Madison Square Garden Entertainment Corp.

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 speaker's remarks, there will be a question and answer session. I would now like to turn the call over to Ari Gaines, Senior Vice President, Investor Relations and Treasury. Please go ahead.

Thank you. Good morning and welcome to MSG Entertainment's fiscal 2024 third quarter earnings conference call. On today's call, Mike Graw, 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 investor 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 five and six 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.

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 standalone public company, And thanks to our strong results, we remain on track to deliver robust growth for fiscal 2024. In fact, the 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 24, including an increase to our expected AOI range for the year, which I will discuss in more detail shortly. Two main areas are driving this financial performance. The Christmas Spectacular's 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 24. This includes concert growth across all of our venues, with the Garden and Radio City both headed towards setting new records for a number of concerts in a 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 third quarter 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. A 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 acts as John Oliver and Seth Meyers, Tina Fey and Amy Poehler, 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 their 2023-24 regular seasons at the Garden. This included five more Knick 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 multi-year 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 product. Before we talk about our financial results, a couple 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've 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, this $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 spinoff 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 had we been a standalone 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 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 Knick games at the Garden during the quarter. This was partially offset by lower per-concert food and beverage revenues, which reflects a mixed 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 NIC 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 24 outlook. Given the positive momentum in our business, we are updating our guidance for fiscal 24. We now expect revenues of between 940 and $950 million versus our prior range of between 930 and $950 million. The midpoint of this updated range reflects 11% revenue growth versus fiscal 2023. We also expect operating income for the year of between 100 and $110 million versus 95 to $105 million previously. An adjusted operating income is now expected to be between 200 and 210 million dollars. This compares to our previous range of 195 to 205 million dollars, with both prior and updated guidance having been adjusted to no longer remove the 25 million dollar non-cash portion of the ARENA license fees. Turning to our balance sheet. As of March 31st, we had approximately 28 million dollars 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 spinoff 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 Town Square 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 pay down 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 standalone company, we are continuing to offer consumers unforgettable experiences while delivering attractive growth for fiscal 24.

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

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

We will now begin the question and answer session. In order to ask a question, press star then the number one on your telephone keypad. Your first question comes from the line of Steven Lavik with Goldman Sachs. Please go ahead.

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 to 180 to 175 to 185. 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. 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.

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 start probably 15 minutes later than scheduled, so we certainly apologize for any inconvenience, and we'll get that ironed out going forward. As to your question, 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 to 180. You bump it up by 5 million, it's 175 to 185. 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 to 210. I see a second question on the Christmas show. We see a lot of runway action on both fronts. In terms of number of shows, to reiterate the calendar 23 season show, We went out with 185 shows, and based on demand, we did add eight 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 justified 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 23 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 believe or 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 of shows, ticket pricing, and sell-through.

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 one-time margin headwinds you're facing this year. As we move past your fiscal 24 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 25 and beyond.

Sure. So in 24, 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 getting very specific as to fiscal year 25. 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 booking side, we still think we have an opportunity to increase venue utilization. We've had a lot of success in 24 in growing per-event profitability and have reason to believe we can sustain that trend through 25 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 dropped 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 streams, 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 25 and beyond where we'll see more in renewal activity. Fiscal 24 was relatively quiet in that regard. And at renewals, we often have opportunities to price up the sponsorship deals, or better yet, even upsize them. We also have the OVG relationship, which we're really starting to gain some traction there. And we really have some really nice, unique assets, and we can add to that inventory as well. So all sorts of 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 24, and we think additional opportunities exist on that front as well. The 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. Great. Thank you for that.

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

Good morning. Thank you for taking the question. You mentioned that your bookings business has grown low double digits in fiscal 24 and I wanted to know if at this point you had any sense of what that would look like for fiscal year 25 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.

Thank you, Daniel, for the questions. Appreciate it. In terms of bookings, I think you have to look at that really in two parts. I think the arena and the theaters are slightly different animals in that regard. With the arena, we've talked historically and still the case. The booking window tends to be about six to nine months out. um so we do have enhanced visibility there as we look at fiscal 25 and the kind of number shows we have booked now versus the same point a year ago for fiscal 24 i would say we're up mid single digits for the full year 25 and if i were to look at just the first half of 25 probably up more like low double digits in terms of number of events so pretty encouraged by the current trends in terms of bookings on the arena On the theaters, the booking window is a little shorter, three to six months, so the pipeline is a little less developed and the visibility is not as good. Nevertheless, if we look at it the same way, we are up high single digits versus the prior year in terms of events booked at the theaters at this point in time. So, you know, look, we're coming off what will be a record year in fiscal 24 in many respects as to event volume. We're still pacing very nicely versus that record year. In regard to your second question, in terms of softening of consumer spending and demand, and you referenced McDonald's and Starbucks, we're not really seeing that. We see that in a couple different data points that would support that. Most of our shows continue to sell out. For our fourth quarter shows, we're pacing ahead of the prior year in terms of our sell-through percentages versus where we were, again, same point last year. We still have a lot of acts that are selling, that are adding additional shows because of demand. So in terms of events and tickets, the demand is very healthy, which supports just what we're seeing in the live experience sector in general, both here and amongst our peers. In terms of the per cap spending on food and beverage and merchandise, we are up low single digits versus the prior year for concerts. That's actually most notable at the arena, which is where the biggest opportunity is. The per cap spending at the arena outpaces the theaters for a variety of reasons, and we're seeing even more robust growth there. So we're not really seeing a softening demand. I would speculate that We enjoy certain tailwinds that I think maybe McDonald's and Starbucks don't in terms of, again, kind of the burgeoning popularity of live experiences and the continued return of New York City tourism from the pandemic. So by virtue of that, we are not seeing that kind of softening of demand.

