Sphere Entertainment - Earnings Call - Q4 2020

Transcript

Operator (participant)

Good morning. My name is Christie, an I'll be your conference operator today. At this time, I would like to welcome everyone to the MSG Entertainment Fiscal 2020 Fourth Quarter and Year-End Earnings Conference Call. Later, we will conduct a question-and-answer session. If you would like to ask a question at this time, simply press star, then the number one on your telephone keypad. To withdraw your question, press the pound key. Thank you. I will now turn the call over to Ari Danes, Investor Relations. Please go ahead, sir.

Ari Danes (Head of Investor Relations)

Thank you, Christie. Good morning, and welcome to MSG Entertainment's Fiscal 2020 Fourth Quarter and Year-End Earnings Conference Call. Our President, Andy Lustgarten, will begin this morning'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 investor 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, developments, and events may differ materially from those in the forward-looking statements as a result of various factors. These include financial community perceptions of the company and its business, operations, financial condition, and the industry in which it operates, as well as the factors described in the company's filings with the Securities and Exchange Commission, including the sections entitled Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations contained therein.

The company disclaims any obligation to update any forward-looking statements that may be discussed during this call. 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. With that, I'll now turn the call over to Andy.

Andy Lustgarten (President)

Good morning, and thank you for joining us. I know we've all heard the word unprecedented many times over the past few months, but it truly has been an unprecedented year that no one could have anticipated. Through mid-March, we are experiencing impressive momentum across the company. The Christmas Spectacular celebrated its highest grossing run ever.

Our booking business was on track to deliver a record number of events for the year, and Tao Group was on its way to generating strong year-over-year growth. In addition, we are full speed ahead on MSG Sphere in Las Vegas, preparing for the $400 million sale of The Forum and finalizing the details of our spinoff transaction, and then in March, the global pandemic hit, changing the outlook not only for our company but the world.

Even with these difficult circumstances, we successfully completed the spinoff of MSG Entertainment in April, followed by the sale of The Forum in May, and despite the current environment, we remain confident in the strength and resilience of our assets and believe that establishing MSG Entertainment as its own company sets the stage for long-term value creation for our shareholders. I'd like to spend a few minutes talking about how COVID-19 has impacted our business and the steps we're taking to position the company to weather these difficult times.

Our shutdown began in mid-March when each of our entertainment venues closed its doors due to the pandemic. This was followed by the temporary closure of all Tao Group entertainment, dining, and nightlife venues and the cancellation of our Boston Calling Music Festival, which was scheduled for Memorial Day weekend.

And last week, we announced that the season's production of the Christmas Spectacular has been canceled. It was a very tough decision. We considered a number of factors, including the significant time and investment it takes to mount the show and the continued level of uncertainty just a few months out from when the show would traditionally start.

Taking this all into account, we felt moving forward was not worth the risk. Given where our business is today, we have been forced to make decisions, some of them very difficult, to ensure we are a healthy company for the future. Tao eliminated essentially all of its venue line staff and manager positions in March and recently reduced its corporate staff. On May 31st, we ended our financial support of event-level employees at our performance venues.

At the same time, we've made efforts to reduce discretionary spending while continuing to review our operations. Last week, we took additional measures, including significantly reducing our corporate workforce and cutting spending across all departments. These actions reduced our go-forward operating expenses by approximately $100 million on a run-rate basis. Our review also extended to the MSG Sphere in Las Vegas.

In April, we temporarily suspended construction on the venue due to COVID-related impacts that were outside of our control. And as the ongoing effects of the pandemic have continued to impact our operations, we revised our processes and our construction schedule and now have resumed work but on a lengthened timetable, enabling us to better preserve cash in the near term. For Fiscal 2021, we now expect to spend approximately half of what we previously anticipated spending.

We also expect that our new schedule will push the opening of the MSG Sphere in Las Vegas into calendar 2023. We remain committed to bringing the state-of-the-art venue to Las Vegas, but given the impact of the pandemic on our company, we are going to proceed at a more measured pace and will continue to be thoughtful about our liquidity.

