Madison Square Garden Sports Corp. Q4 FY2020 Earnings Call

Good morning. My name is Christie, and I'll be your conference operator today. At this time, I would like to welcome everyone to MSG Sports Fiscal 2020 Fourth Quarter and Year-End Earnings Conference Call. Later, we will conduct a question-and-answer session. I would now like to turn the call over to Ari Danes, Investor Relations. Please go ahead, sir.

Thank you, Christie. Good morning, and welcome to MSG Sports fiscal 2020 fourth quarter and year-end 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 Investors 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. And with that, I'll now turn the call over to Andy.

Good morning, and thank you for joining us. Our first several months as a stand-alone sports company have been in the midst of an extremely difficult period, which has seen sports seasons suspended and arenas closed to fans due to the COVID-19 pandemic. And while the path ahead will be challenging, we remain confident that we have the financial flexibility to weather these unprecedented times. We continue to believe that creating a pure-play sports company better highlights our premium assets and sets the stage for long-term value creation. Our Company owns some of the most recognized franchises in professional sports, including the New York Knicks, the New York Rangers, their two development teams, the Westchester Knicks and Hartford Wolf Pack, Knicks Gaming and NBA 2K League franchise and Counter Logic Gaming, a North American esports organization. I'd like to share more about why we think these assets uniquely position MSG Sports for long-term growth and value creation. But let me start by discussing how we're navigating our business through the current environment. The NBA and NHL suspended their '19/'20 regular seasons in March. At the time of the hiatus, our teams had already played the vast majority of their regular season games, with the Rangers missing 12 games, including five at home and the Knicks missing 16 games, including eight at home. Since then, both leagues have resumed play. While the Knicks were not a part of the NBA's restart in Orlando, the Rangers did participate in the NHL's return in Toronto. Although we were disappointed with the outcome of the Rangers' qualifying round series against the Hurricanes, we are excited about the team's future, especially with us winning the first pick in the lottery earlier this week. We look forward to seeing them back on the ice next season. We've been very encouraged by the public's response to the return of the NBA and NHL, which reflects significant pent-up demand for live sports. We've also seen the effects of this demand closer to home. The Rangers' renewal process began in March. We're pleased to report that over 80% of the Rangers' season ticket holders have renewed for the upcoming season, a clear sign that Rangers fans want to see their team at the Garden. In terms of the Knicks, we started our renewal process at the end of June, which is much later than usual. Although still early, we have been pleased with the demand given the current environment. Looking ahead, we are confident in the long-term outlook for both the leagues and our teams. However, due to the level of uncertainty caused by COVID-19, we are managing our business with an eye towards reducing expenses and conserving liquidity until we resume our regular operations. As of June 30, we had over $290 million in liquidity between cash on hand and availability under our credit facilities. Victoria will provide more detail shortly. When the NBA and NHL seasons were suspended in March, we immediately realized cost savings since our teams were no longer competing, including adjustments to player compensation. Over the past several months, we closely reviewed our entire cost structure and have taken measures, including cuts to discretionary spending, followed last week by a reduction in our headcount. While these decisions were difficult, we believe they are necessary and will enable us to better preserve cash during this challenging time. At the same time, we continue to thoughtfully work through our deferred revenue obligations related to Knicks and Rangers' games that were not played. To give our season ticket holders flexibility, we offered them a number of options, including a full refund or credit towards next season. We have been in close contact with our corporate partners as we work together to find mutually beneficial solutions. The NBA and NHL continue to assess the best path forward for the 2021 seasons. With the successful return of the NBA and NHL seasons in bubble format, we are optimistic that we will have basketball and hockey next year. I would also reiterate that we have significant liquidity available to us. Our sports franchises are extremely valuable assets with considerable pent-up demand and strong long-term prospects, and we are confident that we have the financial flexibility to navigate