Earnings Call Transcript - MSGS Q2 2021

Operator, Operator

Good morning. My name is Teressa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Madison Square Garden Sports Corp Fiscal 2021 Second Quarter Earnings Conference Call. At this time, all lines have been placed on mute to prevent any background noise. Thank you. I would now like to turn the conference over to Ari Danes, Investor Relations. Please go ahead, sir.

Ari Danes, Investor Relations

Thank you. Good morning, and welcome to MSG Sports fiscal 2021 second 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 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.

Andy Lustgarten, CEO

Thank you, Ari, and good morning, everyone. I'd like to begin by saying that we're excited to have both the Knicks and Rangers back in action. Even though the season started later than usual, and our fans can't be at The Garden in person, we know they are enjoying watching their teams compete again. And while the COVID-19 pandemic still presents operating challenges in the near term, we are paying close attention to the vaccine rollout and what it means for the return of normal operations. Since our last earnings call, there have been a number of positive developments for both our company and the leagues. The NHL and NBA completed their 2019 seasons. The success of each league’s return to play clearly demonstrated the shared commitment and strong working relationships that both the leagues have with their teams, players, and partners. This was followed by the 2020 NHL and NBA drafts, during which both the Rangers and Knicks made key additions to their rosters. The Rangers used their number one overall pick to select Alexis Lafreniere, a dynamic forward with the potential to become an all-star player for the team. And the Knicks finished the draft welcoming two talented first-round picks: Forward Obi Toppin, who last season was named College Basketball Player of the Year, and guard Immanuel Quickley, who was named the 2019-2020 SEC Player of the Year. The Knicks and the Rangers each have a talented, young core, and strong leadership in place, and we look forward to watching them progress over the 2021 season. We are also excited that the teams have returned to the world's most famous arena for the first time since March. With December marking the start of the NBA’s 72-game regular season and January the start of the NHL’s 56-game season. And while home games at The Garden are currently being played without fans due to government restrictions, we're working towards safely welcoming guests back into the building as soon as possible.

Victoria Mink, CFO

Thank you, Andy, and good morning, everyone. I'm going to begin by discussing our November debt refinancing and providing an update on our company's liquidity position. As Andy mentioned, in November, we enhanced our financial flexibility and increased our borrowing capacity by completing a $600 million debt refinancing. As part of the refinancing, the Knicks increased the availability under their senior secured revolving credit facility by $75 million to $275 million, while the Rangers increased the availability under their revolver by $100 million to $250 million. In addition, both teams extended the maturity dates of their facilities to November 2023. As a reminder, the Knicks and Rangers facilities were previously set to mature in September 2021 and January 2022, respectively. The Knicks also entered into a new $75 million unsecured revolving credit facility, which also matures in November 2023. As part of this refinancing, the Knicks' previous $15 million unsecured revolver and the $200 million delayed drawn term loans with MSG Entertainment were extinguished. At the end of the quarter, we had $380 million of total debt outstanding, consisting of $220 million drawn on our Knicks senior secured revolver and $160 million on our Rangers facility. Turning to our liquidity; as of December 31, we had $290.8 million of liquidity comprised of $70.8 million of cash and cash equivalents and $220 million in borrowing capacity under the team's revolving credit facilities. Our quarter-end cash balance of $70.8 million represented a net increase of $47.2 million compared to our September 30 balance of $23.5 million. This net increase was primarily due to local and national media rights fees related to the 2021 NBA and NHL seasons, a combined $30 million draw on our Knicks and Rangers senior secured revolvers, and the $30 million from the NBA that Andy mentioned. These inflows were partially offset by a number of items, including our normal operating expenses, such as compensation for our teams, as well as our corporate and administrative staff, payments to MSG Entertainment under our various commercial agreements, and debt-related payments, including non-recurring amounts for our recent refinancing. I would note that our quarter-end cash balance did not include the approximately $30 million that we may look to access from the NHL recent debt grades. As of December 31, our deferred revenue balance net of billed but not yet collected revenue was $206 million, as compared to approximately $127 million as of September 30. The increase in this balance was primarily due to local and national media rights payments for the 2021 seasons, and the $30 million from the NBA. This deferred revenue balance as of December 31, was primarily comprised of local and national media rights, tickets, and suites, which will be addressed through games played and if necessary through make-good credits or refunds.