We've made some tough decisions, but believe these actions will allow us to conserve our cash and successfully navigate these challenging times. As of June 30th, we had approximately $1.2 billion in cash on hand, and we had essentially no debt aside from a relatively small amount related to Tao Group. Like everyone else, we are learning more each day. The one thing we continue to believe in is community and that people will gather again to share experiences once it's safe to do so.

Prior to the onset of COVID, we were benefiting from favorable industry dynamics that included steady growth in the supply of live events and rising demand from our customers for these experiences. Our expectation is that when things do bounce back, they will bounce back quickly. For example, the majority of impacted events in our venues have been or are expected to be rescheduled to calendar 2021.

In fact, we currently have twice the number of events booked for calendar 2021 than we did for 2020 at this time last year. For rescheduled shows, while ticket holders were offered the option for a refund, most are choosing to hang on to their tickets, and while we can assure you that these events will take place, it does highlight the pent-up demand for artists who want to be on the road and from fans who want to see these acts.

In addition, Tao Group has recently started reopening venues in five cities at reduced capacity, and we have been encouraged by the initial response. While the road ahead is uncertain, we have every reason to believe that the innate desire to be part of shared experiences will return. When that happens, our business will be ready. It starts with our portfolio of iconic venues anchored by Madison Square Garden, a venue we own along with the development rights associated with the property. In April, the Garden entered into a 35-year agreement to host home games of two of the most well-known franchises in professional sports, the New York Knicks and New York Rangers. When the Garden fully reopens, these arena license agreements will provide a significant growing contractual revenue stream for our company.

In addition to the Garden, we expect the rest of our venue portfolio, Radio City Music Hall and the Hulu, Beacon, and Chicago Theatre, to regain their industry-leading positions once we're able to reopen the doors. The same goes for the Christmas Spectacular, a property we own that has played for a remarkable 87 consecutive years at Radio City Music Hall. And although this year's production has been canceled, we are confident that it will remain a holiday tradition for years to come and look forward to welcoming guests back for the 2021 holiday season. We also believe Tao Group will continue creating some of the most innovative premium hospitality experiences in the entertainment, dining, and nightlife industry and that Boston Calling will remain New England's premier outdoor music festival.

And finally, we are bringing together all of our expertise in venue operations, content creation, and hospitality to create MSG Sphere, which we continue to view as a transformative growth opportunity for our company. I'd like to end by thanking our employees, fans, partners, and shareholders for their continued support. For decades, our venues have been the backdrop for some of the most memorable moments in sports and entertainment, and we've been working extremely hard to ensure that when our doors reopen, guests can be confident that there is a safe and secure environment where they can gather once again to share unforgettable experiences. Before I finish, I'd like to take a quick moment to introduce our new Chief Financial Officer, Mark Fitzpatrick, who joined us in April.

Mark is a seasoned executive with more than 20 years of finance experience, including WeWork, where he most recently served as the Deputy Chief Financial Officer. Prior to that, Mark spent 10 years at Time Warner Cable, where he held a variety of senior finance roles, including Chief Financial Officer of Residential Services. I'm confident that after helping us get back up and running, he'll play a key role in ensuring the long-term success of our company. And with that, I'll turn the call over to Mark.

Mark Fitzpatrick (EVP and CFO)

Thank you, Andy, and good morning, everyone. I'm very excited about joining MSG Entertainment, a company with iconic venues and marquee brands that I am confident will weather this period of uncertainty. I joined this company because I was inspired by its vision for the future, and I look forward to working with the executive team on achieving our long-term goals.

Over the next few minutes, I will provide additional details on our liquidity and go-forward cash outflows, as well as briefly discussing our recent results in segment reporting, so let's start by walking through our current liquidity position and the actions we have implemented to preserve flexibility so we are ready to return to business as soon as possible. First, as Andy mentioned, we had $1,244 million of cash and short-term investments on our balance sheet as of June 30th.