through this challenging time. Before I return things to Victoria, I'd like to discuss why we remain confident in our Company's future. MSG Sports provides investors with a rare opportunity to own irreplaceable and enduring assets. With only 30 NBA and 31 NHL teams, there is significant scarcity value associated with these franchises, especially those that play in large markets. The value of our teams is further supported by strong fundamentals, which in recent years have included record attendance levels for the NBA and NHL as well as ever-increasing global interest. The popularity of the leagues has driven ongoing expansion, both domestically and internationally. Beginning with the '21/'22 season, the NHL will welcome a 32nd team to Seattle with an ownership group that will pay a record $650 million expansion fee that will be divided equally among 30 of the NHL's 31 teams. The Knicks and Rangers also benefit from being based in New York, the nation's largest media market, and having 35-year agreements to play their home games at Madison Square Garden, the world's most famous arena. While we are navigating through a period of uncertainty, our business has historically benefited from substantial recurring revenue streams. This includes media rights. We have 15 years remaining on our local media rights agreements with MSG Networks. We are also a pro rata recipient of revenues from media deals, including multi-year agreements on the NBA side with Disney and Warner Media, and at the NHL, with Rogers Communications. The NHL also has a US national media deal with NBCUniversal that expires next year. We believe this will be an opportunity given the continued demand for live sports and the long-term visibility for rights holders due to the NHL's recent CBA extension to 2026. Sponsorship and suites are also important revenue streams for our Company and are generally contracted on a multi-year basis. As part of our arena license agreements with MSG Entertainment, we receive significant percentages of shared in-arena sponsorship and signage and suite license revenue. Starting with sponsorships, we entered into a 10-year agreement with MSG Entertainment at the time of the spin-off that enables us to continue to benefit from being part of a broader sports and entertainment media offering. The majority of our sponsorship revenue comes from our marquee and signature partnerships with globally renowned brands such as JPMorgan Chase, Anheuser-Busch, Delta Airlines, DraftKings, Kia, Lexus, and Squarespace. In addition, through CLG and Knicks Gaming, we are able to introduce both our existing marketing partners as well as new brands to the exciting world of e-sports, which has a global fan base that primarily consists of millennials and Generation Z. Tickets are another significant revenue stream, and the majority of our team's revenue is derived from full and partial season plans, where we benefited from having loyal fan bases. On average, our renewal rate has been over 90% for each of the past five seasons. In addition, both the Knicks and Rangers have continually ranked in the top three of their respective leagues for ticket sale receipts. As we look out over the long-term of MSG Sports, we see a number of opportunities to accelerate our overall growth rate. These include improved team performance and playoff participation; we have strengthened the Knicks with the hiring of Leon Rose as President, and William Westley as Executive Vice President, Senior Basketball Advisor; and most recently, we were excited to announce Tom Thibodeau as Head Coach, who has already welcomed the first member of his staff. University of Kentucky's Kenny Payne as a new Assistant Coach for the Knicks. Over the next four years, the Knicks and Rangers have seven and five first-round draft picks, respectively, including two each in the upcoming NBA and NHL drafts. These picks will allow us to build on our existing young core of talented players. We also believe the continued legalization of sports gaming would drive increased fan engagement and have a meaningful impact on our in-venue business. In addition, media rights renewals remain an opportunity. As press reports of Major League Baseball's renewal of Turner Sports, citing a significant premium, continue to remind us how valuable sports rights are to distributors. As I mentioned earlier, the NHL has a US national media rights agreement that expires after the '20/'21 season and a Canadian media deal that expires after the '25/'26 season. The NBA's media agreements expire after the '24/'25 season. I'd like to conclude by saying that this is certainly a difficult and uncharted time. But again, we believe it is one that we can navigate through successfully. I want to thank our fans, employees, partners, and shareholders for their continued support. I know we all look forward to the day when we can, once again, gather together to cheer on our teams. With that, I'll turn the call over to Victoria.

