Madison Square Garden Entertainment Corp. (NYSE:MSGE) Q3 2024 Earnings Call Transcript

Madison Square Garden Entertainment Corp. (NYSE:MSGE) Q3 2024 Earnings Call Transcript May 10, 2024

Madison Square Garden Entertainment Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. Thank you for standing by and welcome to the Madison Square Garden Entertainment Corporation Fiscal 2024 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. I would now like to turn the call over to Ari Danes, Senior Vice President Investor Relations and Treasury. Please go ahead.

Ari Danes: Thank you. Good morning and welcome to MSG Entertainment’s fiscal 2024 third quarter earnings conference call. On today’s call Mike Grau, our EVP and Chief Financial Officer will provide an update on the company’s operations and review our financial results for the quarter. After our prepared remarks, we will open up the call for questions. During Q&A, we will also be joined by Phil D’Ambrosio, our EVP and Treasurer. 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 Mike.

Mike Grau: Thank you, Ari and good morning everyone. I’d like to start the call by saying how pleased I am to be joining you today. MSG Entertainment has a really strong portfolio of assets and a great team and I feel privileged and excited to be working with everyone to ensure the company delivers on our key business objectives. I’m certainly very grateful for the opportunity and also very optimistic about our future prospects. Along those lines, there are less than two months left in our first full year as a stand-alone public company and thanks to our strong results, we remain on track to deliver robust growth for fiscal 2024. In fact, a strong operating performance that led us to increase our full year revenue and AOI guidance in February has continued and we are now updating our financial forecast for fiscal 2024, including an increase to our expected AOI range for the year, which I will discuss in more detail shortly.

Two main areas of driving this financial performance. First, the Christmas Spectacular 90th Holiday Season Run, which ended in January delivered yet another year of record-setting revenues for the production. And second, our booking business, has continued to grow and remains set to achieve a low double digit percentage increase in events for fiscal 2024. This includes contract growth across all of our venues with the Garden and Radio City, both headed towards setting new records for a number of concerts in the year. The strength of our financial results has enabled us to repurchase a substantial amount of our Class A shares for this fiscal year. And as we look ahead, we remain confident that our business is positioned to continue generating long-term value for our shareholders.

Let’s now review some Q3 operational highlights. During the quarter, our portfolio of venues hosted more than 1.5 million guests at over 200 live events. A majority of these events were driven by our bookings business, which delivered a double-digit percent increase in total concerts versus the prior year quarter. Key contributor to this increase was a strong multi-night comedy schedule. This included a combined 55 nights across Radio City, The Beacon, and The Chicago Theater from such access John Oliver and Seth Meyers Tina Fey and Amy Polo, Jerry Seinfeld, and Ali Wong among others. And as the volume of events at our venues continues to increase, we are pleased to see it matched by strong demand. For the third quarter, the majority of concerts at our venues were once again sold out.

Sales of single night suites increased significantly and per-cap spending at concerts on food, beverage, and merchandise again increased on a year-over-year basis. Also during the third quarter, the Knicks and Rangers continued the 2023, 2024 regular seasons at the Garden. This included five more Knicks home games in the current year as compared to the prior year quarter. In addition to these extra matchups, Knicks and Rangers games followed the same trend we saw in our other live events, with increases in average per game revenues for food, beverage and merchandise sales. We also saw continued demand for our Premium Hospitality offerings. As we have previously discussed, the Garden introduced two new suite products this fiscal year, an Event Level Suite and a Luxury Event Level Club Space.

We already noted that we secured a multiyear agreement for the Event Level Suite earlier this year. And to add to that, we are now close to selling out the Event Level Club Space and have started adding more seats to help match the interest that we are seeing for this Premium Hospitality drive. Before we talk about our financial results, a couple of points regarding presentation and comparability; first, I’d like to note that we have revised our definition of adjusted operating income, as it relates to the Arena License fees with MSG Sports. We are no longer removing the non-cash portion of the Arena License fees in our reconciliation of operating income to adjusted operating income, which is reflected in the financial results we reported today for all periods presented as well as in our financial guidance.

You may recall that the Arena License fees are recognized on a straight-line basis, over the life of the 35 year agreements, which equates to approximately $68 million a year. For fiscal 2024 to $68 million will be comprised of approximately $43 million of cash revenue and $25 million of non-cash revenue. We will continue to disclose the non-cash component of the Arena License fees on a quarterly basis. And secondly, because the Company completed its spin-off from Sphere Entertainment in April of last year, our fiscal third quarter results are not fully comparable on a year-over-year basis. Results for the prior-year quarter, are based on carve-out accounting and do not reflect all of the SG&A expenses we would have incurred and we’ve been a stand-alone public company.