Our cash balances include approximately $200 million in deferred revenue and collections due to promoters. These amounts reflect tickets, suites, and sponsorships related to future events. A significant majority of deferred ticket revenue is for events that have been or are expected to be rescheduled to calendar 2021. To date, most people have opted to hold on to their tickets for these rescheduled events, but if requested, we have provided refunds. In terms of suites and sponsorships, we are in constant dialogue with our partners discussing ways to address these obligations via non-cash means such as credit and make goods. However, if necessary, we will provide cash refunds. In terms of debt, Tao's $34 million bank term loan is our only debt outstanding, and it was recently amended to suspend certain financial covenants through calendar 2021, and as a reminder, it matures in May of 2024.

I would also like to note that we held equity interests in both DraftKings and Townsquare Media. And in June, we were able to monetize a portion of our DraftKings holdings for net proceeds of over $7 million. Currently, we own approximately 1.3 million shares of DraftKings and 3.2 million shares of Townsquare Media. Now let's turn to our expected cash outflows for Fiscal 2021. As Andy mentioned, we've implemented a series of cost-saving measures to preserve our liquidity.

Since March, we've cut down significantly on non-essential spending, including marketing, training, and T&E, and reduced our alliance and associated spending with third-party providers. In March, Tao eliminated nearly all its venue staff and manager positions, and recently, it reduced its corporate workforce. At the end of May, we've ended our financial support for virtually all of our 6,000 event-based venue employees.

Last week, we reduced our full-time workforce by approximately 350 positions and eliminated an additional 50 open positions that we had intended to fill this fiscal year. I should note that as our business recovers, we will bring back a portion of these positions to support our operations and the associated revenue.

Overall, these actions will significantly reduce our annual operating expenditures. While it will fluctuate on a month-to-month basis, we estimate that our monthly operational cash burn rate will be approximately $25 million a month on a going-forward basis. This compares to an average of approximately $35 million that we experienced in the fourth quarter of Fiscal 2020. I would note that our operational cash burn rate reflects our revenue less direct operating and SG expenses.

It excludes severance costs and capital expenditures, including those related to the construction of the MSG Sphere in Las Vegas and capitalized spending on content and technology. It also excludes working capital adjustments, including potential cash refunds related to our deferred revenue and collections due to promoters. In terms of the MSG Sphere, Andy noted earlier that we were lengthening our construction timetable in Las Vegas.

As a result, we now expect to expend approximately half of what we previously anticipated in Fiscal 21. As previously disclosed, our cost estimate for the MSG Sphere venue in Las Vegas is approximately $1.66 billion. Through June 30th, project-to-date construction costs incurred were approximately $453 million, which includes nearly $70 million of accrued costs that were not paid as of June 30th and is net of $65 million received from the Las Vegas Sands.

Finally, I want to note that we continue to actively pursue potential debt financing options of up to $500 million to further bolster our liquidity position and help finance MSG Sphere in Las Vegas. Let's turn briefly to our business performance. Before I start, please note that Fiscal 2019 and Fiscal 2020 results through April 17th are based on carve-out financials. After April 17th, which was the date of our spinoff, the results reflect the company on a standalone basis, inclusive of the various intercompany agreements between our company and MSG Sports. Second, due to the impact of COVID-19, Fiscal 2020, especially the fourth quarter, was not a true indication of the operating and financial potential of our diversified mix of assets and revenue streams.

As a result, Fiscal 2020 revenue was $763 million, with only $9 million achieved in the fourth quarter, and our adjusted operating loss was $43 million, including a $103 million loss in the fourth quarter. In comparison, for Fiscal 2019, revenue was $1,050 million, with $215 million of revenue in the fourth quarter and full-year adjusted operating income of $104 million. Prior to opening the call for questions, I would also like to provide an overview of the two operating segments that we use to manage our business, as this is the first time we have reported with these segments. Our 10-K, which we expect to file next week, provides additional detail on these segments. Our first segment is the entertainment segment. This is our live events business, which welcomed nearly 6 million guests to over 1,000 events in Fiscal 2019.