Ari Danes, Investor Relations

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

John Janedis, Analyst

Hi, thank you. Andy, you've talked about private equity investments in NBA teams, and I think liquidity position is well appreciated. But can you talk about the potential willingness to bring in a minority partner to further bolster the balance sheet that COVID drags on longer than expected or to at least establish what could be perceived as normalized value for the equity?

Andy Lustgarten, CEO

Thanks, John. Yes, I did mention private equity, the NBA has made some rule changes. As you know, in terms of our point of view, we're not going to comment on hypotheticals on the sale of stakes right now.

John Janedis, Analyst

Okay. In the past, you guys have also talked about the impact of no fans for a full season. Can you talk about to what extent that changes or not due to the shortened seasons?

Andy Lustgarten, CEO

Victoria, do you want to take that question?

Victoria Mink, CFO

Yes, sure, John. Hi, good morning. So, you're at as we're currently operating in an environment where fan attendance at The Garden is restricted by government mandates. And the fan restrictions will have a greater impact on our financials this year as compared to the impact of just the shortened seasons. But with that said, in terms of the impact of fewer games this year, I can certainly give you a little color, so from a revenue perspective, we currently expect a reduction in local media rights fees for the Rangers side as we have a minimum threshold of games that must be delivered to MSG networks for broadcast on an exclusive basis. So, if those thresholds are not met, there'll be a pro rata reduction in our local media rights fees. I also note that we currently don't anticipate a reduction in local media rights fees on the Knicks side. Also, in a shortened season, it reduces camera-visible sponsorship and signage opportunities. But on the other side, on the expense side, we would anticipate additional reductions in per-day costs under our arena licenses such as day-of-game expenses. And also, we would expect reductions for certain other team operating expenses. Yes, and just noteworthy is right to the extent revenues on a league-wide basis are impacted by the shortened seasons, we could see reductions in other areas, including player compensation.

Ari Danes, Investor Relations

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

Brandon Ross, Analyst

Hey, Andy, you mentioned earlier your excitement around potential mobile sports betting legalization in New York. Could you unpack some of the opportunities for MSG, and maybe help us understand how incremental sponsorship or an on-site sports book would break down as opportunities between MSGS and MSGE?

Andy Lustgarten, CEO

Thanks, Brandon. I'm glad to discuss this. We've been working on this for quite a while, and we believe it represents a significant opportunity for our company. As you mentioned, New Jersey's Meadowlands, which started operating in 2018, has become one of the largest sportsbooks in the nation. Research indicates that once legalized, New York State could emerge as the largest market for sports gaming. We're very optimistic about Governor Cuomo's recent announcement concerning sports gaming in our state, but there are still many uncertainties regarding regulations. Different jurisdictions have varying approaches to legalization. On a broader level, we see great potential for fan engagement during events, which can increase viewership and subsequently boost sponsorship opportunities. Additionally, enhanced media rights would come from greater engagement. We also see potential for substantial growth in partnerships and various revenue streams. For instance, Washington has a sportsbook on-site, and the key will be how regulations evolve. We recognize a significant opportunity here that could benefit all parties involved if a sportsbook is established; it’s just a matter of figuring out the best way to capitalize on it.

Brandon Ross, Analyst

Yes, you just mentioned media rights. And at the local level, is there anything that would be available to you at sports besides what you've already kind of licensed out to MSG Networks?

Andy Lustgarten, CEO

Do you mean in terms of rights?

Brandon Ross, Analyst

Yes, in terms of like what are the additional opportunities for MSG Sports on the media front or is that really more of an MSG Network?

Andy Lustgarten, CEO

We have a long-term rights deal with networks, and those networks have various ways to monetize those rights. Being a rights holder in sports is a unique asset today, and we value our position. The timing of rights agreements for the leagues will influence the sports landscape, but there are still opportunities. We have game-visible signage and official partnerships, providing multiple avenues to generate additional revenue, even if it's not currently coming directly from rights fees.