Got it. Thank you very much.

Your next question comes from the line of Peter Henderson with Bank of America. Please go ahead.

Yes, good morning, and thank you for taking the question. I'm just wondering if you can help us sort of think through the size of the potential benefit from an extended run for both the Knicks and the Rangers in the playoffs, and then also just how much or how deep of a run for both teams is already contemplated in your guidance. Thank you.

Thank you, Peter, for the questions. Appreciate it. So in terms of the benefit of an extended playoff run for the Nixon Rangers, arena license fees, as I think you're aware, arena license fees, I'm sorry, we had a little noise there. Arena license fees, as I think you're aware, are fixed. But there are certainly variable revenue streams that we participate in and share with our partners in sports. I'm talking about things like food and beverage, merchandise, single events, sweet sales. So each event is incremental in that regard. As well as on a more macro basis, I think the team's success can drive attendance and renewals on a go-forward basis. So our interests are very much aligned with the Nixon ranges in that regard. I mean, we're a New York-based company. We're a New York-centric company. What's good for New York is going to be good for us over the longer haul. And as well as in terms of short-term economics, we do enjoy those variable incremental revenue streams. The flip side of that coin would be on the booking side. That's something we've become pretty experienced and adept at in terms of managing potential conflicts, working with the league, working with artists. and kind of optimizing scheduling. I think this week is a great example of that, right? We're just coming off a run of four consecutive days of home playoff games, and tonight we'll have Billy Joel at the Garden. So just one data point to show how we've managed to enhance flexibility around that. So, you know, he said the Knicks and Rangers go on an extended run, and we're all hopeful and optimistic that that will be the case. There could be a small subset of shows at risk, and by at risk, I mean at risk of being pushed into fiscal 25. And we've actually managed to hone that down to the point where the number of shows in question is really around low single digits. As to your second questions, I'm not going to get specific on what's baked into our internal forecast in terms of number of rounds. I'll just say that our guidance encompasses, I mean, the range of our guidance encompasses all these types of scenarios as far as how far the Nixon ranges go. We would not change guidance for any of those outcomes. Thank you.

The next question comes from the line of David Karnovsky with JP Morgan. Please go ahead.

Hey, maybe just following up on that last point, I'm curious, you know, how many days in general does the arena keep on hold when it does its planning process, I mean, on hold for the playoffs? And what is the optionality to book acts on a short-term basis if those games aren't played, recognizing this is less of an issue this year? And then following up on capital allocation, you noted the share authorization wanted to zero in on what circumstances would lead you to potentially restart a buyback. Thank you.

Sure. So thank you, David, for the questions. What I'm going to do is I'm going to take your first question and then I'm going to ask Phil D'Ambrosio, our treasurer, who's with us, to address your question on capital allocation. In terms of how many days we keep on hold, I'm probably not going to get into specifics other than to say we generally have kind of one-and-a-half, two-month window, which is a playoff window for both hockey and basketball, where we're, again, managing it in the manner I described earlier. We continue to book acts. There's certain language in the contracts for acts in this time, day and date subject to change, that kind of thing. We remain in constant contact with the league, with the sports teams, with these acts in order to manage. And, again, I feel like we've done a really solid job in that. The bookings team has become very adept at maximizing utilization during this window, which can be challenging at times, but, again, a really nice job and we don't really have too many shows at risk as i alluded to earlier uh you also asked about the ability to replace shows i agree with you that feels less relevant this year as both teams seem to be doing well knock on wood um you know it depends on the type of the artist what their schedule is it needs to be an artist that can sell out in a short period of time there's a narrow pool of artists who could probably satisfy those criteria it's possible I don't know that it's probable, but it's certainly possible to book an event until you sense something opened up unexpectedly. And with that, I'd like to defer to Phil if you could address the question on capital allocation.

Great.

Thanks, Mike. Hi, David.

