Madison Square Garden Entertainment Corp. (NYSE:MSGE) Q4 2023 Earnings Call Transcript

Madison Square Garden Entertainment Corp. (NYSE:MSGE) Q4 2023 Earnings Call Transcript August 18, 2023

Madison Square Garden Entertainment Corp. misses on earnings expectations. Reported EPS is $0.47 EPS, expectations were $0.63.

Operator: Good morning. Thank you for standing by, and welcome to the Madison Square Garden Entertainment Corp. Fiscal 2023 Fourth Quarter and Year End Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. I would now like to turn the call over to Ari Danes, Senior Vice President, Investor Relations, Financial Communications and Treasury. Please go ahead.

Ari Danes: Good morning, and welcome to MSG Entertainment’s fiscal 2023 fourth quarter and year-end earnings conference call. On today’s call, Dave Byrnes, our EVP and Chief Financial Officer, will provide an update on the company’s strategy and operations, as well as review our financial results for the period. After our prepared remarks, we will open up the call for questions. If you do not have a copy of today’s earnings release, it is available in the Investors section of our corporate website. Please take note of the following. Today’s discussion may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements.

Please refer to the company’s filings with the SEC for a discussion of risks and uncertainties. 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’ll now turn the call over to Dave.

Dave Byrnes: Thank you, Ari, and good morning, everyone. Fiscal 2023 was an important year for our company. In April, we began our new chapter as a pure-play, live entertainment company following the completion of our spin-off from Sphere Entertainment Co. Fiscal ’23 also marked the first full year of events at our venues since the onset of the pandemic, with a busy event calendar, demonstrating robust demand for our premier live entertainment offerings. This momentum is reflected in the strong full year financial results that we have reported today. We are proud of our accomplishments over the past year. And as we look forward to fiscal ’24 and beyond, we believe we are poised to deliver ongoing growth in our business. That includes increasing venue utilization, driving growth in per event revenues and profitability, building on the enduring success of the Christmas Spectacular, growing our sponsorship business and expanding our premium hospitality offerings.

At the same time, our capital allocation strategy remains focused on debt paydown and opportunistically returning capital to shareholders. In fact, since the completion of our spin-off, we have already reduced our Class A shares outstanding by approximately 6% by repurchasing shares from Sphere Entertainment. With our valuable portfolio of assets and established presence in an industry with strong fundamentals, we are confident in our ability to generate significant long-term value for our shareholders. Now, let’s review our key operational highlights from the past year. After three fiscal years impacted by the pandemic, we were pleased to host a full calendar of events at our venues in fiscal ’23, featuring a wide array of live entertainment and marquee sporting events as well as the 89th year of the Christmas Spectacular.

We’ve welcomed over 5.5 million guests at nearly 900 events this past year, which reflects a robust supply of live entertainment as well as strong demand from consumers for shared experiences. That included a record number of concerts this fiscal year at both The Garden and Radio City Music Hall. And across all our venues, the majority of concerts, including in our fourth quarter, continue to sell out. In fact, the aggregate number of tickets sold to concerts at our venues in fiscal ’23 were at record highs, which helped drive total event-related revenues above pre-pandemic levels. Consumers have also continued to demonstrate their willingness to spend on experiences in our venues they find valuable. This includes food, beverage and merchandise, where we saw per cap spending finish over 10% higher than last year’s results, which if you recall, were above pre-pandemic levels by a double-digit percentage.

As we look ahead to fiscal ’24, we see no signs of this business slowing down. In fact, as we remain focused on increasing utilization across our venue portfolio, we are currently projecting a low double-digit percentage increase in events in our bookings business. This is particularly notable when comparing to fiscal 2023, which benefited from a number of rescheduled concerts due to the pandemic. This reflects our expectation of another robust slate of concerts as well as a more complete return of family shows and special events, two categories whose recovery has lagged coming out of the pandemic. We’re also looking forward to welcoming the Knicks and Rangers back to The Garden next month for the start of the pre-season under our long-term arena license agreements with MSG Sports.