Brandon Ross, Analyst

Got it. And then staying on the rights fees, the NHL deal is obviously coming up in surprise. There hasn't been an announcement yet. Maybe if you could comment on how and when you see that playing out, and then more generally, as an NBA and NHL team owner, how you think about the future of national and local sports rights, especially with cord cutting and kind of younger demos being on other platforms and shying away from full-length games. Do you think the model needs to be adjusted some?

Andy Lustgarten, CEO

There is a lot to consider. Let me start at the highest level. We have almost 16 years left in our media deals with MSG Networks. The leagues sell their rights at the league level, and while the NHL deals are coming up soon, the NBA negotiations will follow a few years later. The media landscape is always changing, and distribution patterns will shift. I can't speculate on specifics, but I firmly believe in the fundamental value of live sports. There will always be demand for it, especially as more platforms emerge. Content is crucial, and live sports provide exceptional content. With more platforms, we expect more buyers and increased value for our product. Additionally, the impact of legalized gaming on media rights further strengthens our position as a sports rights holder. Regarding the NHL, I am unable to discuss current negotiations, but their agreement is set to expire at the end of this season. I enjoy being a sports rights holder; ratings are up this year, and there is significant attention on how legalized sports gaming affects media rights. Once the NHL has more information, we will reassess, but I remain optimistic about the future for all media rights holders, though I can't provide further details on the NHL at this time.

David Karnovsky, Analyst

Prepared remarks on how the pandemic and some of the results in fallout to the New York City area may impact the current earnings and future cycles it.

Andy Lustgarten, CEO

Hey, David, could you start over again. I missed the beginning here; you cut out for a second and I didn't hear, where you start your question. I'm sorry.

David Karnovsky, Analyst

Sure. It's just that can you just comment on how the pandemic and maybe some of the resulting fallout to the New York City area may impact the current or even future cycles for suite sponsor and all.

Andy Lustgarten, CEO

We are currently collaborating with all our partners and typically have long-term agreements with both suite holders and sponsors. We are committed to being consumer-friendly and maintaining close relationships with our partners. New York is in a different situation now compared to a year ago, but I am optimistic about the recovery and feel the city becoming more vibrant every day. While our current focus is on this season, I am confident about our long-term relationships and how suite holders and partners have supported us during these challenging times.

David Karnovsky, Analyst

Okay, then maybe as a follow-up to John's first question. Do you expect an untimely NBA or NHL might be open to PE firms taking controlling interest in teams? And if so, how much that further impact team values overall in your view?

Andy Lustgarten, CEO

The leagues have a detailed voting process regarding who can acquire both minority and controlling stakes, and I can't comment further on that. Recent changes aim to allow certain approved funds to own minority stakes in multiple teams, which we believe will contribute to increasing team valuations. I can't provide any additional information beyond that.

Unidentified Analyst, Analyst

Great, thanks so much for the question. Andy, one for you on a reopening. I'm curious if you could share some insights with respect to talks you've had with local or state regulators regarding the prospective timeline of a reopening for The Garden to fans? And specifically, I'd love to hear your thoughts to the extent you're able to share on any specifics with respect to disease incidence or vaccination thresholds being considered. And if it's more likely than not that capacity will be phased once a reopening occurs. And Victoria, just as a quick housekeeping, could you shed some light from an accounting perspective in terms of how the revised CBA for the NHL and NBA might affect the accrual of player compensation throughout the year? And cash flows for this year and years going forward? Thanks so much.

