Madison Square Garden Sports Corp. Q4 FY2022 Earnings Call

Good morning. Thank you for standing by, and welcome to the Madison Square Garden Sports Corp. Fiscal 2022 Fourth Quarter and Year-End 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. I would now like to turn the call over to Ari Danes, Investor Relations. Please go ahead.

Thank you, operator. Good morning and welcome to MSG Sports Fiscal 2022 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 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. And with that, I'll now turn the call over to Andy.

Good morning, and thank you for joining us. As we look back on fiscal 2022, we are incredibly proud of the year we had, highlighted by record full year financial results with revenues of over $820 million and adjusted operating income of more than $140 million. In addition, every major revenue line exceeded results for fiscal 2019, our last full year prior to the pandemic from tickets, sponsorship and suites, to food, beverage and merchandise sales and media rights. This is a true testament to the incredible demand and enthusiasm for our iconic franchises, especially in the Knicks’ and Rangers’ first full regular season in three years. The Garden was packed night after night with our fans. We are clearly thrilled to be back supporting our teams in person. But it's also important to remember that the environment in which we operated over the past year was far from perfect including restrictions on international travel, very low office occupancy rates in New York and the impact of both the Delta and Omicron COVID-19 variants. And yet, despite these headwinds, we successfully navigated our business through these uncertainties. We have used the last two years to enhance the way we operate, including updating our infrastructure and processes, emerging as a stronger and more nimble organization with new growth strategies in place to drive our business. As we look ahead, we will focus on executing our density strategies and see numerous ways to grow our business, both in the near and long-term. These opportunities include new ticketing and premium hospitality products, such as new courtside seating, valuable sponsorship inventory including our keen jersey patches and growing Knicks international presence, increasing our focus on knowing our consumer including through social content, which drives our sponsorship business and through new and tailored merchandising offerings and at the lead level further upside in media rights as national deals come up for renewal. After record financial results this past year, we're already seeing our momentum carry forward. From what we could see, excluding the impact of the playoffs, our business is poised to deliver year-over-year growth across key revenue lines in fiscal 2023. Furthermore, we remain confident that our ownership of two of the most renowned teams in all professional sports positions us well to drive long-term value creation for our shareholders. Let's now turn to those franchises. Both the Knicks and Rangers have a talented young core of developing players with most under contract for multiple years. The Knicks have also amassed a substantial number of draft picks over the next seven years, further positioning the team for success in the years ahead. For the Rangers, the end of the 2021-2022 season was marked by a thrilling post-season run. The impact of which you can see in today's results. This included the team's first trip back to the Eastern Conference Finals since 2015, which generated one of the highest per game gate revenues ever for any NHL team in any playoff round, including the Stanley Cup finals. Looking ahead, we know our fans are ready for play to begin with all signs pointing to continued positive momentum for our business. For example, the average combined season ticket renewal rate for the Knicks and Rangers for the 2022-2023 seasons has climbed to approximately 91% while sales of season ticket packages to new members remain strong. We anticipate that the momentum we've seen, coupled with an increase in Rangers season ticket prices, the introduction of new technologies that have increased the effectiveness of our sales process, as well as a reconfigured Knicks courtside layout providing new floor seats will drive solid growth in ticket revenue. The enthusiasm from our fans extends beyond just the tickets in their hands and they demonstrated that all season at the Garden. We saw it in double-digit percentage increases compared to fiscal 2019 levels in food, beverage and merchandise per-cap spending, with results hitting season highs on Henrik Lundqvist's special retirement night at the arena and during the Rangers' playoffs. They also showed it in their desire to engage with our teams outside the Garden. For example, across both teams’ social media channels, we added over one million net new followers this year, as we continue to focus on creating compelling content to directly connect with and grow our audience. The growth in followers on our social media platforms also creates valuable additional inventory for our marketing partners. We also saw fans' enthusiasm reflected in strong viewership across traditional media. For example, the Rangers-Penguins opening round playoff series on TNT and TBS was the most watched NHL first round