Madison Square Garden Sports - Q2 2024

Transcript

Operator (participant)

Good morning! Thank you for standing by, and welcome to the Madison Square Garden Sports Corp. Fiscal 2024 second quarter 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 Danes, Investor Relations. Please go ahead.

Ari Danes (SVP, Investor Relations and Treasury)

Thank you, operator. Good morning, and welcome to MSG Sports Fiscal 2024 second quarter earnings conference call. Our President and COO, David Hopkinson, will begin this morning's call with an update on the company's strategy and operations. This will be followed by a review of our financial results with Victoria Mink, our Executive Vice President, 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 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 four and five 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.

David Hopkinson (President and COO)

Thank you, Ari, and good morning, everyone. With the 2023-24 NBA and NHL seasons now more than halfway complete, I'm pleased to say that our positive operating momentum from last year has carried forward into fiscal 2024. This momentum is reflected in our fiscal second quarter results, with revenues of approximately $327 million and adjusted operating income of $37 million. While reported results reflect nine fewer Knicks and Rangers home games at the Garden versus the prior year period, per game revenues across nearly every key category, including tickets, suites, food and beverage, and merchandise, were up compared to the fiscal 2023 second quarter. These results highlight the sustained enthusiasm we continue to see from our fans and partners and the strength of our marquee sports franchises.

It also reflects our ongoing success in executing on opportunities to grow our business, including maximizing ticket revenue through season ticket renewals, increases in ticket yield and sell-through, introducing new premium hospitality products, and forging deeper relationships with our fans. We also continue to benefit from contractual growth in media rights. With these successful initiatives and numerous avenues for growth ahead, we believe we are very well positioned to create long-term value for shareholders. Now, let's discuss our business in more detail. Both the Knicks and Rangers have had strong starts to their seasons. In December, the Knicks qualified for the quarterfinals of the NBA's first-ever in-season tournament. This was followed by a significant trade for OG Anunoby, Precious Achiuwa, and Malachi Flynn, and we've been very pleased with how the team has performed since then.

More recently, we were proud to see Julius Randle and Jalen Brunson selected as 2024 NBA All-Stars. For the Rangers, just this past weekend, Igor Shesterkin, Vincent Trocheck, and our head coach, Peter Laviolette, represented us in the NHL All-Star Game. With a couple of months left to go in the regular season, both teams are in playoff contention, and we look forward to watching the remainder of the seasons unfold. Complementing strong team performance has been the sustained enthusiasm from our fans. As you know, season tickets comprise the significant majority of our ticket revenue, and this season, our average combined renewal rate was above 94%. This is particularly notable as it takes into account a larger renewal base than last year and season ticket price increases for both teams.

Combined with group tickets and individual tickets, we saw year-over-year increases in both average ticket yield and average paid attendance on a per-game basis in the fiscal second quarter. The enthusiasm from our fans has also been evident at the arena, with food and beverage and merchandise per capita spending up almost 10% as compared to the fiscal 2023 second quarter. In addition to our in-arena success, we continue to look for ways to drive deeper fan engagement and build the next generation of fans, including through original merchandise offerings, as well as exciting fan experiences and digital content. On the merchandise front, we continue to focus on introducing compelling offerings that our fans value.

Whether it's this year's third jersey for the Rangers, their special edition jersey for next week's outdoor Stadium Series game, or our exclusive one-off collaborations, like with Siegelman Stable for the Knicks and global rock band KISS for the Rangers, our innovative initiatives this season have generated tremendous fan interest. We also saw robust fan interest when we welcomed thousands to the Knicks' 23-24 season tip-off event at The Garden in October. In addition to watching the Knicks practice, this free event included a celebrity basketball game and Knicks alumni meet and greets. It also demonstrated how we've been leveraging opportunities to create engaging content for our broader fan community on our digital platforms. In total, content covering our season tip-off event generated more than 29 million impressions, including over 18 million video views on social media and digital platforms.

We'll continue to look for unique avenues to deliver compelling content to our digital platforms that highlight our players and teams in an effort to forge stronger connections with both our avid and casual fans. Turning to marketing partnerships, we've also brought in a number of new marketing partners so far this season, including Beyond Meat, Pfizer, Nexen Tire, and Oura Ring, amongst others. At the same time, we continue to benefit from our existing agreements with our strong roster of core marquee and signature partners. And this past fall, through our sponsorship sales representation agreements with MSG Entertainment, we began a new relationship with Oak View Group and Crown Properties Collection that presents new opportunities to expand our sponsorship business over the long term.