Thank you, Andy, and good morning, everyone. In light of the current uncertainty around how the upcoming seasons will look, I'd like to start by providing an update on our Company's liquidity position. As of June 30, total cash and cash equivalents were approximately $78 million. In addition to our cash balance, we have $215 million in borrowing capacity between our delayed draw term loans with MSG Entertainment and our $15 million unsecured New York Knicks revolving credit facility. Our $350 million Knicks and Rangers senior secured revolving credit facilities remains fully drawn. As a reminder, the $200 million delayed draw term loans were put into place to provide a short-term source of liquidity in light of the COVID-19 pandemic, and these loans mature in October 2021. As we continue to monitor the operating environment, we are assessing our options, including potentially seeking a longer-term source of financing as an alternative to the delayed draw term loans. With regard to our deferred revenue obligations, as of June 30, our current balance was approximately $126 million. Of this amount, approximately $61 million was related to the '19/'20 NBA and NHL seasons. This includes approximately $42 million associated with national media rights fees. Based on the completion of the '19/'20 season, we would recognize these rights fees in the first quarter of fiscal '21. In this morning's earnings release, and as you will see in more detail in our 10-K, which we expect to file later this month, our financial results for the fiscal '20 fourth quarter reflect a number of items, including the impact of the NBA and NHL season suspensions as well as discontinued operations accounting for the period through April 17, 2020, which was the entertainment spin-off date. The results for the post-spin period through the end of the quarter represent our Company on a stand-alone basis. Although the impact of COVID-19 on our industry will likely continue for some period of time, I'd like to take a few minutes to discuss what our financial results look like on a pro forma basis in fiscal 2019, the last full fiscal year before the pandemic. As we disclosed in a Form 8-K filing with the SEC on April 23rd, 2020, and in this morning's earnings release, for fiscal 2019, on a pro forma basis, MSG Sports generated $695 million in revenue and $96 million in adjusted operating income. These pro forma results reflect the spin-off of the entertainment and sports booking businesses and the various agreements between our Company and MSG Entertainment. As Andy noted, a substantial portion of our revenue is contracted on a multi-year basis. When we look at our fiscal 2019 revenue, nearly $240 million was from media rights fees. This, along with sponsorship and suite license fees, comprised well over half of total revenues in fiscal 2019. The remainder of our revenue base is primarily ticket-related. Because full and partial season tickets represent the majority of this revenue stream, we typically have strong visibility for the year before we even play the first game of each season. Regarding our operating expenses, there's significant variability, including related to the level of revenues generated by our teams and leagues. This is also true for our largest expense line items: team personnel compensation and revenue sharing. There are other similar examples, such as the assessment we pay to the NBA based on 6% of regular season ticket sales. In addition, we have entered into 35-year arena license agreements with the Knicks and Rangers to play their home games at the Garden. On a pro forma basis, for fiscal 2019, this amount was comprised of a cash component of $38 million, which grows 3% per year, and a non-cash component of $30 million. Since the Garden is currently closed due to the pandemic, we are not currently paying these license fees. Once the Garden is made available to us, if capacity is limited, our fee will be reduced by up to 80%, depending on the capacity constraints. With respect to SG&A expenses, as Andy discussed, we focused on various cost-saving measures. Last week, we reduced our business operations and admin workforce by approximately 15%. I would note that as our business returns to normal operations, we would look to bring back many of these positions. In summary, although COVID-19 has had a significant impact on our Company, we are confident that our business is well positioned to weather this period of uncertainty and generate long-term growth and value creation for our shareholders. With that, I will now turn the call back over to Ari.

Thanks, Victoria. Christy, can we open up the call for questions, please?

Operator Instructions. And your first question is from John Janedis of Wolfe Research.

Thank you, Andy. Regarding your point, we are all optimistic about having basketball and hockey for the next season as well. Looking ahead, it appears there may be a greater chance of having fans in attendance. I know there are many moving pieces to consider, but could you explain how this could affect our revenue and tax costs in that situation? Thank you.

Let me give it a high level, and then I'm going to pass over to Victoria to take you through some of the details. Of course, we want to be back in the building next year in front of fans. It's obviously our first desire. But we're only going to do that under one scenario, which is that it's safe—safe for our fans, safe for our players, safe for our staff. So I'll tell you, we're looking at a lot of scenarios, everything from no fans to full buildings and in between. Obviously, if we have no fans, our revenues are going to come down pretty substantially. We will still have our media rights revenue to recognize, signage, sponsorship, tickets; those will obviously be impacted. I can't tell you that leagues have been great currently in the bubbles at trying to find new opportunities to generate revenue with signage, new locations, and we'd expect something like that as we look towards the future. And then, of course, some of our expenses will come down as they're variable based on games such as players and game expenses. But Victoria, why don't you take us through the details?