It features our portfolio of performance venues, including the MSG Sphere, the Christmas Spectacular starring the Radio City Rockettes production, which last season generated record-high revenues of approximately $130 million, the Boston Calling Music Festival, and the revenue related to our arrangements with both MSG Sports and MSG Networks. These arrangements include our 35-year arena license agreements and our 10-year sponsorship sales agreements with MSG Sports, and our multi-year advertising sales representation agreement with MSG Networks.

Finally, this segment also includes the cost of our corporate functions net of our transition services agreements with MSG Sports and MSG Networks. Our second segment is Tao Group Hospitality, which features our controlling interest in this globally recognized hospitality group. In Fiscal 2019, the Tao Group generated over $250 million in revenue from its popular entertainment, dining, and nightclub venues.

Today, Tao operates 28 venues around the world and is developing opportunities to expand its select markets. In conclusion, while the entire industry continues to face a challenging and uncertain road ahead, we remain confident that we have the financial flexibility to navigate through this unprecedented period and deliver long-term growth and value creation for our shareholders. With that, I will now turn the call back over to Ari.

Ari Danes (Head of Investor Relations)

Thank you, Mark. Christie, can we open up the call for questions, please?

Operator (participant)

Certainly. At this time, if you would like to ask a question, press star, then the number one on your telephone keypad. And your first question is from Brandon Ross of LightShed Partners.

Brandon Ross (Partner and Media and Technology Analyst)

Hey, guys. How are you doing? A couple of questions. First, New York and Vegas have obviously been hit hard by the events of 2020. Wanted to get your outlook going forward for these cities as entertainment markets. I guess starting with Vegas, do you see this changing the return profile for the Sphere? And then in New York, how are you planning for the long term? I guess with the permanent job cuts you did, is that a signal that you foresee more permanent impairment from the pandemic and the other issues going on in New York? And then I have a follow-up.

Andy Lustgarten (President)

Hey, Brandon. Thanks. We'll start with these two, and then we'll go back to your follow-up. Let's start at the top of Vegas. So I'll tell you both our revenue and our AOI projections have not changed because of this. What has changed is our timing, right? We've moved it out, as we've discussed. We think Vegas is one of the best, if not the best, entertainment market in the world. We think that and we're in this project for the long term. I think people will need to feel safe, both consumers, artists, and our employees. But once that happens, and we believe it will, we think the market's going to come back roaring. And our view has not changed. We believe the Sphere is going to be the most utilized venue in our portfolio in terms of events.

We think the attractions business is going to play multiple times a day year-round, which is a key part of our strategy. We think the new immersive experiences will take advantage of the venue's state-of-the-art technology in a way that will change live entertainment. And we're, as we've talked about before, very bullish on our sponsorship opportunity. So while both New York, Vegas, and all of the U.S. are fighting through the pandemic right now, we think live experiences are going to come back roaring once people feel safe. And we feel very bullish. Now, in New York, similar message. I think New York was the hotspot and the center of the pandemic in the start, but as we could see, it's been moving all over the country.

New York, specifically, of all cities, has been resilient through many difficult times over the course of its history. I think New Yorkers are going to come back strong. The best proof that we have in the pudding, as I mentioned earlier, we have a backlog of bookings for 2021 that's twice the size of where it was this time last year. That's made up of both rescheduled events and new bookings, which tells me the artists want to be here. Then when we offered fans the ability to refund their tickets, 80% chose to keep their tickets. What does that say to me? Fans want to be coming to the events once they feel safe and once we reopen. We feel really strong that both New York and Vegas will come rushing back once we're able to be open and running.

Brandon Ross (Partner and Media and Technology Analyst)

Great. And then wanted to ask about venue rental pricing. For this big backlog of shows that you've booked for 2021, have you taken cuts on venue rental pricing or shared the risk with promoters? And have there been any changes to the contracts that you had signed on the dates that were rescheduled from 2020?

Andy Lustgarten (President)

So simple law of economics, supply and demand. When your supply is twice as high, you can figure out what you can think about on pricing. So I guess the simple answer is no. We haven't changed pricing at all. We feel very good about the future.

Brandon Ross (Partner and Media and Technology Analyst)

Great. Thanks.

