Madison Square Garden Sports - Q1 2022

Transcript

Operator (participant)

Good morning. Thank you for standing by, and welcome to the Madison Square Garden Sports Corp. Fiscal 2022 first 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. To ask a question at that time, please press Star and then the number one on your telephone. If you should require any further assistance, please press Star zero. I would now like to turn the call over to Ari Danes, Investor Relations. Please go ahead.

Ari Danes (SVP of Investor Relations)

Thank you, operator. Good morning, and welcome to MSG Sports' Fiscal 2022 first quarter earnings conference call. Our President and CEO, 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 Victoria Mink, our EVP, Chief Financial Officer, and Treasurer. 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 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 Andy.

Andy Lustgarten (President and CEO)

Good morning, and thank you for joining us. As you know, when we became a standalone sports company, we announced, in keeping with the cadence of our business, that we would conduct earnings calls for the fiscal second and fourth quarters only. While that remains our plan going forward, given the still fluid operating environment due to the pandemic, we thought it was important to provide an update on our business, including some positive signs we're seeing across the company, which we expect will be reflected in our results over the balance of this fiscal year. This positive shift is being driven by both consumer and corporate demand, which is continuing to improve in a number of areas. I'll take you through more details shortly, but these areas include season tickets, per caps for food, beverage, and merchandise, suites, and marketing partnerships. We are not out of the woods yet.

There remain lingering effects of the pandemic and select areas of softness in the business. However, we are as confident as ever, both in our fundamentals and that we are on the path back to normal operations. At the center of it all are two tremendously valuable assets, the Knicks and Rangers. Iconic franchises with dedicated fan bases that play in the largest media market in the world. As we discussed on our last earnings call, there have recently been several precedent transactions across our leagues that highlight the robust value of professional sports teams. These include minority stake sales with no public market liquidity involving the Los Angeles Lakers and Golden State Warriors at reported valuations of $5 billion and above. Since we spoke last quarter, there have been additional data points specifically for our company.

Last month, Forbes published its annual list of NBA team valuations, with the Knicks leading the league at $5.8 billion. In addition, Sportico recently released its NHL team valuations, listing the Rangers as the second most valuable franchise at nearly $1.9 billion. These two valuations, when combined, are obviously well in excess of our current enterprise value of just over $5 billion and speak to the enormous and still untapped value of our marquee assets. Let's now turn it to our business operations. The NBA and NHL 2021-2022 regular seasons are underway, with both the Knicks and Rangers having signed a number of key players to new contracts. Since our last call, this includes the Rangers reaching long-term extensions with Mika Zibanejad and Adam Fox. We're extremely happy with the composition of our rosters and the direction of both teams.

After the disappointment of two shortened seasons due to the pandemic, both teams are scheduled to play full seasons this year with no capacity restrictions at the Garden, and the response from our fans has been tremendous. We are extremely pleased with where we are on season tickets, which is the significant majority of tickets sold for both the Knicks and Rangers. The teams have a combined season ticket renewal rate of 94% and have also experienced strong sales for new customer season ticket packages. The pandemic's impact on international tourism has, however, had a lingering effect on our group and individual tickets, which make up a minority of our overall ticket sales. We're hopeful this will be mitigated by the loosening of international travel restrictions into the U.S., which took effect this week. Closer to home, we see other possible tailwinds for ticket sales.

Office occupancy in New York City, while still very low, has increased significantly in the past month and a half. According to a recent survey of major city employers by the Partnership for New York City, is expected to improve substantially by January. In addition, the percentage of adults in New York State that have received at least one vaccination dose is now nearly 90% and rising. The CDC's recent approval of vaccinations for children could bring more families back to games. We think all signs are pointing in the right direction, and we're also seeing particular strengths in other areas. For example, the enthusiasm we've seen from fans who have been eager to watch their team in person has been terrific. Not only are they bringing an incredible amount of excitement to the garden, they're spending.

While it's still early in the season, this has led to strong double-digit percentage increases in F&B and merchandise per caps compared to pre-pandemic levels. We've also seen this enthusiasm extend to corporate hospitality as our suite holders have started to entertain again at the garden. In fact, so far this season, average suite usage for the Knicks and Rangers is back to nearly 85% of historical levels. This renewed interest in corporate hospitality has also helped accelerate activity around suite renewals and new sales. Our team has been working hard to return suite revenue to pre-pandemic levels, and we're pleased to say that on a go-forward run rate basis, we've achieved that goal. Another proof point of corporate confidence has been engagement we're seeing by our marketing partners. They've been extremely supportive over the past 20 months.