Sure. Hi, John. So let me provide a little more color. On the revenue side, we would, of course, not receive revenue related to tickets, suites, food, beverage, and merchandise, so of our in-arena business. But if the seasons are playing in broadcast, we would expect to receive our local and national media rights fees, which represent approximately $250 million in our annual revenues. While sponsorship revenue would be reduced, we would still likely recognize revenue from certain of our agreements; for example, related to the broadcast exposure certain partners receive, as well as, for example, the NBA jersey patch sponsorship. In addition, in fiscal 2021, it's somewhat of a unique year since we also expect to receive our pro-rata share of the NHL expansion fee related to the new Seattle franchise. Now, on the expense side, our single largest expense item is player compensation. The NHL recently extended its CBA, which has some helpful terms. We're still waiting for some guidance from the NBA. But to the extent there are arena license fee payments to the Garden, those would be impacted if we're unable to play in front of fans. Since the Garden is currently closed due to the pandemic, we are not currently paying these license fees. If the Garden is made available to us, but capacity is limited, our fees would be reduced by up to 80%, depending on the capacity constraints. I guess there are also a number of reductions across additional areas of expense, including our revenue sharing, league assessments, and, of course, day-of-game costs and marketing expenses. I hope this color that I provided is helpful.

Very helpful, thank you.

Thank you. Your next question is from Brandon Ross of LightShed Partners.

Hey guys, thanks. First, a follow-up to John's last question. Can you just summarize what the cash burn rate is kind of in between seasons? And then assuming there were no fans to start the season next season, what you would expect the cash burn rate to look like then? And then on the job cuts, what percent of those do you foresee being permanent or efficiencies you found? And if some of them are temporary, why not do furloughs instead of full cuts? And then I have one for Andy after.

Sure. Okay, Brandon. So I guess regarding cash burn and sort of our overall liquidity, as we operate in this period of uncertainty, we're carefully considering and planning for a range of scenarios with respect to our '20/'21 seasons. As you'd imagine, we're very focused on cost reduction and cash conservation. We recently implemented these cost-cutting measures that will help us preserve additional cash as we continue to navigate through this period of uncertainty. As we mentioned, we reduced our workforce by approximately 15% in our business operations and admin area. We're carefully reviewing any potential new hires going forward. We've reduced the use of third-party vendors and additional cuts to discretionary spending. But just as a reminder, at fiscal year-end, we had over $290 million of liquidity. This included capacity under our delayed draw term loans, which were put in place with this exact purpose as a short-term source of additional liquidity given the impact of COVID-19, and if it continues into next season. Looking ahead, we'll continue to monitor the operating environment and assess our options. For example, we may seek a longer-term source of financing as an alternative to the delayed draw term loans. At the end of the day, our sport franchises are extremely valuable assets with strong long-term growth, and we are confident that we'll have the financial flexibility to navigate through this challenging time. Whether or not our cost reductions are permanent, I would consider like other companies; we've focused during this time on how we can operate more efficiently. So I'm sure we'll be able to realize some savings as a result of this. However, we do anticipate that many of the positions we had to eliminate, we believe we will need to hire back as our business returns to normal operations.

Got it. And then, just for Andy, I know your contract with Chase is up very shortly. Is there anything to report there on those negotiations? I know recent sponsorship numbers, including in Seattle, have been pretty encouraging. Just your thoughts there.

Brandon, thanks. At the highest level, I'll just start—we don't comment on any individual agreement. It's just been our policy. I will say, however, with Chase, they've been a longstanding, great partner of ours. I believe they understand the value we bring, and we incredibly value their partnership. This relationship has been very strong. I can't really give you much more than that right now, so I don't think that gets you there, Brandon.