In terms of premium hospitality, this fiscal year we are seeing record suite revenues, driven by strong new sales and robust renewal activity, as well as the addition of new premium products at the arena. In October, the Garden opened two new event-level suite products, which have been very well received. The first, an event-level suite, has already been licensed in a multi-year agreement, and the second, which is a luxury club space, is nearly sold out. We're pleased with our momentum in premium hospitality and remain poised for continued growth in this area of our business. Turning to media rights, we continue to benefit from increases in local and national media rights fees due to ongoing annual contractual rate escalators. At the same time, we continue to see enthusiasm from audiences for live sports.

The NBA's viewership across ESPN, ABC, and TNT remains strong, and with the NBA's national media rights agreements coming up for renewal after the 2024-25 season, we remain optimistic about the media rights opportunity ahead. At the local level, both the Knicks and Rangers have seen robust viewership trends this season, with local ratings for both up double digits compared to the same time last year. Before I turn the call over to Victoria, I'd like to touch on the recent third-party valuations across our leagues. In December, Sportico published its annual ranking of NBA team valuations, with the average team value up 33% from last year. That same month, Forbes released its updated NHL team valuations, with average team values increasing 29% year-over-year.

These rising third-party valuations reflect not only the scarcity of these assets, but the strong underlying business fundamentals and significant growth opportunities for both of our leagues, all of which reinforces our confidence in the value of owning these two iconic sports franchises. We're pleased with how our business is performing and remain confident in our ability to deliver long-term shareholder value. With that, I will now turn the call over to Victoria.

Victoria Mink (EVP, CFO and Treasurer)

Thank you, David, and good morning, everyone. I would like to start by reviewing our fiscal 2024 second quarter financial performance, and then provide an update on our balance sheet. Results for the fiscal second quarter reflect preseason play and the start of the 2023-2024 regular seasons for the Knicks and Rangers. In aggregate, we hosted 32 pre and regular season games across both teams, as compared to 41 games last year, which impacted the year-over-year comparability of results. I'd also note that our fiscal third and fourth quarters will reflect nine additional home games in total as compared to the prior year periods.

Turning to our results for the fiscal second quarter, total revenues were $326.9 million, as compared to $353.7 million in the prior year period, which reflected the impact of fewer home games at The Garden versus the prior year, partially offset by increases across nearly every key revenue category on a per-game basis. Event-related revenues of $122.4 million, which mainly consist of ticket, food, beverage, and merchandise revenue, decreased 14% year-over-year, while suites and sponsorship revenues of $69.3 million also decreased 14% year-over-year. National and local media rights fees of $122.5 million increased 4%, primarily due to the impact of contractual rate increases on our local and national media rights deals.

Adjusted Operating Income decreased $27.4 million to $37 million, primarily due to the decrease in revenues, and to a lesser extent, an increase in direct operating expenses, partially offset by lower SG&A expenses. AOI for our fiscal 2024 second quarter includes $9 million of non-cash arena license fee expense, as compared to $12.2 million in the prior year period. The increase in direct operating expenses primarily reflects higher team personnel compensation, as well as higher revenue sharing expenses net of escrow. This was partially offset by lower arena license fee expenses due to the 9 fewer regular season games played at the Garden during the current year period and other net cost decreases.

The decrease in SG&A expenses was primarily due to lower employee compensation, a result of executive management transition costs recognized in the prior year period, and lower other general and administrative expenses. As we look ahead, we continue to expect our business to deliver revenue growth in fiscal 2024, excluding the impact of the playoffs. Our AOI will reflect the growth in revenues, along with higher team operations expenses and league-related costs. Turning to our balance sheet. As of December 31, our cash balance was approximately $38 million, and our debt balance was $360 million. This was comprised of $275 million under the Knicks senior secured revolving credit facility, $55 million under the Rangers senior secured revolving credit facility, and $30 million advanced from the NHL.