Turning now to our financial results, for the fiscal 2024 third quarter, we reported revenues of approximately $228 million, an increase of 13% as compared to the prior year period. This reflected growth across our three revenue categories Entertainment Offerings; Food, Beverage and Merchandise, and Arena License fees. Revenues from Entertainment offerings increased primarily due to higher revenues from concerts and suite license fees partially offset — offset by the absence of the NCAA East Regional Tournament which took place at the Garden in the prior-year quarter. Higher Food and Beverage revenues were primarily, due to an increase in the number of concerts held at our venues as well as the impact of five more Knicks games at the Garden during the quarter.

This was partially offset by lower per concept food and beverage revenues which reflects a mix shift to more concerts at our theaters during the current year quarter and the increase in Arena License fees reflects the impact of five additional Knicks games in the quarter as compared to the prior year period. Third quarter adjusted operating income of 38.5 million, decreased by $11.6 million as compared to the prior quarter. These AOI results include $13.2 million of non-cash Arena License fees in the current year quarter as compared to $12.1 million in the prior year period. The decrease in AOI primarily reflects higher SG&A expenses. And as I mentioned earlier third quarter SG&A expenses are not fully comparable on a year-over-year basis. Moving on to our fiscal 2024 outlook, given the positive momentum in our business, we are updating our guidance for fiscal 2024.

We now expect revenues of between $940 million and $950 million, versus our prior range of between $930 million and $950 million. The midpoint of this updated range it reflects 11% revenue growth versus fiscal 2023. We also expect operating income for the year of between $100 hundred and $110 million versus $95 million to $105 million previously. And adjusted operating income is now expected to be between $200 million and $210 million. This compares to our previous range of $195 million to $205 million with both prior and updated guidance having been adjusted to no longer remove the $25 million non-cash portion of the Arena license fees. Turning to our balance sheet. As of March 31st we had approximately $28 million of unrestricted cash. In addition, our debt balance was approximately $630 million consisting of a single-term loan facility with mandatory quarterly principal repayments of approximately $4 million per quarter.

Looking ahead, we remain focused on our dual capital allocation priorities of opportunistically returning capital to shareholders and paying down debt. As a reminder, since our spin-off last year, we have repurchased approximately $140 million or about 10% of our outstanding Class A shares. We continue to have $110 million remaining under our current buyback authorization. In addition, subsequent to quarter end and through the end of April, we sold approximately 1.6 million shares in Townsquare Media for net proceeds of approximately $15.6 million as we continue to build our cash balance back up following our share repurchase and debt paydown activity earlier this fiscal year. In summary, we had another quarter that reflected the strength of our assets and robust demand for our business.

And as we near the end of our first full year as a stand-alone company, we are continuing to offer consumers unforgettable experiences while delivering attractive growth for fiscal 2024. With that, I will now turn the call back over to Ari.

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

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Stephen Laszczyk with Goldman Sachs. Please go ahead.

Stephen Laszczyk: Hey, great. Thanks for taking the questions. Just to clarify on the AOI guidance, is it correct for us to be interpreting the revision on a like-for-like basis on your prior way of reporting as a move from $170 million to 180 million to $175 million to $185 million, so that would be a $5 million revision higher at the midpoint? And then fundamentally, just thinking ahead on Christmas Spectacular, it sounds like demand for live entertainment remains strong. I’d be curious for your updated thoughts on the opportunity to increase show count versus the opportunity to increase price or sell-through both this year and beyond for that property?

Mike Grau: Thank you, Steve. Thank you for the questions. Before I answer, I just want to quickly apologize to the audience. I know we had some technical glitches at the top of the call that forced us to stop probably 15 minutes later than scheduled. So we certainly apologize for any inconvenience, and we’ll get that ironed out going forward. As for your questions, Steve, so on AOI guidance, your interpretation is absolutely correct. We’ve redefined AOI. We no longer make an adjustment for the non-cash portion of arena license fees, which for this year is about $25 million. So you’re right, you take — the previous guidance was $170 million to $180 million. You bump it up by $5 million is $175 million to $185 million. That’s what’s happening on an apples-to-apples basis.

