Madison Square Garden Entertainment Corp. (MSGE) Earnings Call Transcript

Good morning. Thank you for standing by, and welcome to the Madison Square Garden Entertainment Corp. Fiscal 2026 Fourth Quarter and Year-End Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Ari Danes, Senior Vice President, Investor Relations and Treasury. Ari, please go ahead.

Thank you. Good morning, and welcome to MSG Entertainment's fiscal 2026 fourth quarter and year-end earnings conference call. On today's call, David Collins, our EVP and Chief Financial Officer, will provide an update on the company's operations and review our financial results for the period. After our prepared remarks, we'll 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 4 and 5 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 David.

Thank you, Ari, and good morning, everyone. Fiscal 2026 was an outstanding year for our company with full year revenues of more than $1 billion and adjusted operating income of $262 million. This represented increases of 13% and 18%, respectively, driven by growth across all key areas of our business. In addition, we continue to execute on one of our core capital allocation priorities during the year, repurchasing approximately $25 million of our Class A common stock. And in June, we announced the proposed transfer of the Infosys Theater at Madison Square Garden as part of the Penn Station redevelopment project, a transaction that, if finalized, would further our goal of creating long-term shareholder value. As we head into fiscal '27, we look to build on our operating momentum with a continued focus on growing the number of events across our venues, increasing per event profitability, delivering another record-setting year for the Christmas Spectacular and advancing our sponsorship and premium hospitality businesses. We also anticipate strong ongoing demand from consumers and partners alike, which we believe sets us up for another year of solid growth in revenues and AOI in fiscal '27. Let's now review some key operational highlights. During fiscal '26, we hosted approximately 6.4 million guests at nearly 960 live events. That included a strong fiscal fourth quarter where we more than doubled the number of concerts at the Garden year-over-year, reflecting our efforts to drive utilization within the NBA playoff window. And in terms of consumer demand, the majority of our concerts were again sold out during the quarter. Looking ahead to fiscal '27, we expect to grow the number of events at our venues year-over-year as we host a wide range of bookings across concerts, special events, family shows and marquee sports. This includes a number of high-profile upcoming events such as Harry Styles residency with 30 dates from August through October and return of the NCAA Men's Basketball East Regionals to the Garden in March. Turning to the Christmas Spectacular production. During fiscal '26 across 215 paid performances, we sold over 1.2 million tickets, the highest attendance in 25 years, leading to another record-setting year for the production with approximately $195 million in revenue. We are currently on sale with 230 shows for the 2026 holiday season, a new high in terms of number of performances in a year. This year's show will feature the addition of a new Rockettes scene as well as new immersive technology that will give audiences different perspectives of the production as we continue innovating going into our 93rd season. In terms of our agreements with MSG Sports, the Knicks and Rangers completed their '25, '26 regular seasons during the quarter with the Knicks advancing to the NBA playoffs and ultimately going on to win the NBA Championship. For both our fourth quarter and full year, we saw robust growth on a per game basis in our Knicks and Rangers shared revenue streams, including suites and food, beverage and merchandise, which all benefit from the Knicks post-season run. We expect this momentum to carry forward into fiscal '27. In addition, the cash component of the Arena license fees will be approximately $47 million in fiscal '27 and will continue to grow 3% each year through fiscal 2055. On the marketing partnerships front, we capitalized on several notable opportunities in fiscal '26. We welcome new partners, including most recently a multiyear deal with Kalshi, while also reaching multiyear renewals with Lexus, Anheuser-Busch and Infosys. And in terms of premium hospitality, we again saw strong new sales and renewal activity for suites at the Garden. That included a number of Lexus level suites that were renovated at the start of the fiscal year. We're continuing to build on the successful initiative by renovating several more suites to drive incremental revenue in fiscal '27. So as we look to the next fiscal year, we expect the positive momentum in both marketing partnerships and premium hospitality to continue. Turning to the Penn Station redevelopment. In May, Amtrak selected Penn Transformation Partners, led by Halmar International and Skanska as the master developer team to redevelop Penn Station. We then announced in June that we had entered into a nonbinding MOU with a master developer to transfer the Infosys Theater at Madison Square Garden. Our proposed agreement will also acknowledge that the Arena will remain fully operational during the redevelopment. We believe the potential transaction, which remains subject to negotiation and definitive documents, makes strategic and financial sense for the company as we look to create long-term value for our shareholders. We look forward to working with the master developer team, and we'll keep you updated as we have more to share. Now let's turn to our financial results. For the fiscal '26 fourth quarter, revenues were $196.3 million, up 27% year-over-year. This primarily reflected an increase in revenues from entertainment offerings and to a lesser extent, higher food, beverage and merchandise revenues. The increase in revenues from entertainment offerings as well as food, beverage and merchandise primarily reflected the increase in number of concerts at the Garden during the quarter. In addition, we benefited from higher revenues subject to the sharing of economics with MSG Sports, including the benefit of the next championship run in areas such as merchandise. Revenues from venue-related sponsorships, signage and suite license fees also grew year-over-year. These increases were partially offset by fewer concerts at our theaters. Fourth quarter adjusted operating income of $18.6 million increased $19.9 million from an adjusted operating loss of $1.3 million in the prior year quarter. This significant year-over-year growth primarily reflects the robust increase in revenues, partially offset by higher direct operating and SG&A expenses. Turning to our balance sheet. As of June 30, we had $294 million of unrestricted cash, while our debt balance was approximately $579 million. This cash balance includes a significant amount due to promoters, which reflects the robust concert activity ahead at our venues led by the Garden. With respect to fiscal '27, we anticipate generating significant free cash flow on an underlying basis. This will primarily be driven by our substantial and growing adjusted operating income, partially offset by ongoing net interest payments related to our credit facilities, which totaled $32 million in fiscal '26, our status as a full cash taxpayer, capital expenditures, which will reflect some incremental spend related to technology investments across the company and select suite renovations at the Garden and the timing of working capital, including the partial reversal of our cash due to promoters balance as a result of the timing of events. As I touched on earlier, we repurchased approximately 623,000 shares of our Class A common stock for $25 million during fiscal '26. Since our spin-off in 2023, we have repurchased approximately 6.1 million shares in total for $205 million. And going forward, we'll continue to explore ways to opportunistically return capital to shareholders. So in summary, we saw strong demand across our business in fiscal 2026. We see this momentum continuing in fiscal 2027 and remain confident in our ability to deliver long-term shareholder value. I'll now turn the call back over to Ari.