Operator (participant)

Thank you. Your next question is from John Janedis of Wolfe Research.

John Janedis (Stock Analyst)

Thank you. Good morning. I had two guys: one on the Sphere and one on costs. And by the way, thanks for the color on the Sphere. I was hoping to give us an update on the timing of the London Sphere. Is that getting pushed down the road indefinitely? And then Vegas, how do you think about the potential for a cost increase above and beyond the $1.67 billion given the delay? And then separately, on the $100 million of reduced run rate costs, to what extent are those permanent, or do the majority of those come back as you get back up and running?

Andy Lustgarten (President)

How are you doing, John? First off, why don't I start, and I'm going to pass over to Mark. I'll start with the London question. So we are currently working towards a planning approval with the London Legacy Development Corporation. We don't see the earliest we see getting planning permission would be in the autumn of 2020, and as we work through this planning process and design process, our timeline will continue to evolve, so I don't have anything to give you more in terms of our opening timeline, but I can tell you we intend to open London after Vegas once we have a planning approval, once we have designs finalized, and we are committed to bringing the Sphere to London, but it's going to be post-Vegas. I think the other part of your question was on cost cuts. Mark, do you want to answer that?

Mark Fitzpatrick (EVP and CFO)

Sure. Hi, John. I think your second question was just on the overall Vegas cost. Is that correct? I just want to make sure I'm...

John Janedis (Stock Analyst)

I think there are two pieces of cost. One would be on the Vegas cost, and the second on the $100 million of the run rate cost reduction. Are those permanent, or a piece of those I assume come back as you guys get back up and running?

Mark Fitzpatrick (EVP and CFO)

Sure. I'll start with the Vegas costs. One, I think we just saw in our release today, we're still comfortable with the $1.6 billion of total cost. We are spending, spreading the time to spend that, but we are still comfortable with the $1.6 billion. We think over time we're going to reevaluate some of the spending associated with the different aspects of that, and we think we'll be able to offset any potential cost increases and may actually be able to drive it lower. But overall, we're still comfortable with the $1.66 billion. And then in terms of your permanent costs, as I mentioned in my speech, we took a comprehensive look at our operations to find out what we could eliminate. We made the difficult decisions to eliminate some of our headcount to preserve cash, ensure we're healthy for the future.

So we've reduced our workforce and spending across all our departments. As our business comes back, some of this spending will obviously return. We don't think all of it will return, as we think there's efficiencies, and we'll be able to embed those into our go-forward cost base. So like every other company, we're going to continue to focus on it and make sure that we can reduce our cost base going forward and increase the profitability of our business. So we're excited about the future in terms of lowering our overall costs.

John Janedis (Stock Analyst)

Great. Thank you.

Operator (participant)

Thank you. Your next question is from John Belton of Evercore.

John Belton (Research Analyst)

Thanks. I just have one on this Las Vegas Sphere project. So it looks like, given the remaining CapEx associated with that project and the events over the last few months, that you may no longer be able to fully self-fund that project. So how has your view on financing strategy changed? You've spoken in the past about looking at an array of options for other venue projects like debt financing, joint ventures, and strategic equity partners. How are you thinking about those options as they pertain to Las Vegas Sphere and the potential that you might need to raise capital several quarters down the line?

Mark Fitzpatrick (EVP and CFO)

Sure. This is Mark. I'll answer that question. First, I'll just remind you that we have over $1.2 billion in cash on our balance sheet as of June 30th. And as we mentioned in our prepared remarks, we plan to raise another $500 million in debt. Secondly, we've changed the calendar for the MSG Sphere, so it'll enable us to spend the capital expenditures over a longer period of time. In terms of future Spheres, as we've mentioned before, our intent is to explore other options, including non-recourse debt financing, joint ventures, equity partners, and a managed venue model. Hopefully, that answers your question.

John Belton (Research Analyst)

So you're not necessarily looking into any of those options for Las Vegas at the moment?

Mark Fitzpatrick (EVP and CFO)

Look, we always consider options, both potentially that make sense for the company strategically and financially, but we're not currently looking into those options right now.

