading in the right direction. Our safety protocols are proving effective in ensuring a safe environment for customers, and we feel good about the Tao Group’s potential for profitability. Regarding gaming, there’s been a lot of discussion in New York City and State about gaming regulations, and we are excited about Governor Cuomo's recent announcement regarding these regulations. We are particularly interested in sports gaming and its influence on consumer engagement, which is already significant for us given our presence in New York with our tenants at The Garden. The Governor indicated that about 20% of all sports wagering in New Jersey is from New York residents, which is promising for our market. The Metal Lands, which opened in 2018, is one of the largest sports books in the country, which makes us curious about our potential here. The upcoming legislation will influence our involvement, but we’ve seen examples of partnerships in other markets, such as Capital One Arena in D.C. and Wrigley Field in Chicago, that present opportunities for us. Additionally, at MSG Entertainment, we have agreements with MSG Network and MSG Sports that will benefit from the advertising and sponsorship associated with sports betting, and this will positively impact our results as well. We're optimistic about the opportunities ahead and eagerly await more details on future regulations as global sourcing incomes become authorized.

This is Marianne on for Ben. Just one question on reopening in New York. If there's anything you guys can share on what you're hearing from the state in terms of reopening plans and capacity, and what you're doing during the interim process to prepare for a fuller reopening down the line that can impact the financials that aren't fully obvious to us today.

We have discussed the reopening process extensively, and we are excited about the 10% capacity. I believe this marks the beginning, not the conclusion, of our reopening journey. There are many who have followed the governor's initial remarks from about eight months ago, where he outlined that as cases and hospitalizations decrease, he would gradually allow certain sectors of the economy to reopen. We are now focusing on the entertainment and dining sectors, which I believe are crucial for New York City's recovery as they will drive the city's resurgence. This truly represents the start of the reopening phase. As cases and hospitalizations continue to decline, we anticipate an increase in capacity. Regarding your second question about our preparations, we have the infrastructure in place and need to rebuild our arena staff, including ushers and food and beverage personnel. This will involve training and development, which we expect to grow alongside our capacity increases. We are particularly excited about our first event on the 23rd and are eager to host the next Warriors game, as we begin welcoming fans back to The Garden.

Thank you all for joining us. We look forward to speaking with you on our next earnings call. Have a good day.

Thank you, ladies and gentlemen for your participation. You may now disconnect.