So our capital allocation priorities remain unchanged. We have two. The first is opportunistically returning capital to our shareholders, and the second is debt pay down. Again, since our spinoff last April, We've repurchased approximately 140 million of our Class A shares outstanding, which represents about 10% of those Class A shares outstanding. And we have remaining authorization for repurchases of $110 million. So on a go-forward basis, we will continue to opportunistically seek attractive opportunities to return capital to shareholders. Turning the debt pay down. As Mike noted, our debt balance at the end of March is almost $630 million. And as we mentioned last quarter on our earnings call in early February, in the December quarter, we paid down the rollover completely. So on a go-forward basis, in terms of debt pay down, we will simply continue to pay the quarterly amortization on our term loan of $4 million per quarter. But we're not planning to pay down any more debt beyond that. So when you think about leverage, as the company continues to grow and to generate more AOI, the company will naturally deliver. And when you keep in mind the substantial level of activity on the repurchase front over these last 11 months, currently we're focused on digesting that, meaning We're going to build our cash balance up again. And as Mike noted, we sold most of our position in Town Square last month and generated just over $15 million of cash. So on a go-forward basis, we will rebuild the cash balance that syncs very nicely with the seasonality of our business. And at the same time, we're going to keep our eye on opportunities to return capital to shareholders. Thank you.

The next question comes from the line of Logan Angus with Wolf Research. Please go ahead.

Hi, thank you. First, I'm curious, with the garden only available for a relatively fixed number of days throughout the year, but with more and more artists touring or at least wanting to tour, How have you seen that supply-demand imbalance translate to pricing at the garden? And then I'm curious, obviously Christmas Spectacular has been a big success. I'm curious how you think about opportunities to potentially move more into owned and operated shows more year-round, or is the focus just to continue growing Christmas Spectacular? Thank you.

Thank you, Logan, for the questions. In terms of your first question, I think you're right on the money. Speaking specifically to the arena at the garden, we are very well positioned in terms of supply and demand here. On the supply side, we'll do about 245 total events at the arena in fiscal 24, which, as we mentioned previously, would be internally a record for us. That does equate to about 70% utilization, relatively flat year over year. We've managed to minimize the number of loading days, and we've had some success in having multi-event days. So while number of events is up, utilization is relatively flat. I think there's some runway to improve that, but there is a scarcity of supply. You're absolutely correct in that regard. And then in terms of demand, we do see more and more artists touring. We do see live experiences and live entertainment being very popular. And the Garden is a premium venue. Artists want to play here. We often have promoters that will book us first and then build the rest of the tour around that to make sure they can get a day for us. So I think we do have some pricing power versus other venues in that regard in terms of where we sit in the supply and demand curves. The point I would make, that's not necessarily a new dynamic. It's reflected in the rates that we charge currently. We re-examine our pricing continuously, especially now while we're in a budget process and within the context of these market dynamics. So it's not a new dynamic, but we are very well positioned in that regard. In terms of your second question on the Christmas Spectacular, the Christmas Spectacular is a very unique franchise with a very unique and one-of-a-kind history. We did put up record revenues this past season. It's bounced back very nicely from the pandemic, and the economics are definitely different than some of the other shows we run, do the content ownership. Right now, and kind of alluded to this in response to an earlier question, our focus is on maximizing profitability of the Christmas show through a number of shows, through ticket yield, through sell-through. You know, in terms of the show itself, we will continue to make modest refinements to it in terms of upgraded technology, content refinements, whether it's adding a scene or modifying a scene. You know, example, last season, we added some drones, we added a Frost Fairies scene to the show, all of which was very well received. So we'll continue to refine and upgrade the show in that regard. And we continue to be focused on the Rockettes brand. But that's where the focus is on growing the profitability of the existing Christmas show. We don't have any plans currently to develop more owned content or new productions in that regard.

Thanks, Logan. Operator, we'll take one last caller.

The final question comes from the line of Paul Golding with Macquarie Capital. Please go ahead.

Thanks so much for taking the question. Mike was wondering if you could elaborate a bit more on how the Oakview relationship is going. I think you referred to it in relation to sponsorship and signage. Just wanted to get a broader view of how that's driving the business and if you're seeing any tangible uplift at the moment. Thanks.

Sure, Paul, thanks for the question. So our relationship with Oak View Group and their subsidiary, Crown Properties, we announced it last September and really initiated October 1. Right now, the structure of the deal is such that Crown Properties leads all of our sales and sponsorship signage inventory for all of our venues and for all of our live entertainment properties. We continue to retain certain functions in-house. We have a certain legacy expertise and constant liaison with Crown Properties, quite frankly, daily, if not more frequently. and all activation and fulfillment responsibilities in regard to these sponsorship deals, which can be complex, continues to reside with us internally. We're definitely encouraged by the momentum we're seeing right now. We've had a couple nice wins of late that are either closed or right at the finish line. We've seen the pipeline is growing much more robust as time goes on. So, you know, this is a long-term deal that we have, and we expect it to be a long-term relationship. And all the reasons we entered into this deal are starting to manifest themselves. I think we're still in the early innings of that deal. But it definitely feels like we're getting some traction right now in the marketplace, and we're seeing some trends that make us very encouraged and kind of validate our initial rationale for entering into this deal. Something we'll continue to talk about going forward, but we're very encouraged and optimistic right now. Great. Thanks so much.

I will now turn the call back over to Ari Daines for closing remarks. Please go ahead.

Thank you all for joining us. We look forward to speaking with you on our year-end earnings call in August. Have a good day.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

We look forward to speaking with you on our year end earnings call in August. Have a good day.