For fiscal ’24, the cash component of the arena license fees that we receive will be approximately $43 million, and we’ll continue to grow 3% each and every year through fiscal 2055. Through these agreements, we also benefit from additional revenue and profit sharing from sponsorship, signage, suites, food, beverage and merchandise sales related to the Knicks and Rangers. And with how well the teams performed last season, including playoff appearances from both, we expect to see growth in these revenue streams in fiscal ’24. Another area where we will look to build on this past year’s momentum is the Christmas Spectacular. During fiscal ’23, the production generated over $130 million in revenue for our company, the highest in its 89-year history, with approximately 930,000 tickets sold and record ticket yields, a testament to the enduring appeal of this holiday tradition.

As both demand and tourism making more complete return post pandemic, we believe we have the opportunity to drive higher sell-through as well as increase the number of shows over time. To that end, we are currently on sale with 185 shows for the upcoming holiday season compared to 181 shows this past year. We will also continue to focus on growing the Rockettes brand more broadly, including through social media, which enables us to forge stronger, more direct connections with fans throughout the year and opens up potential ancillary revenue opportunities. Turning to marketing partnerships. In fiscal ’23, our business exceeded pre-pandemic levels as we saw continued demand from corporate partners for our entertainment brands. We were pleased to reach renewal agreements this past year with signature partners, Verizon and Spectrum, while also expanding our roster through multi-year agreements with new partners such as HUB International, a leading global insurance brokerage firm, and QVC, which became the presenting partner of the Christmas Spectacular.

This same holds true for our premium hospitality business, which also exceeded pre-pandemic levels this past year, driven by strong renewal and new sales activity. Given the strong demand, we continue to see for corporate hospitality, this year, we will be introducing two new event level suites at Madison Square Garden. This is in keeping with our goal to enhance and expand our premium offerings to create new monetization opportunities for our business. So, as we look to fiscal ’24, with the majority of our suites under multi-year agreements, along with new premium hospitality offerings, I’m pleased to say we expect another year of growth in this area of our business. I’d like to now turn to our financial results for the quarter as well as guidance for fiscal ’24 and then close with a discussion of our capital allocation priorities.

With respect to our fiscal 2023 fourth quarter, there are a number of factors which caused our financial results to not be fully comparable with the prior-year quarter. For example, we reported revenues of approximately $148 million, a decrease of $30 million as compared to the prior-year quarter. This decrease primarily reflects the absence of the Boston Calling Music Festival, which we sold earlier in the fiscal year; fewer Knicks and Rangers regular season games, mainly due to the timing of the NHL season in the prior year and, to a lesser extent, fewer playoff games in the fiscal ’23 fourth quarter; and the impact of the termination of our advertising sales representation agreement with MSG Networks. These items, which are not indicative of the underlying strength in our business, were partially offset by robust growth in bookings, primarily driven by a higher number of events held at our venues.

Fourth quarter AOI decreased by $20 million to a loss of $1 million. This decrease reflects a $14 million year-over-year increase in SG&A expenses as well as the impact of lower revenues. I’d note that fourth quarter SG&A expenses are also not fully comparable on a year-over-year basis. Results for the entire prior-year fourth quarter are based on carve-out accounting and do not reflect all of the SG&A expenses we would have incurred had we been a standalone company for the entire period. In comparison, the fiscal ’23 fourth quarter reflects the company on a standalone basis after April 20, the date of the spin, through the end of the quarter. With respect to fiscal 2024, we continue to see strong demand for our portfolio of live entertainment assets and currently anticipate broad-based growth across all key areas of our business.

We expect to generate revenues of between $900 million and $930 million, and AOI of between $160 million and $170 million. Moving on to our balance sheet and capital allocation priorities. As of June 30, we had approximately $76 million of unrestricted cash, and our debt balance was approximately $659 million, which includes the repayment of $10 million on our revolving credit facility during the quarter. Our year-end cash balance also reflects our repurchase of approximately 840,000 MSGE Class A shares for $25 million, which occurred concurrently with a secondary offering of our shares in late June by selling stockholders Sphere Entertainment. Subsequent to the end of the quarter, we lent $65 million to Sphere Entertainment through the delayed draw term loan facility, which was put in place at the time of our spinoff.

Earlier this month, Sphere Entertainment repaid the entire loan balance, including accrued fees and interest, by delivering approximately 1.9 million MSGE Class A shares to us, which served as an efficient buyback mechanism. In the short time, we have been a standalone public company, we have reduced our Class A shares outstanding by approximately 2.8 million shares or 6%. On a go-forward basis, we continue to expect to generate significant free cash flow, which is underscored by the following expectations: approximately $160 million to $170 million in fiscal ’24 AOI and growing over time; estimated net interest payments in fiscal ’24 of approximately $45 million to $50 million based on current market rates; minimal cash taxes through fiscal ’26; and capital expenditures that are primarily maintenance related.