As we make our way back to normal operations, we are pleased to find a readiness to embrace existing partnerships while also adding new ones. As we mentioned on our last earnings call this past summer, we renewed our marquee partnership with JPMorgan Chase. Since then, we've also successfully renewed deals with a number of our existing signature marketing partners, Lexus, Anheuser-Busch, and Squarespace, while also adding a new signature partner to our roster, Infosys, a global leader in digital services. In addition, we continue to complete other important marketing partnership deals, including our recent extension with Kia and our announcement that Benjamin Moore has joined as an official partner and helmet sponsor of the Rangers. We applaud the NHL and NBA for their ongoing efforts to introduce new marketing partnership opportunities.

In addition to the NHL helmet sponsor, last year also brought the introduction of a second NBA practice jersey patch and virtual signage on the court for the NBA and on ice for the NHL. The NBA has also expanded international sponsorship rights, increasing the number of sponsors a team can have, while the NHL has approved a jersey patch for teams starting next season. We're actively in the market now for much of this new inventory. The league's efforts also extend to embracing new sponsorship categories, such as sports gaming. Just this week, we completed an agreement with BetMGM, which represents our first significant partnership related to mobile sports gaming in New York State. This expansive multi-year deal, which was done in partnership with MSG Entertainment, includes deep integration with the Knicks and Rangers, as well as across MSG Entertainment's portfolio, most notably at the world's most famous arena.

This announcement is just the beginning. BetMGM is our first major sponsor in this important category. Although we don't expect them to be our only partner as we begin to realize this tremendous opportunity this space represents for our company. As you can see, we are experiencing real momentum across our business, driven by the strong desire of our customers and partners to fully engage with our assets and with each other. We also see substantial upside opportunities across nearly all of our major revenue lines as our on-court and on-ice performance improve over time. While challenges remain as we continue to navigate this unique environment, we believe strongly in the value of our brands, the incredible energy and excitement of our games, and the enduring connection between our franchises and their fans. We are confident in our ability to drive long-term value for our shareholders.

With that, I'll turn the call over to Victoria.

Victoria Mink (EVP, CFO, and Treasurer)

Thank you, Andy, and good morning, everyone. I'll start by very briefly touching on our fiscal first quarter results. Total revenues for the quarter were $18.8 million as compared to $57 million in the prior year quarter. We also generated an adjusted operating loss of $28.1 million as compared with a loss of $17.8 million in the prior year period. I would note that year-over-year comparability for the fiscal first quarter was impacted by the NHL and NBA's return to play in the prior year period.

Additionally, we held two preseason games in the current quarter versus none in the prior year period as the 2019-2020 return to play last year also caused delayed starts to the 2020-2021 seasons. More detail on our first quarter financial results can be found in our Form 10-Q, which we filed yesterday after market close. In terms of liquidity, we continue to prudently manage our balance sheet. As of September 30th, we had $278.6 million of liquidity, comprised of cash and cash equivalents and available borrowing capacity under our existing credit facilities. Our total debt outstanding at quarter end was $385 million. Looking ahead, the balance of the fiscal year will primarily reflect the financial results of the 2021-2022 seasons for the Knicks and the Rangers.

As Andy discussed, we are seeing positive momentum across virtually every revenue line of our business. Ticket, food, beverage, and merchandise sales have been strong, while suites and sponsorship revenue have essentially returned to pre-pandemic levels on a go-forward run rate basis. In addition, media rights revenue this fiscal year on the NHL side will reflect a significant increase as a result of the league's new national media rights agreements with Disney and WarnerMedia. In summary, we feel very good about the trajectory of our business for the remainder of fiscal 2022, and I believe our company is on the path back to normalized results. With that, I will now turn the call back over to Ari.

Ari Danes (SVP of Investor Relations)

Thank you, Victoria. Operator, we would now like to open the call for questions.

Operator (participant)

Ladies and gentlemen, as a reminder at this time, if you'd like to ask a question, please press Star and then the number one on your telephone keypad. Our first question comes from the line of David Karnovsky with JPMorgan.