Our cash and debt balances both reflect a total of $40 million of repayments under our senior secured revolving credit facilities during the quarter. Regarding liquidity, as of December 31, we had $233 million of liquidity, comprised of $38 million of unrestricted cash and cash equivalents, and $195 million in borrowing capacity under the team's revolving credit facilities. Based on the momentum we have seen in fiscal 2024 and the opportunities ahead to drive long-term growth, we remain confident in the trajectory of our business. With that, I will now turn the call back over to Ari.

Ari Danes (SVP, Investor Relations and Treasury)

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

Operator (participant)

At this time, I would like to remind everyone, in order to ask a question, press Star, then the number one on your telephone keypad. Your first question comes from the line of David Karnovsky from J.P. Morgan. Your line is open.

David Karnovsky (Executive Director and Senior Research Analyst)

Hi, thanks for the question. First, on your RSN distribution, your partner, MSG Networks, has a material debt maturity coming up in October, and I wanted to see if you think there's a role or opportunity for you to play in that process, just given your... you know, the largest cost item for them. And then secondly, on the Sphere jersey patch agreement, are there any incremental details you'd be willing to share here, financials, deal lanes, or maybe even just relative to the, the prior partnership you had there? Thank you.

David Hopkinson (President and COO)

Hi, David. Thanks for the questions. With respect to MSG Networks, so if we take a step back, you know, we all know the media landscape is evolving, but we believe strongly in the value of live professional sports content, and especially in the case of premium content like the Knicks and Rangers. We're also fortunate that we operate in the nation's largest media market, so that benefits us and MSG Networks. So we have the long-term local media contracts in place with MSG Networks, the agreements that provide exclusive local distribution of all of our, all of our live content, including the digital. And they're a great partner of ours. We're supportive of what they're doing on the distribution front, including their new direct-to-consumer offering, MSG Plus.

I think you know MSG+ allows sports fans in our market that do not currently subscribe to a traditional linear TV package to access live Knicks and Rangers games. So look, we believe having sports rights has proven to be a great investment, especially over the long term, and we remain confident in that as we continue to look ahead. Your question on Sphere and the patch. You know, we don't discuss the specifics of any individual marketing partnership detail or pardon me, deal, so we're not going to share any details on that. But what I will tell you is that we're proud of this agreement, which brings together two globally recognized sports entertainment brands, and we think this creates an exciting partnership right at the intersection of sports and entertainment.

David Karnovsky (Executive Director and Senior Research Analyst)

Thank you.

Operator (participant)

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

Brandon Ross (Partner and Media & Technology Analyst)

All right, I'll spare you my trade deadline questions. But your stock still trades at a pretty sharp discount to PMV. I know you're bullish about the values of sports teams in the future, but right now, there's a pretty big gap to close, and you definitely have tools to help close that gap. In the past, you've talked about minority sales, and last year you did a pretty successful buyback. Do you intend to employ any of these tools in the near future? And just generally, how do you think about closing that gap in short order?

David Hopkinson (President and COO)

Sure. Thanks, Brandon. Yeah, you would use the word confident, and that's how we feel. I referenced in my earlier remarks those third-party valuations, which we noted, has really affirmed our conviction. We agree with you. We don't think that our stock price today appropriately reflects the value of our assets, which are incredibly scarce, but also with really strong business fundamentals. So specifically, our job is to maximize ticket revenue through season ticket renewals, increases in ticket yield and sell-through, continue to build on renewal and new sales momentum in premium hospitality, while also introducing new premium products like the two new event level suites. We've got a new relationship with Oak View Group and Crown Properties Collection to maximize our valuable sponsorship inventory and expand our sponsorship business over time.

We continue to work on focusing on building new and even more direct relationships with our fans, which drive and enhance results across every aspect of our business. Our media rights are strong and continuing to benefit from annual contractual growth, and we talked about an upcoming renewal in the NBA after next season. We're as confident as ever in the value of our teams. You asked about a minority stake sale, and while we would never rule out the possibility of a minority stake sale, I have nothing to report at this time. Victoria, do you want to take that about capital allocation?

Victoria Mink (EVP, CFO and Treasurer)

Sure. Good morning, Brandon. So, you know, when it comes to how we think about capital allocation, and the sort of disconnect between our stock price and the values, you know, our priorities remain the same. You know, first, we want to maintain appropriate liquidity to fund our operations and invest in our core business. You know, second, we want to make sure we have a strong balance sheet, and to that extent, we have been prioritizing debt paydown, given the high interest rate environment that we're in. You know, including the $40 million of repayments under our senior secured revolving credit facilities that we did during this fiscal second quarter. But third, we plan to be opportunistic about our uses of our cash flow, and we'll keep all options open, right?