Okay, no problem. Thank you.

Thank you. Your next question is from Ben Swinburne of Morgan Stanley.

Thanks, good morning. Just going back to the balance sheet, Victoria, anything you can tell us about plans around the term loan—the revolvers at the Knicks and Rangers? I think they mature in the next, I think it's 12, 18 months. Just any plans to maybe term those out? And remind us if there's any restrictions that the league sets on debt levels as those teams on the franchises, just as we think about the ability to raise more capital? And then, I had two for Andy. One is whether or not a bubble is under consideration, a bubble approach for this upcoming season. If so, what that might mean to the financials. And then you mentioned in your remarks, Andy, about sports betting, and you talked about benefiting the in-venue business. Sports betting is continuing to happen now during the COVID period, so at least that's going on. I'm wondering if you could just update us on your thoughts around that opportunity for the Company, especially based on what we've seen so far over the last couple of weeks and months, given the return of sports would be great.

Sure, Ben. So let me address your debt question first. Yes, the Knicks senior secured revolver matures in September of '21, and the Rangers in January of '22. Regarding the Knicks, well, it's still early. We expect to begin the refinancing process for that Knicks facility in the near term, with the Rangers following thereafter. As you know, our sports franchises are extremely valuable assets, and we carry a relatively small amount of debt compared to the estimated values. We have strong relationships with our bank group and expect to be able to successfully refinance these credit facilities in the ordinary course. Our delayed draw term loans are also available to us, and they were intended to be a short-term source of liquidity. As I mentioned earlier, we continue to monitor the operating environment and are assessing our options, including potentially seeking a longer-term source of financing as an alternative to the delayed draw term loans.

Any restrictions from the leagues that we should be keeping in mind in terms of the amount of money you're able to raise?

So the leagues have approved the delayed draw term loans, which is the additional $200 million of availability. There are some parameters around those loans with the delayed draw, where we would first have to secure commercially reasonable efforts to raise alternative debt financing. But there are restrictions that the league has in place, but we're clear for this $200 million.

Got you. Thank you.

Just as an add-on to that, I will say the leagues have shown willingness to understand where we are and work through waivers to policies with us and with other— as we can see with our delayed draw term as well as with other teams, understanding the uncertainty in the market. I would expect them to work with us as well.

Great. Anything on a bubble and sports betting, Andy you can add?

Absolutely. As for the bubble question, we're looking at many different scenarios. The leagues are exploring multiple options. Everyone's focused on one scenario, which is being with our fans in the building, but in a safe and secure manner. It's hard to go into any more detail than that. In terms of sports betting, I only mentioned in-venue; I feel like there's a big opportunity there, but also in the wider market. We've talked about this many times. We love what sports gaming does for sports. Even if I didn't make a dollar from partnerships or any direct revenue from gaming, we'd still love the business. It encourages engagement, drives viewership, and incentivizes attendance. The fact that we will have the opportunity to monetize through various means such as through partnerships, as we've seen through DraftKings historically, leads us to believe that it's a growing market. Perhaps you've noticed what recently happened in Washington DC, where they opened a sportsbook within the Capital One arena that benefits both the venue and the teams. Looking across the river to New Jersey, the sportsbook there has become the largest in the country. There is clearly a huge opportunity, and it's just a question of timing in our minds. We believe this is a significant opportunity for us.

Okay, thank you.

Thanks, Ben. Christy, we'll take one last caller please.

Certainly, your final question is from John Belton of Evercore.

Hi, good morning, it's Patel on for John Belton. Could you just share any thoughts around how has the pandemic impacted your core view around the esports universe and kind of any longer-term implications around that?

Sure, the esports universe certainly has benefited during this time as it is not a fixed location in-venue business. There are opportunities here and there for more of a booking type of a business with championships. Right now, it is more of a media play, and the audience is growing. When we think about it, it is very millennial-focused, and these people are spending more time online or on TV, and esports fits right into that. The viewership continues to increase, and we remain very bullish on the long term as we figure out how to turn those views into revenue. We believe this trajectory will continue.

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

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

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