cable broadcast on record. A remarkable stat that doesn't even take into account that the series simultaneously delivered robust ratings on MSG Networks local broadcast. The impressive ratings continued as the Rangers-Lightning series in June was the most watched Eastern Conference Finals since 2013. But this rising trend wasn't just limited to the playoffs. Across both leagues, the demand for premium sports content was evident the entire season. The NBA's average regular season viewership was reported to be up 19% compared to last season and was the most watched regular season since 2018-2019. And in the first year of the NHL's new US national media rights deal with Disney and WarnerMedia, average viewership for the league in the US was up 16% as compared to last season, making it the NHL's highest since the 2016-2017 season. As we have previously discussed, the NHL's new agreements align the leagues with two of the leaders in sports programming, which has clearly aided in increasing viewership and further elevating the NHL profile. In recent weeks, new media rights agreements across various leagues have been announced, serving as further evidence of the popularity and importance of premium live sports content. This includes Major League Soccer, which landed a 10-year global deal with Apple; Formula 1, which reached a significant renewal with ESPN, and cricket's Indian Premier League, all of which are reportedly multiples of the prior media rights agreements. As a reminder, the NBA's US deals with Disney and WarnerMedia run through the 2024-2025 season, and with national media rights across professional sports continuing to increase in value, we remain bullish on the opportunity ahead for the NBA. Turning to marketing partnerships. Fiscal 2022 ushered in robust activity from both existing and new partners as companies reengaged with our assets and brands coming out of the pandemic, driving our marketing partnerships business to a record level. The year was highlighted by successful renewals across a slate of key partners from Anheuser-Busch to Kia as well as our expansion into new categories. This includes our partnerships with Infosys and Benjamin Moore, as well as our push into mobile sports gaming following its legalization in New York State. In partnership with MSG Entertainment, we were swift and strategic in forming three expansion deals with BetMGM, Caesars Sportsbook, and DraftKings, and fiscal 2023 will benefit as we will see the full run rate impact of this new category for the first time in our results. These partnerships demonstrate the unparalleled exposure we offer to companies trying to reach consumers in the New York market. As the leagues open new sponsorship inventory, we are confident we'll continue to do the same with current and future partners, whether it's the NHL jersey patch and digitally enhanced dasher boards, or the NBA expanding the number of the international partners the team can have. These are compelling opportunities and we will be measured in our approach to the sales process. In the past year, we have also demonstrated the strength of our premium hospitality offerings, reminding companies as they return to corporate entertaining that there is no experience like a live game experience at the Garden. In partnership with MSG Entertainment, we saw strong suite renewal rates and new sales activity, driving record suite revenues. With the average usage of our suites for Knicks and Rangers games exceeding pre-pandemic levels in the last few months of the season, we are confident in our outlook heading into next season. As we look ahead to fiscal 2023, with new sponsorship opportunities coming to market and corporate entertaining are expected to make a more complete return, we anticipate continued growth in these revenue lines in the year ahead. We also expect to see positive effects on our business from the Rangers’ outstanding playoff run, whether to improve consumer or corporate demand; we anticipate benefits to ticket, sponsorship, and suite sales. Since we last spoke, we continue to be reminded of the significant value that persists for marquee professional sports teams. This includes, in the last three months, record majority ownership transactions in the English Premier League, with Chelsea Football Club and in the NFL with the Denver Broncos. Since the Bronco sales, Sportico has published the latest NFL team valuations with the average team valuation above $4 billion, up 18% from last year's report, and the Dallas Cowboys leading the list at a new record high of $7.6 billion. We’re eager to see the next publication of the NBA and NHL team valuations, and we believe these recent examples continue to highlight the untapped value of our assets, relative to where our stock currently trades. Before closing today, I'd like to take a moment to thank our fans, partners, employees, and shareholders for playing a vital role in our journey this year, as we work to drive our business to record highs. As we look to fiscal 2023 and beyond, we see ample growth opportunities, building off the existing strength in our business and the new growth strategies we've put in place, leaving us confident in the future of our company and our ability to generate long-term value for our shareholders. With that, I'll now turn the call over to Victoria.