Andy Lustgarten, CEO

I am happy to share that the reopening process is progressing well. Governor Cuomo has been increasingly clear about the importance of reopening the economy in both New York State and New York City. Recently, he allowed the Buffalo Bills to host 25% capacity for fans at their playoff games, which was considered a success. We have observed a pattern of limited openings that are gradually increasing toward fuller capacity. We are pleased with the announcement that restaurants can now operate at 25% capacity starting February 14, following the decline in positivity rates in New York State. I am confident that we will continue to see capacity increases. Moreover, the state has announced that events such as wedding receptions and parties can raise their capacity to 150 people, following safety protocols starting in March. The focus on health and safety remains paramount, and the rollout of vaccines is essential for a complete reopening of the economy. The governor has committed to distributing more vaccines in New York over the next few weeks, which should help in this endeavor. In terms of our reopening plans, our top priority is the safety of our fans, athletes, and employees. We will proceed with a phased approach and maintain ongoing discussions about potential protocols, including testing. Our goal is to ensure that our facilities open safely so that everyone can enjoy a great experience.

Victoria Mink, CFO

Okay, and then, David, your question was around the mechanics around the CBA. So first, let me start with the NBA. So the amended collective bargaining agreement for the NBA includes more flexibility. So it's new terms added as a result of COVID-19 to ensure that the players still ultimately receive the approximately 50% of the league-wide revenues, right. So for example, while the escrow remains the same at 10%, player compensation can be reduced by up to 20% in a season inclusive of the escrow. And now the salary cap and the luxury trigger for the 2021 seasons are flat with last year with the 2019-20 season and the CBA lays out a minimum of 3% and a maximum of 10% annual increases in the salary cap through the remainder of the CBA. So, and then on the NHL side the amended CBA includes a four-year extension. So it now expires in September 2026. So, obviously, that gives us some additional visibility. The NHL amendment also includes more flexibility, also adding new terms as a result of COVID-19. So for the NHL, for example, the salary cap for 2021 was also kept flat with last season. And they'll only be modest average annual increases throughout the 2025-26 season. And in addition, the players also the NHL has agreed to defer a portion of their 2021 salaries and signing bonuses. So with new maximum escrow recovery rates also having been established. So with the same mechanism in place to achieve, the players ultimately receiving the 50% of league-wide revenues. So when you think about the two leagues, the mechanisms are a little different but the end results are generally the same with the players ultimately receiving the 50% of league-wide revenue.

Ben Swinburne, Analyst

Thanks. Good morning. Victoria, could you help us think about sort of the cash flows over the next couple of quarters into the end of the fiscal year, particularly around your deferred revenue balance? I am just thinking if you have refunds as we move through the rest of the season, but also whether you're going to be pulling in some cash from season tickets. Anything you can tell us about kind of the puts and takes around cash flows through the end of the fiscal year would be great. And then, Andy, I want to ask you about the Knicks. So congratulations on Quickley, it looks like a steal in the draft. I'm just wondering what you guys are doing, to try to maximize fan engagement during the pandemic, obviously, everyone's wishing they were there at the games. But the team seems to have really picked up in interest level and excitement. And I'm wondering what you guys are doing specifically to try to maximize fan engagement during this tough period, anything you can share would be great. Thanks.

Andy Lustgarten, CEO

Thanks, Ben. I'll answer that question first and then discuss cash flow. We've had to adjust how we communicate with our fans, which aligns with our ongoing efforts over the last couple of years. We've been improving our focus on social media to connect with people since in-person connections are challenging right now. To foster connections, we've hosted many small roundtables featuring either retired or current players and coaches who communicate directly with our fans. I'm proud of our team's efforts during the NHL draft when we traded to secure a second first-round pick, and our team captured that thrilling moment on video. We've been committed to providing fans with behind-the-scenes access, and our players genuinely want to engage with them. Our efforts to connect and offer insights have been successful, as reflected in our ratings, user engagement, and interactions, all trending positively. Additionally, we've explored unique ways to connect, such as our partnership with Kith, which designed our new jersey and a clothing line that sold out quickly. On the NHL side, the release of our Liberty Retro jersey has also been one of the fastest-selling items. We're focused on staying connected with our fans and giving them a voice, even if we have to do it differently than in the past. Regarding cash flow, Victoria will provide more detail, but we have maintained a fan-friendly policy by not charging credit cards this year and allowing season ticket membership retention through a minimal deposit. We believe this approach is vital during these times, especially since other teams have taken different routes that aren't as considerate to fans. While we will begin the renewal process soon, we haven't announced or started charging yet. I thought it was essential to share our philosophy on treating customers, as it closely relates to our cash flow.