You know, as you mentioned, right, last year, we did return $250 million to shareholders through the $173 million cash dividend and the $75 million accelerated share repurchase program. You know, that leaves us today with still approximately $185 million remaining under our share repurchase authorization. You know, and that first-ever return of capital to our shareholders was really a reflection of the strength of our business and the confidence in the value of the sports franchises, as Hop you know was talking about. And we're pleased to see that positive operating momentum has carried forward. So we feel really good about our business and the opportunities ahead to continue to drive long-term value for our shareholders.

Brandon Ross (Partner and Media & Technology Analyst)

Excellent. Thank you so much.

Operator (participant)

Your next question comes from the line of Logan Angress from Wolfe Research. Your line is open.

Logan Angress (VP of Equity Research)

Thanks for taking the question. I guess first, on demand, you mentioned per caps and per game revenues a little bit. I'm curious to what extent are you seeing the Knicks and Rangers benefit from strong demand for live entertainment, entertainment more broadly? And I guess if you could dig in a little bit more into specific per caps or specific kind of revenue sources that are seeing sort of the biggest tailwinds. And then in terms of costs, can you provide any more color on the cost forecast for this year? And do you expect the revenue growth you mentioned to outpace growth and costs? Thank you.

David Hopkinson (President and COO)

Thanks, Logan. I'll start and dig in, as you said, on the specifics for the demand and how that's translating into our business. As we said in the opening remarks, you know, we're up across almost every line on a per game basis, but with some granularity here. Ticketing. Our average season ticket renewal rate was over 94%, and again, that was on a larger renewable base and with season ticket price increases for both teams. So that's a huge lever for us, and as a result, you know, we're seeing growth in overall per game revenue, paid attendance, and total ticket yield so far this season, pardon me.

If I think about suites, we're seeing record revenues from suites driven by both strong new sales and robust renewal activity, and then we're also benefiting from the addition of those two new event level suites at the Garden. On sponsorship, we've welcomed a number of new partners this year, joining our strong roster of signature partners. You know, we've also got headroom here. We look to continue to pursue valuable growth opportunities, the jersey patch for the Rangers, international sponsorship for the Knicks. We're focused on maximizing the value of these opportunities, and that's one of the reasons that we've entered our new relationship with Oak View Group and Crown Properties Collection, who we believe will help us expand this area of the business over the long term.

We're also really focused on fan engagement, and driving deeper relationships with fans results in enhanced performance across every aspect of our business. So you know, things like that third jersey for the Rangers, the special edition jersey that we're going to wear next week at the outdoor game, the NHL Stadium Series, our Siegelman Stable collection with the Knicks, the partnership we did, the merchandise partnership we did with KISS. These are all things that excite and engage our fans and, one of the reasons that we're experiencing food and beverage and merchandise per capita spending, which is up almost 10% over the same period last year. So we're really bullish on our business for the remainder of this fiscal and beyond. Victoria, you want to take the second half of that question?

Victoria Mink (EVP, CFO and Treasurer)

... Sure. Good morning, Logan. So let me talk a little bit about revenue and expenses in this fiscal year. So, you know, taking a step back, right? We do expect to again deliver robust revenue growth on a year-over-year basis, excluding the impact of the playoffs. You know, and as you can see in our second quarter results today, we saw higher average per game revenues across tickets, suites, food and beverage, and merchandise. You know, so we're seeing overall positive momentum across our business and expect, you know, that to continue for the remainder of the fiscal year. Now, while we're not providing more specific AOI guidance, as I mentioned earlier, AOI this fiscal year, it will reflect the growth in these revenues, but in addition, there'll be the impact of higher team operation expenses and league-related costs.

So what that really includes is, you know, number one, the impact of our current rosters. You know, so as a reminder, you know, the NHL salary caps saw a modest increase from $82.5 million to $83.5 million. Now, while on the NBA side, the salary cap is increased over $12 million to $136 million this season. And so in addition to those costs, you know, we are-- we're also expecting higher revenue sharing expense and lower projected luxury tax receipts. You know, but with that, based on the momentum we've seen, we remain confident in the trajectory of our business this fiscal year.