John Belton (Research Analyst)

Got it. Thank you very much.

Mark Fitzpatrick (EVP and CFO)

Ari?

John Janedis (Stock Analyst)

Christie will take the next question.

Operator (participant)

The next question is from Ben Swinburne of Morgan Stanley.

Ben Swinburne (Equity Research Analyst)

Thanks. Good morning. It's good to hear from everybody and hope everyone is doing well. I have two questions. Andy, as you look at the portfolio of assets at this company and think about kind of reopening over the next, who knows, six, 12 months, what, if any, changes or sort of adjustments do you think you want to make or could make to the various offerings, given we're going to be coming out of this COVID situation incrementally rather than flipping a switch and going back to pre-COVID?

I'm thinking about things like the Christmas Spectacular, reopening the garden, even Sphere, which you obviously haven't built yet. Are there changes you're thinking about making given just we're going to be dealing with the lingering effects of this one way or the other, even psychologically long term? And then I was curious on the sponsorship and suite front, how demand is holding up given just the economic pressures we're seeing as you look at, I know those are multi-year contracts. You've got the visibility, but just give us a sense for what the demand looks like as you have contracts come off and potential new sales. Anything you could tell us there would be helpful. Thank you.

Andy Lustgarten (President)

Ben, first off, nice to speak to you. Good morning. In terms of what changes we're making to our venues and our events, I mean, we are following this extremely closely, working with our government officials, working with the leagues on the sports side. Obviously, they're our biggest tenant here at MSG Entertainment, as well as all of our partners and our promoter partners.

The first thing that's important to us is the safety of our. I'll start. I should have started with that. The most important thing is the safety of our guests, our employees, and our artists, right? But nothing can start until they're safe, right? That is the number one point. As I think we've shown many times over, we're the leader in terms of both amenities for our guests and artists, as well as safety and protocols.

So what I'd say to you is we're going to do everything we can to make sure people feel safe. We're going to modify our venue as we need to. But right now, it's still early. We don't know when, we don't know what, to your point, the ramp-up will look like. Will it be capacity constraints? Will it be spacing between patrons? And we're exploring every option and have a task force looking at ways to deliver the best experience to our guests, our artists, and our employees as we come back. In terms of the future, I know you mentioned this Christmas show. Obviously, as I mentioned before, this was a tough decision. We waited until the last minute till we made the decision. We did that for a reason because we believe in the demand of the show.

We couldn't take on the risk of mounting with such uncertainty in short order. In the long term, we feel very good about the return to the show and its appeal. And it's just a question of how quickly can we get to that long term? Not necessarily for the Rockettes, I'm just saying, in terms of our total business. And we think this is coming back. We think people want live events. I think if you look across the world at other countries that have slowly started to open up, the demand has been there. Yes, people have modified their behavior, wearing a mask, etc., but we're going to stay on top of it, and we're going to get this business back up, and we feel very good about the long-term future.

Ben Swinburne (Equity Research Analyst)

Anything on sponsorships and suite demand?

Andy Lustgarten (President)

To be honest, it's still early.

Ben Swinburne (Equity Research Analyst)

Yeah.

Andy Lustgarten (President)

Right? Our deal agreements are long-term, multi-year. We've got great partners who view us as long-term, see the value of our business long-term, and we're working through stuff right now.

Ben Swinburne (Equity Research Analyst)

Got it. Okay.

Andy Lustgarten (President)

Don't read anything negative or positive into it. It's just these are long-term relationships, and long-term relationships, again, when you have a business and what we could deliver, and we feel good about the long term.

Ben Swinburne (Equity Research Analyst)

Got it. Thank you very much.

Operator (participant)

Thank you. With that, I'll turn the floor back over to Ari Danes for any additional or closing remarks.

Ari Danes (Head of Investor Relations)

Thanks, Christie. And thank you all for joining us today. We look forward to speaking with you on our next earnings call. Have a good day.

Operator (participant)

Thank you. This does conclude today's conference call. You may now disconnect.