Victoria Mink, CFO

Yes, great. Thank you, Andy. Yes, Ben, let me just take a step back, right, with $290.8 million in available liquidity at the quarter end including a cash balance of $70.8 million and then the $220 million capacity under our Knicks and Rangers facilities. We feel confident in our liquidity position, and some of the cost reduction measures we've taken to date that we've talked about. I think also, one of the items mentioned in our prepared remarks is that we may also look to access our portion of the NHL's recent $1 billion private placement which would be approximately $30 million. So that's not reflected in our December 31 cash balance or liquidity. So we are feeling good about our liquidity position. And as I had indicated, talking about the CBA is part of this cash provided by the league is to assist with the timing of payments as it relates to player compensation and recovery. So we feel like we're in a good position there as well. But when you think about deferred revenue, I think what's important to remember, particularly at December 31, is we've received a lot of the national and local media rights cash in advance and so we would expect to record revenue and earn that as the seasons play over the next two quarters. But in general, as Andy has said, we have a very fan-friendly approach, but we hope to earn the deferred revenue through games played or make goods and then to an extent, if necessary through refunds.

David Joyce, Analyst

Thank you. Two questions, please. First on the COVID impacts, given that you've got some variability in the lease expense, how should we think about what that would look like in normalcy kind of a period? And also related to Covid, are there any expenses that you've just taken out of the equation going forward? Or can you discuss the expenses that will be required for the new thing like air purification and cleaning? And then a second question is on the sports gaming aspect. What is the status of the league's trying to participate in the sports betting handled via legally inserting the integrity fee concepts into the state legislation process? Thank you.

Andy Lustgarten, CEO

Thanks David. Victoria, do you want to start with talking about revenue expenses?

Victoria Mink, CFO

Yes, sure. Let me touch on the COVID impacts. I think you explicitly referenced the arena license agreement first so let me just touch on that. Yes, our arena license fee payments to MSG Entertainment have been impacted by both the seasons starting later for the year through December 31 starting later than usual, with only the Knicks playing a few games to date, through December and no Rangers games and obviously the restrictions on fan attendance during those games. So the arena license fees for the games were currently playing are at an 80% reduction due to these attendance restrictions at The Garden. But of course, the situation remains fluid. And, really, we're just if we have the opportunity to welcome fans back into the arena at some point this season, which would be great. Our license fee payments would change accordingly. And then I think you sort of mentioned overall, just some of our expense impacts as it relates to COVID. We've talked a bit both last quarter and a little bit this quarter better various revenue impacts on in-arena tickets, suites, food, beverage etc., and some reductions that we would be anticipating because of the NHL shortened season. But specifically on the expense side as compared to a normal season, right, we're seeing expense reductions for player compensation. A revenue-sharing expense, league assessments, we talked about the leagues amending the CBA to ensure that players are still only receiving about half of the league-wide revenues. And we do have lower day-of-game costs and lower marketing expenses. I think that's the bulk of the types of savings that we're seeing across the board as it relates to COVID. But obviously, getting fans back in the building is really what we're looking forward to.

Andy Lustgarten, CEO

Even one fan generates marginal revenue since the events are already scheduled. Every ticket sale contributes directly to profitability. Regarding changes for improving profitability, we have a relatively new building with a strong filter system, so we are not starting from scratch. While there may be some additional costs, we are carefully considering them. If we can safely have fans, it will result in positive revenue and marginal profit. As for the integrity fee, I can't comment on legal matters. However, we believe sports gaming presents numerous growth opportunities for both leagues and teams, including media rights and sponsorships. There are likely additional ways to monetize, but I cannot provide specifics on the integrity issue.

Ari Danes, Investor Relations

And I would like to turn the call back over to Ari for closing remarks. Thank you all for joining us. We look forward to speaking with you on our next earnings call. Have a good day.

Operator, Operator

Thank you, ladies and gentlemen for your participation. You may now disconnect.