Thanks, David. Operator, can we now open up the call for questions?

[Operator Instructions] Your first question comes from the line of Peter Henderson with Bank of America.

Two, if I can, related. Can you just update us on the status of the Infosys Theater sale process? And if that sale occurs, how much of the venues event volume and associated economics like the sponsorship, do you believe you can recapture elsewhere in your portfolio?

Sure. Peter, thanks for the question. First, I'd like to congratulate Penn Transformation Partners on being selected to redevelop Penn Station. And as I had mentioned earlier, we believe that this potential transaction is in line with our goal of creating long-term value for our shareholders. So currently, we're working through the definitive documents with their team and we will keep you posted on that progress. As it relates to our ability to redirect the theaters business, first, I would remind you that a significant majority of our company's economics are driven by the Garden and the Christmas Spectacular production. The theaters in aggregate follow those 2 revenue streams. That said, we are exploring all opportunities to maximize the economic benefit of this potential transaction, which does include analyzing our ability to shift events from the Infosys theater to our other theaters in New York. And I would say in terms of sponsorship and signage, our partnerships do generally allow us the flexibility within our business while protecting the value delivered to our partners. So similar to events, we are evaluating ways to leverage our other live entertainment assets for sponsorship and signage.

Your next question comes from the line of Brandon Ross with LightShed.

Just maybe a follow-up on the last one. Assuming the Infosys sale does go through, how do you guys expect to use the proceeds and limit tax leakage at the same time? And do those options include partnering with Sphere potentially on New York Sphere or Sphere elsewhere?

Thanks, Brandon. I would say with regard to the proposed transfer of the theater, our focus right now currently is on completing the proposed transaction. No decisions have been made at this stage in terms of the use of those proceeds should the transfer be completed. But with that said, we are certainly mindful of the potential tax implications related to the transfer of the theater. And as you may know, the primary way to minimize the tax leakage would be to reinvest the potential proceeds in another venue. So of course, we would evaluate venue opportunities in New York City market if they presented to us in the future. But I don't think we're in a position to speculate on any hypothetical venue transactions at this time. I'd also add that any decision that we do make will be in line with our core priorities for capital allocation, which, as you know, are ensuring that we continue to have a strong balance sheet, that we maintain our flexibility to pursue compelling opportunities when they arise and lastly, to opportunistically return capital to our shareholders. So we will continue to make our decisions based on these priorities and we'll have more to share as we move through that process.

Thanks, Brandon. Operator, we'll take the next question.

Your next question comes from Stephen Laszczyk with Goldman Sachs.

I wanted to see if you could provide an update on the pacing of event bookings in 2027 across the portfolio. Just to be curious how much visibility you have into bookings potentially growing at the Garden year-over-year? And then I wanted to check in on the pacing of bookings around the theater footprint since we last caught up in the third quarter, how that's progressed since.

Sure, Stephen. In terms of our progress, we're almost 90% to our bookings goal for this year for the Garden and about 60% of the way there for -- 60% to our goal for our theaters. Our fiscal first quarter is already underway and we remain on track to shatter our record for the number of concerts in any quarter at the Garden. Obviously, that includes the impact of the Harry Styles residency. At our theaters, we are currently pacing behind for the September quarter. And looking at the December quarter, we are again pacing ahead at the Garden in terms of the number of concerts, but still behind at the theaters. However, as I've discussed in the past, the booking window at our theaters is typically a 3 to 6 months in advance window. So we do still have time and we are definitely working to narrow that gap. So I would say, overall, all in, we feel good about our start to the year and expect to drive growth at both the Garden and our theaters in fiscal '27.

Your next question comes from the line of David Karnovsky with JPMorgan.