David Karnovsky (Senior Research Analyst)

All right, thank you. I just have one. In light of a better outlook today, is there any update you can provide on something thinking about capital allocation? You know, where would you need the business to be to consider share repurchases? Thank you.

Victoria Mink (EVP, CFO, and Treasurer)

Hi, David, it's Victoria. Thanks for the question. You know, we've talked a bit about this before, and, you know, of course, our number one priority is to ensure the health of our company and to protect our assets. You know, so as you know, we took on additional debt last year to strengthen our liquidity position. You know, but now that our business is turning the corner, we've started to pay that down a bit, and we're considering paying down more debt in the near-term. You know, but looking ahead, we are very encouraged by the positive signs we're seeing across our business, and we do feel really confident about our long-term outlook. Over time, we'll look at all options for utilizing our free cash flow.

David Karnovsky (Senior Research Analyst)

Okay. Thank you.

Operator (participant)

Our next question comes from the line of Ben Swinburne with Morgan Stanley.

Ben Swinburne (Equity Research Analyst)

Thanks. Good morning. Andy, could you talk a little bit about, sort of sports betting as it relates to your two more key franchises and sort of the opportunity there, not just what you've signed with BetMGM, but looking longer-term. You know, do you see this as an evolving space for, you know, the leagues that have historically been a bit reticent about embracing sports betting? Do you think this becomes a bigger and bigger part of the business and revenue profile of the teams over the longer-term? Then maybe just taking another quick crack at the balance sheet, is there sort of a right debt level for this kind of business?

I know the leagues are involved in approving leverage or have at least a role to play there, but I don't know if there's any kind of framework we could think about for the optimal capital structure for a business like this, just to pick up on the last question. Thank you.

Andy Lustgarten (President and CEO)

Thanks, Ben. Well, let's start with your sports gaming question. I'll start, and I start every time with the same comment because I think it's super important. To me, sports gaming for us reflects two points. One, today, and two, tomorrow. What I mean by that is, as gaming continues to gain adoption, it will drive viewership and engagement. Viewership and engagement pays off today with some ticket prices, but long term with what we're able to do with our sponsors and eventually and even longer-term with our media deals. It's a very valuable tool in our inventory of driving engagement and enthusiasm for the sport. Second, today. Today, obviously, New York just opened its and granted the nine operators their licenses.

BetMGM is our first partner, as we've mentioned. We feel really good about that partnership. As a sports team, we have lots of ability to drive revenue out of that, of those sports partners. Specifically here at MSG Sports, the two teams have and own all premium signage, so on court, on ice, courtside rotation, some of our other premium assets, patches, helmets, stickers, et cetera. Right? Those are all assets that we control and own. Second, official partner designations, that has tremendous amount of value both in-market, and so depending on who are operators, could even be international value.

Even the thing that seems to be even more driving the gaming interest in us is our access to our consumers, both through in-venue and through direct relationships digitally, et cetera, and database. Of course, not surprisingly, that's the largest group of people, you know, the people who are most likely to game, and hence the most likely the most interested of a gamer, I mean, of a gaming company. There's lots of opportunities for a sports team to drive revenue. To our relationship with MSG Entertainment, we also share in unique exposure right here at the arena. To remind you, all fixed arena signage and all entitlements are shared very robustly between the two entities, between MSG Sports and MSG Entertainment.

MSG Entertainment's being able to represent across the network, the arena. MSG Entertainment, as well as MSG Sports, we're able to offer a partner a much larger package and offering than anybody else can. I believe it's gonna be reflected in what we're able to generate in this category because we're gonna be able to deliver partners, customers and interest like nobody else can in the largest market, or it's forecasted to be the largest market. That's why we think we've been off to a fast start. We've had a lot of interest from the other eight remaining gaming partners or licensed stores. We think this is gonna be a really big opportunity for our company, both, as I said, in the near-term as well as in the long-term.

Ben Swinburne (Equity Research Analyst)

Got it.

Victoria Mink (EVP, CFO, and Treasurer)

Ben, it's Victoria. Let me follow up on your second part of your question there. You know, we're not gonna provide guidance on a leverage target. Let me just remind you just, you know, two quick points. I mean, first of all, you know, the amount of debt that we can incur is capped by the leagues. You know, that's sort of the first point. I think, you know, the second point is to just as a reminder, we are looking at, you know, paying down some of the debt in the near-term as we, you know, just closely track how the business continues to perform.