And then you add $25 million to the upper and lower bounds to get to the guidance we discussed, which was the $200 million to $210 million. As to your second question, on the Christmas show, we see a lot of runway actually on both fronts. In terms of number of shows — to reiterate the calendar 2023 season show, we went out with 185 shows. And based on demand, we did add 8 shows, and so we did 193 shows. For the upcoming show, that’s about six months away, we have released 197 shows for sales, and we do have the ability to add additional shows around the edges to the extent that’s specified by demand. I’ll also mention right now, the advanced sales pacing is pretty encouraging. Right now, our sales of Christmas shows tickets versus the same time last year, we’re up about 35% in terms of gross revenue.

So that encompasses both volume and price. It’s a relatively small sample size because we’re not actively promoting or marketing the show yet, nevertheless, kind of an encouraging trend. And so that’s where we stand in terms of number of shows. In terms of ticket pricing and sell-through, I mean, that’s almost a 2a and 2b, right, two different dynamics. In terms of sell-through, we did about a 90% sell-through for the Christmas show season just ended. That was up from mid-80s the year prior. We have in the past done as many as five percentage points or more higher than even the 90% that we just realized this past season. So we certainly think there’s runway there for additional growth and profitability. Ticket yield tends to grow every year.

That’s sort of the nature of that thing. And 2023 was our highest ticket yield ever. Having said that, still a pretty healthy discount to what a comparable Broadway show might cost in the same time horizon. So that, coupled with the success we’ve had with dynamic pricing leads us to be very optimistic about additional runway on ticket yield as well. So we think we can grow the Christmas Spectacular on all of the fronts you mentioned, number shows, ticket pricing and sell-through.

Stephen Laszczyk: Got it. Thanks for all that. And then maybe one more, if I could on margin. In the past, I think you’ve called out some onetime margin headwinds you’re facing this year. As we move past your fiscal 2024 and some of these come off. I’m curious how you’re thinking about the opportunity for margin expansion and maybe some of the drivers in 2025 and beyond.

Mike Grau: Sure. So in 2024, as we discussed, we’re on track to deliver very robust growth in terms of revenues but as well as some margin expansion. I’m going to steer away largely on this call from given very specific as to fiscal year 2025. We’re still very much in the early innings of our budget process and that’s something we’d be more likely to address in more detail on our year-end earnings call, which will be somewhere in the neighborhood of early August. But taking a step back and looking at this over the longer term, we see margin opportunities in a lot of areas in our business. On the bookings side, we see — we still think we have opportunity to increase venue utilization. We’ve had a lot of success in 2024 in growing power event profitability and have reason to believe we can sustain that trend through 2025 and beyond.

In terms of the Christmas show, we just talked about it, but I would highlight the sell-through and the ticket price yield is really drops straight down to the margin — to the bottom line. So that’s very margin accretive to the extent we make progress on those fronts. And then some of our ancillary but very meaningful revenue stream sponsorship and signage and premium suites, very high-margin revenue streams and again, runway for growth in both of these. In terms of sponsorship, we’re entering a year in fiscal 2025 and beyond we will see more and renewal activity. Fiscal 2024 was relatively quiet in that regard. And that renewals we often have opportunities to price up the sponsorship deals or better yet even upsize them. We also have the OBG relationship, which we’re really starting to gain some traction there.

And we really have some really nice unique assets that we can add to that inventory as well. So also, to reasons to believe we can grow sponsorship revenue — sponsorship and signage revenues going forward, which is very margin accretive. And likewise, on the premium front, we talked in some of our scripted comments about the success we’ve had in adding new suites and club space in 2024 and we think additional opportunities exist on that front as well. And last point I would mention would be on the expense side. We think our infrastructure is such that we can scale the business, get a lot of operating leverage. We don’t think we necessarily need to add a lot of OpEx in order to support some of these growth initiatives that we’re talking about.

So we see a lot of opportunity over the long haul for margin expansion.

Stephen Laszczyk: Great. Thank you for that.

Operator: Your next question comes from the line of Daniel Duran with Morgan Stanley. Please go ahead.

Daniel Duran: Good morning and thank you for taking the question. You mentioned that your bookings business has grown low-double-digits in fiscal 2024. And I wanted to know if at this point you had any sense of what that would look like for fiscal year 2025. And on top of that, if you have seen any softening of per-caps or consumer spending as we’ve seen in other larger consumer businesses like McDonald’s or Starbucks? Thank you.