Thank you, Andy, and good morning, everyone. I would like to start by discussing our financial results for both the full year and fourth quarter. I will then review our balance sheet and liquidity. For fiscal 2022, we generated total revenue of $821.4 million and adjusted operating income of $142.2 million. As a reminder, fiscal 2022 marked the first full season back for the Knicks and Rangers following the onset of the COVID-19 pandemic. We are very pleased with the strong financial performance we continue to see across the business; including, as Andy mentioned, record high results. Now turning to our fiscal 2022 fourth quarter. Our results for the quarter continue to reflect robust demand for our teams, as they completed their 2021-2022 regular seasons followed by a strong playoff run by the Rangers. I'd remind you that the prior year quarter reflected the compressed timing of the shortened 2021 NBA and NHL regular seasons, which resulted in more home games played in the prior year period than the current year period, as well as certain revenues and expenses being recognized over a shorter timeframe in the prior fiscal year. The prior year period also reflected the impact of certain capacity restrictions, as well as three Knicks playoff games as compared to the Rangers' 10 this year. These factors affected the year-over-year comparability. As a result, total revenues for the quarter were $175.2 million, compared to $146.9 million in the prior year period. Event-related revenues represented $99.1 million in the quarter, which mainly consist of ticket, food, beverage, and merchandise revenue inclusive of the playoffs, while suites and sponsorship revenues, also inclusive of the playoffs, represented $34.4 million. In addition, national and local media rights fees represented $31.9 million of revenue this quarter. This reflected a $14.7 million decrease compared to the prior year period, primarily due to the impact of the compressed timing of the shortened NBA and NHL 2021 seasons in the prior year period. This was partially offset by the impact of the NHL's new US media rights deals which began at the beginning of the 2021-2022 season, as well as contractual rate increases on our local media rights and the NBA's national media deals. As a reminder, the prior year period also included the recognition of the NHL expansion fee associated with the Seattle Kraken. Adjusted operating income improved by $39 million to $33.2 million, primarily due to the increases in revenues, a decrease in SG&A expenses, and to a lesser extent lower direct operating expenses. The decrease in SG&A expenses was primarily due to the absence of severance related to team executives recognized in the fourth quarter of fiscal 2021, which was partially offset by higher playoff-related and other expenses compared to the prior year period. The decrease in direct operating expenses included lower team personnel compensation and other team operating expenses both primarily due to the compressed timing of the 2021 season. These decreases were partially offset by higher revenue-sharing expenses, net of escrow reflecting a return to normal levels compared to a net credit in the prior year period, as well as an increase in playoff-related expenses. As we look ahead, we believe our business is poised to deliver growth across key revenue lines in fiscal 2023, while we expect our AOI to also reflect higher team operations expenses including league-related costs. Turning to our balance sheet, at the end of the quarter we had $250 million of total debt outstanding comprised of $220 million under the Knicks' senior secured revolving credit facility and $30 million advanced from the NHL. Our quarter-end cash balance of approximately $91 million represented a net increase of $41.8 million compared to our March 31 balance of $49.2 million. Our cash and debt balances both reflect $65 million of repayments on the Rangers' senior secured revolving credit facility during the period, which brought our total debt paydown in fiscal 2022 to $135 million and eliminated all outstanding balances under the Rangers facility. With regards to liquidity, as of June 30, we had $396 million of liquidity comprised of $91 million unrestricted cash and cash equivalents and $305 million in borrowing capacity under the team's revolving credit facilities. Based on the momentum we're seeing heading into fiscal 2023 and with the opportunities 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.

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

And your first question comes from the line of Brandon Ross from Lightshed Partners. Your line is open.

Hey, Andy, it's pretty clear from your prepared remarks that sponsorship has been a big part of the revenue growth story here and frankly at MSG also. And just recently there have been some headwinds, especially with the crypto pullback. We've seen some high-profile deals abandoned there. And then it seems like the sports betting industry is getting a little more rational. Does this in any way cap your upside in sponsorship?