Ben Swinburne (Equity Research Analyst)

Got it. Thank you.

Operator (participant)

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

Brandon Ross (Partner and Media and Technology Analyst)

Hi, good morning. I know we've discussed this a lot yesterday in the MSGE call, but there's lots going on with RSNs now with especially with the MSG and Comcast dispute and all the rhetoric out of the leagues with potential alternative local broadcast models. I wanted to ask you, Andy, how you see the RSN ecosystem playing out over the next several years and what you think the impact will be on your teams. Then more specifically, is there a scenario where you see needing to renegotiate your deal with networks, and what are your overarching goals as the RSN business takes on new models?

Andy Lustgarten (President and CEO)

Thanks, Brandon. Let's start at the top. Let's just lay some simple facts, right? We have a very long-term local media contract with annual escalators, which we think are strong, for both teams that are not subject to any economic changes based on distribution, right? I'd say we have the utmost confidence in our partner, MSG Network's ability to drive distribution and drive value, right? Taking a step back. That's from the team point of view. Taking a step back, I think at a macro point of view, we strongly believe in the value of professional sports content, especially premium sports content like the Knicks and Rangers.

If you take any point in time of the history since sports media rights have been created, if you've been an investor in it, you've succeeded. It's been a great investment over any sustained periods of times. Can there be hiccups in some short order? Sure. When you take a long-term view about what sports media rights are, it is a great asset to own. Right now, we have a long-term partner who holds those rights, but I love being the grantor of those rights. When you take a look again, just to make the point about the great long-term investment, look at the latest NHL deal. Very strong deal out of the NHL. We expect a very strong deal out of the NBA when their rights come up.

Yes, the landscape is evolving. Yes, there's some noise in the market right now. Having those rights and the ability to exploit it, there's gonna be more than enough ways to monetize our content. You know, we feel very good about it. To get to your question about how we feel about it. Yeah, how we feel here about Knicks and Rangers. One, I would say, look, our goal is obviously to maximize distribution, to drive revenue, sponsorship, tickets. That's what distribution drives. Your question about a renegotiation, let me start by saying, again, we feel very strong about what the value of owning rights. That's the first point.

Secondly, just in terms of thinking about our ability to renegotiate or not renegotiate, remember that first, any changes to a contract would have to go through the leagues and then go through our Independent Board. I think there is a very strong view that we have, we feel very good about our rights here and our rights fees. I would also say that while I can't speak for other leagues, we feel very confident in both the NBA and NHL's understanding and recognition of the importance of the RSNs and are very focused on finding a path forward to protect this overall ecosystem for both, which includes the leagues, the teams, and their networks.

I think this, you know, we feel very good about being a rights holder, just to conclude, Brandon.

Brandon Ross (Partner and Media and Technology Analyst)

Thanks. Just one more. For the first time in a long time, both the Rangers and the Knicks are off to really good starts. I was wondering if you could remind us or help us think about the buckets of financial upside from good team performance. I know most of the tickets for both teams are sold in advance, but sponsorships locked in. What are the other buckets that could really accelerate financial performance from the teams playing well?

Andy Lustgarten (President and CEO)

I'm gonna split your question, Brandon, into two parts, short-term, long-term. Short term, there's always, as we talked about in the past, we're very focused on having a direct relationship with our customer and going after the high volume of sellers. We do sell independent tickets, and we very much variably price those tickets. There is upside in our independent tickets, individual tickets as the team performs in any single season. Let's take a more macro point of view and what it would look like of sustained team performance, because I think that's really what your question is, and how that could positively impact value, you know. Right. Let's just start. Let me remind you, we have a number of revenue streams that are fixed and contractual.

Media rights, both set from our leagues and our MSG Network, set escalators, our suites and our sponsorships, those are locked. The ones we're currently signed are locked, also, long-term set with escalators. Obviously, there's ability to sell incremental sponsorship and open up new categories or find new assets to sell. We've mentioned about how the leagues focus on releasing new assets for us. Again, we're able to go and monetize those, and that will be impacted by team performance. Over time, and again, I guess I would say in short order, obviously there's playoff performance, and during the playoffs are very valuable in terms of incremental dates.