Operator (participant)

Your next question-

David Hopkinson (President and COO)

Thanks, Logan.

Operator (participant)

comes from... Your next question comes-

Logan Angress (VP of Equity Research)

You're welcome

Operator (participant)

from the line of Paul Golding from Macquarie Capital. Your line is open.

Paul Golding (Senior US Payments and Digital Commerce Analyst)

Thanks so much. Just had a quick question on the ticket sales commentary. You mentioned that, combining group and individual average ticket yields were up, in fiscal 2Q year-on-year. I was wondering if you could break that down a bit more for us, just in terms of how group is faring, relative to individual in making up that, yield comment. And then secondly, just around sponsorship, demand, a similar question for, year to date or a balance of the year. Any commentary on the, the mix, in other words, where, you're seeing, the, the strength come through, whether it's signage, ads, or otherwise? Thank you.

David Hopkinson (President and COO)

Sure. Thanks, Paul. I'll talk about the tickets first. As I mentioned, our average combined renewal rate for season ticket packages this season was over 94%. And again, I think that's really noteworthy, considering we had both the larger renewable base and season ticket price increases for both teams. We were strong last year, where we renewed over 90%, but the 94% is, we're really pleased with that. So with the larger season ticket base comes a reduced amount of individual tickets available for sale, but we're seeing both individual and group ticket sales also continue to be really strong. Average paid attendance for groups is up year-over-year, and overall, including the season tickets, average per game paid attendance is up as well. So our higher...

Overall, we've got a higher overall average ticket yield this year. I think this is really a combination of the enthusiasm we're seeing from our fans and a continued improvement in tourism here in New York, post-pandemic. We just have really good momentum on the ticketing front. We're seeing that shine through in the suites as well, where we've got really robust demand from our corporate partners renting suites and licensing those suites in long-term agreements. We saw that again, and we capitalize on that with the two new event level suites we introduced for this season, one of which has direct access, and one of which has indirect access to the bowl in a luxury, sort of a club-style suite.

The direct access suite we licensed in a multi-year agreement, and that club space is almost sold out. I referenced some of the new sponsorships that we have introduced this year, Oura Ring, Pfizer, Nexen Tire. And our new partnership with Oak View Group and Crown Properties, we believe will help us grow that business even further in the weeks, months, and years to come.

Paul Golding (Senior US Payments and Digital Commerce Analyst)

Great. Thanks so much.

David Hopkinson (President and COO)

Operator, we have time for one last caller.

Operator (participant)

Our final question comes from the line of David Joyce from Seaport Research Partners. Your line is open.

David Joyce (Senior Media and Technology Analyst)

Thank you. Going back to the upcoming NBA national rights renewal, which should come with a significant step up, could you please help us understand, what of the incremental flows from that new contract comes to the teams versus to the players? And also, are there other structural changes in the rights, be it local or digital, or otherwise, that you might expect, perhaps influenced by the issues that some other RSNs are facing? Thank you.

Victoria Mink (EVP, CFO and Treasurer)

Great. Good morning, David. So looking at the NBA national rights renewal, so I guess first as a reminder, the current national deals run through the 2024-25 season. So we're talking about our fiscal 2026 period. But, you know, in terms of the potential financial impact, so all teams across the league will share equally in any potential increase in the national media rights fees, right? But as, as you know, and you've alluded to, the players also receive approximately 50% of all league-wide revenues, which would include, which does include the national media rights fees, and, you know, therefore, would include any potential increase there.

You know, and regarding the sort of the second part of your question there, you know, and I think as Hop has talked about too, you know, we, it's clear that the media landscape is evolving, and we continue to believe in the value of live professional sports content, and we expect the NBA will maximize that opportunity. But specifically in terms of local rights, as you know, we have long-term contracts in place with MSG Networks, and those contracts run through the 2034, 2035 seasons, so about 11 years left. Yeah, so that's where, you know, our games will be shown locally.

David Joyce (Senior Media and Technology Analyst)

All right. Thank you.

Operator (participant)

This concludes our question and answer session. I will now turn the call back over to Mr. Ari Danes for some closing remarks.

Ari Danes (SVP, Investor Relations and Treasury)

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

Operator (participant)

This concludes today's conference call. Thank you for your participation. You may now disconnect.