Thanks, Brandon. So let's take a step back for a second. When you talk about crypto, it doesn't make up a large part of our sponsorship business. We have two really strong partners; they were new that came in last year, but it's not a very large part of our whole portfolio. So we feel pretty good there. When I think about crypto, I actually don't think about it alone; I think about the NFT space and key and really more so blockchain and the technology that comes from that. So, when I think about that of the category, I don't know what's coming out of blockchain. There are a lot of companies that are emerging and new technologies that I think is going to benefit our business. If we went back two years, no one would have thought about crypto as part of our sponsorship book. What I've seen is there's always new categories coming into this business. Sports betting was one that didn't exist three or four years ago, which I think we've done very well. When you think about the cyclicality of this business, there's always a category that either comes into fashion or goes out of fashion. We do a great job of capitalizing. The leagues have done an excellent job of opening up new inventory, which gives us the opportunity to further capitalize. Whether it be the jersey sponsorship on the Knicks side, the NHL adding jersey sponsorship, or adding digital enhanced dashboards, the NBA opening up international, which we think is a really big opportunity allowing us to have 10 new partners — we're thinking big about that. There are further growth opportunities here. We feel really good about it. Regarding sports gaming, we have three great partners. We believe we’ve worked with them very effectively and turned out how to grow that business; we think it's going to continue to be a strong part of our portfolio. Last year was only a partial year, so this year you will see the full-year impact in our results as we go into the future.

Great. Thank you very much.

Your next question comes from the line of Ben Swinburne from Morgan Stanley. Your line is open.

Thank you. Hey, good morning Andy. I wanted to ask about sort of the outlook over the next kind of 12 to 24 months in a couple of ways. One clearly we can hear the enthusiasm for the business in your voice, but there's some concern I think in the market that the consumer spending we're seeing for a lot of events is sort of inflated or elevated based on pent-up demand. As we lap these trends a year from now, growth will decelerate. I know you don't have a crystal ball but you see more than we do. So, I'd love to hear your thoughts on that, particularly as it relates to New York. And then kind of a similar line of questioning on the corporate side. Can you just remind us as you think about suites and sponsorship kind of the typical duration of those contracts and your opportunity to reprice those as you sort of go to market in a marketplace that's really strong right now relative to maybe the last couple of years?

Sure. Happy to. Let's start from the beginning. I'm very proud of how we've navigated our way through the last two years, which have been incredibly difficult for a lot of sports entertainment businesses, especially here in New York where our venue was largely closed. We took the opportunity to think about our infrastructure, how we could operate more efficiently. We've made investments in technology, which allows us to sell more effectively and drive our revenue. We've also put a set of growth strategies in place that will allow us to capitalize on our base business and continue to move forward. We have a strong ballast of long-term agreements that provide a certain level of certainty in our business. As we think through these growth initiatives, I feel good about where we can take the business over the next 12 to 24 months regardless of what the market presents. We see a 91% renewal rate on a combined basis and we're still continuing to sell. We've implemented increases in Rangers ticket pricing on our base business, as well as any new tickets that we sell. During COVID, we reassessed ticket distribution to optimize our offers. We believe premium offerings are incredibly valuable. In sponsorship terms, there is a tremendous amount of runway here. With the first full year of betting impact for us this year, along with new opportunities like the NHL jersey patch and digital enhanced dashboards, we're excited about potential growth. For media rights fees, those are all contractual at both the national and local levels. We’ve discussed opportunities as the NBA renewals approach, given trends we're seeing in the sports rights business. With a focus on consumer engagement through short-form content and tailored merchandise, our merchandising strategies have become key areas of growth. We think there are many areas of opportunity for heightened demand, especially after the Rangers' playoff run.

Thanks, Andy.

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

Hi, thank you. Just one for Victoria, wondering if you could update us on how you're looking at capital allocation. Is debt pay down the priority or do you see room for repurchases over the next year? How do you think about the right leverage for the business over time? Thanks.

Sure, Hi David. As we think about our capital allocation, I break it down into three priorities. First, is to maintain the appropriate liquidity to fund our operations and invest in our core business. Yes. For example, in this fiscal year, we expect higher team operation expenses and some higher league-related expenses. I would note that for the upcoming season, the NBA salary cap is increasing from $112.4 million to $123.7 million, and the NHL is also seeing a more modest increase. So in these areas, we are looking to continue funding our operations and making investments. The second priority is to keep a strong balance sheet, which includes a focus on debt pay down. We did another $65 million paydown on the Rangers' facility this quarter bringing our total debt pay down for the full fiscal year to $135 million, eliminating all outstanding balances under the Rangers facility. We learned in recent years, given the unpredictable environment, that it's important to maintain flexibility that might be needed in the near-term. The third priority is considering other uses of our free cash flow, including a return of capital, but at this time, we don't have any specific plans to share.