Especially if you go deeper in the playoffs, it's big pieces of incremental revenue. That also has a long-term impact because as team performance, not only do you increase from that year's playoff, but you have follow on benefits from increasing season ticket renewals. As you know, historically, we only reevaluate ticket prices after a playoff run. Again, further upside as teams perform. The other place that's both fixed today is our individual suite sales, but over the long-term, when suite licenses or when sponsorship deals come up, we're able to drive different prices through both of those either renewals or new sales. Club memberships as well, I'd say the same.

To conclude, I'd say, look, we feel very strong about this business. We have a number of fixed revenue streams that provide a really strong ballast for our company and its performance in any given year. With sustained team performance, over time, I could think certainly accelerate revenue growth, and new revenue growth for this company.

Brandon Ross (Partner and Media and Technology Analyst)

Great. Thanks so much.

Andy Lustgarten (President and CEO)

Thanks, Brandon. Operator, we have time for one last caller.

Operator (participant)

Your last question comes from the line of John Janedis with Wolfe Research.

John Janedis (Managing Director)

Thank you. Andy, this may be somewhat related, but given your comments on new marketing partners, can you give more color on upside from here? You talked about Benjamin Moore. Are there any other categories where you're underpenetrated? And how meaningful could the jersey patch opportunity be for the Rangers and would that revenue potentially hit next season?

Andy Lustgarten (President and CEO)

Sure. Let's, you asked a few questions in there. I think I'm going to move through it and try to answer them all. If I missed one, John, just jump in and let me know. Let's start with the NHL patch because I think it ties into your question about what are opportunities and categories. What's great about an NHL patch or any time a league opens up some premium new inventory, it's not only the revenue you're able to drive from that actual asset or that inventory, it's what you're able to do with the whole partnership. I'll give you the example of Squarespace and the Knicks jersey patch. We're able to have a nice partnership through the patch, of the sale of the patch.

Enabled us to open up a whole new category, a signature partner, and sell a whole number of other assets, and drive our rate card there. It's not only about the actual inventory, it's about what you're able to do with the inventory. What we find is when you have the premium inventory, you're able to go and create new partnerships based around ownership of that premium in inventory. The NHL patch, when it comes online next year, will drive revenue there. Our expectation is we will be selling it this year, sometime through the year to get into place next year. We could reach a partner earlier and start selling some assets around that. Obviously, the big piece of it will be when the patch opens up next season. There is opportunity this year.

I'm not promising that we're going to reach it because we do want to figure out how to maximize that category and maximize that asset. We will be patient because what we do also understand is that premium assets, to sell them correctly, you want to be a little patient. You don't want to go rush to market or else you will not drive the maximum revenue from it. When we take a more macro point of view about marketing partnerships, categories, other types of assets that we have, we think we have a lot of upside still. I think we already mentioned our marketing partnership business is back to pre-pandemic levels already. We're very proud of that on a go-forward basis. Sports betting took us to exceeding our pre-pandemic level.

When we measure ourselves against a number of metrics, we're able to see across different categories, see where people are spending. There are certain categories we have yet to tap into. Cryptocurrency, it's a very big opportunity. The leagues have already reached it, certain teams. There's been a naming rights partner in Miami. I mean, it's pretty significant category, and it's one we're focused on right now. Fitness and health companies, you know, such as Peloton, WHOOP, Fitbit, they're all looking to reach sports customers and our customers. Health insurance, home improvement, these are all categories we really haven't tapped into yet. We have a number of premium assets.

We already talked about the NHL jersey patch coming, but international rights in the NBA, that's a big asset we haven't fully maximized yet. I'll mention also in the NBA, while we have a current patch partner, when that patch comes to market, we believe there's huge upside there as the market seems to really have moved in that space in terms of what some of the teams who've just recently signed deals, what they've been able to realize. We think there's big upside there as well. We think there's a huge advantage in the way we go to market.

Being able to sell across with our partner in MSG Entertainment, being able to sell across the network, across the arenas, across fixed assets, and across the teams, and being able to provide a holistic solution for a partner enables us to drive premium revenues for our teams. We think it's a great opportunity here. We think just to really reiterate, we feel really good about where we are, but we feel even better about where the future is.

John Janedis (Managing Director)

All right. Thank you.

Operator (participant)

I'd like to turn the call back now over to Ari Danes for any closing remarks.

Ari Danes (SVP of Investor Relations)

Thank you all for joining us. We look forward to speaking with you on our next earnings call. Have a great day.

Operator (participant)

Goodbye. Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may now disconnect.