In terms of capital allocation priorities, we remain focused on paying down a portion of our debt balance and we’ll also continue to look to opportunistically return capital to our shareholders. We have $160 million remaining under our current buyback authorization, following our $25 million share repurchase in June and the recent $65 million delayed draw term loan repayment. In summary, we are proud of our performance in fiscal ’23, delivering another year of unforgettable live experiences to our millions of guests. We now look ahead to our first full fiscal year as a standalone company with strong momentum in operations, numerous opportunities for growth and enhanced strategic and financial flexibility, all of which leaves us confident in our ability to drive long-term shareholder value.

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

Ari Danes: Thank you, Dave. Operator, can we open up the call for questions?

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of David Karnovsky from JPMorgan. Your line is open.

David Karnovsky: Thank you. David, when you look at The Garden specifically, how do you think about your ability to drive higher event utilization kind of beyond this upcoming fiscal year? And what specifically do you think you can accomplish on residencies in multi-night runs? And then just separately, last quarter, you gave, I think, standalone company revenue guidance at $835 million to $845 million, and I think AOI was $145 million to $155 million. Just to clarify, can you say how you performed against those targets, so we have the right base for fiscal ’23? Thank you.

Dave Byrnes: Sure, David. I’ll take your second question first. On the standalone guidance that we put out earlier this year for MSG Entertainment, results finished — revenue was on the high end of the range and AOI was right around the midpoint of the range. And then, on your second question regarding utilization, I know you’re focused on The Garden. I’d start by saying we’re optimistic about our outlook for our bookings business, both near term and long term. As I mentioned earlier, we’re currently projecting a low double-digit percentage increase in events in our bookings business for fiscal ’24, and that includes growth in events at The Garden as well as across our theaters. This growth is particularly impressive because we’re up against a tough comp with fiscal ’23 benefiting from a number of rescheduled shows from the pandemic, which is a point that’s important there.

Stepping back, we have a terrific long-term track record of increasing the number of concerts at our venues, including The Garden. Since 2015, which was the first year following The Garden’s renovation, we’ve had mid-single-digit annual growth in the number of concerts here at The Garden as well as across our other venues. And as we think about growing our bookings business on a go-forward basis, increasing venue utilization continues to be an important opportunity for us. For some context at The Garden, we hosted over 130 bookings events at The Garden this year, plus 96 Knicks and Rangers games. So that total is 230 events, which clearly indicates that there remains utilization upside at The Garden. We expect to benefit in future years from continued industry growth as an increasing number of artists and acts continue to go on tour.

And we’ll continue to leverage our industry relationships to identify new events, including potential residencies and additional marquee sporting events. And we’ll continue to be creative in the ways we look to maximize our utilization, including multiple event types per day while of course, weighing what makes the most strategic and financial sense for the company. So, with The Garden being our largest venue and most economically significant, we see increasing utilization as an important opportunity, and we’re confident in our ability to continue to grow the business.

David Karnovsky: Thank you.

Operator: And your next question comes from the line of Brandon Ross from LightShed Partners. Your line is open.

Brandon Ross: Hey, thanks for the question. I guess on that last answer to David, you spoke a lot about the potential for event growth. But you haven’t really said anything on this call about growing per event revenue. Do you expect to grow the profitability per event? And what are the levers to do that?

Dave Byrnes: Sure. Thanks, Brandon. Certainly growing per event revenues and profitability is a key focus of ours. If you look at the Christmas Spectacular, just taking this past holiday season, our sell-through rate was in the mid-80s, and we expect to increase sell-through over time, including as tourism makes a more complete return here in New York. We also believe there’s ticket price upside as we continue to get smarter about dynamically pricing our inventory and as we work to reduce discounting. And there aren’t any material incremental cost to us from higher sell-through or ticket prices. So most of these benefits will fall to the bottom line. In terms of our overall bookings business, we generate revenue, as you know, in a number of different ways, including the rent we charge to use our venues, ticketing fees and food and beverage and merchandise sales, and we see upside over time across all of these components on a per event basis.