Very helpful. Thanks.

Your next question comes from the line of Devin Brisco from Wolfe Research. Your line is open.

Thanks for taking my question. With the Rangers advancing to the Eastern Conference Finals, which helped contribute to an already strong quarter, could you parse out what the playoffs impact was by segment or playoff round in the quarter? What has a strong playoff run historically meant for future performance in terms of ticketing sponsorship suites or any other tailwinds to your business?

Thank you. I'm going to start answering and then ask Victoria to fill in a bit more. At the highest level, obviously we're extremely proud of the Rangers' post-season run. Our news is great and we feel strong about our prospects going forward. We see it from fans' enthusiasm during the playoffs and as we look into this year. Historically, a successful post-season run boosts demand for tickets, both on renewals, selling new tickets, and individuals. Individuals are more effective can dynamically price tickets to capture further upside. Our renewal rate is escalating and is currently at about 91% between the two teams. With a platform, we modify our seats and ticket prices for the following year. It also generates new fans, which is challenging to quantify. A great indicator is our social media engagement; we've added about 320,000 new social followers, with half of that coming during playoffs — those individuals are more likely to buy tickets, merchandise, and consume our products. There's also more demand for suites leading to higher pricing. Corporates need to be part of the premium experience in New York City which we’re providing. Victoria, would you like to add more detail about this quarter?

Sure. Just to give a little recap and more color, we hosted 10 playoff games at the Garden in the fourth quarter, generating a significant boost to revenues and AOI. First part comes from tickets, which are priced at a significant premium to our regular season games. Each playoff game generated AOI of more than about $1.5 million, and as we progressed further into the playoffs, this per-game AOI increased substantially. In the quarter, our playoff-related revenues were $64.8 million compared to $15.2 million in the same prior year period, reflecting the three Knicks home playoff games in last year. So, this translates to approximately $6.5 million in per-game revenues against about $3 million in per-game direct expenses, leading to an average of net $3.5 million per game, skewed higher towards the later rounds. It’s important to note that these figures exclude our marketing administrative costs associated with our playoff participation.

Great. I appreciate the color. My second question is, now that gambling in New York has been legalized for going on eight months. You've had some time to partner with major sports betting companies and your ratings are really strong. Could you speak to the increase in engagement you've seen across your existing fan base or by new fans due to gambling? How much of the sports betting opportunity are you monetizing at this point and how do you see that evolving from here?

Sure. Thank you. It's still early; it's only eight months since the launch. When considering engagement, ratings and attendance at our events are key. Both of those metrics are up. However, it's difficult to separate the influences driving this increased interest. Viewing the New York market, which is undoubtedly large for gaming, we have three strong partners. There's been some hesitancy from certain partners about the tax rate, and we could see future interest if rates change. If we consider sports betting that's been entrenched elsewhere in the world, there are more in-game bets and micro-bets. Over time, we expect to see similar actions which will drive even further engagement for both the NBA and the NHL. I think our partners have been satisfied with our strategies to assist them in driving their businesses, and growth in the industry remains promising, especially with regulatory changes like kiosks.

Thanks.

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

Your final question comes from the line of Farshid Javar from Jefferies. Your line is open.

Thanks for squeezing me in here. You briefly touched on this a little bit, but with broader tailwinds in the NBA for international sponsors, can you elaborate more on what that specific space looks like for the company?

Sure, absolutely. The NBA has done an amazing job of thinking about new categories and new inventory, especially during COVID and coming out. There’s an opportunity to have two partners internationally. Besides China and Canada, we can activate in international markets. The challenge has been that previously we didn't focus on finding these partners. The NBA has recently raised it to 10 partners. With our international experience, we see this as a great opportunity to find domestic partners activating internationally or new international partners. By investing more in this space, we can take our big brands like the Knicks and expand into international markets. It opens up broad opportunities for sponsorship. We've been actively hiring talent focused solely on this international strategy under the guidance of our experienced team. As we seek to drive value, we see international fans as an impactful avenue for future growth.

I appreciate the color. That's all for me. Thank you.

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

Good-bye.

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