Earnings Call Transcript - MSGS Q2 2022

Operator, Operator

Good morning. Thank you for standing by, and welcome to the Madison Square Garden Sports Corp. Fiscal 2022 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s remarks, there will be a question-and-answer session. I would now like to turn the call over to Ari Danes, Investor Relations. Please go ahead.

Ari Danes, Investor Relations

Thank you, operator. Good morning and welcome to MSG Sports Fiscal 2022 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. 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.

Andy Lustgarten, President and CEO

Good morning and thank you for joining us. When we spoke last quarter, we shared the positive momentum we were seeing across our business, driven by strong consumer and corporate demand. Those positive signs are clearly reflected in our fiscal second quarter financial results, which include revenues of $290 million and adjusted operating income of $56 million. Even with the onset of the omicron variant, which briefly slowed us down, we are proud of the strides we’ve made in driving our business back. For the second quarter, I'm pleased to report that our per-game revenues were above pre-pandemic levels. This includes per-game suite and sponsorship revenues, as well as food and beverage and merchandise per-caps that exceeded results for the fiscal 2022 quarter, while per-game ticket revenue was in line with results for that same period. Based on our current trajectory, we expect total revenues for this fiscal year, both including and excluding our growth in media rights to exceed our last full pre-pandemic year, pro forma for the spin-off. The speed with which our business has returned and the demand and enthusiasm we are seeing from our fans and partners reinforces our conviction that as the owner of two of the most recognized professional sports franchises, we are uniquely positioned to drive long-term growth and value creation for our shareholders. Let's now discuss in detail how our business is performing. Our teams are more than halfway through the '21, '22 NBA and NHL regular seasons. Looking ahead to several more months of exciting competition, we continue to be pleased with the response from our fans. On our last earnings call, we discussed the strength we were seeing in our season tickets, which represent the significant majority of tickets sold. We also noted the pandemic's lingering impact on individual and group tickets, which are a minority of overall ticket sales. Throughout much of the second quarter, we were steadily closing the gap in individual and group sales relative to pre-COVID levels. Then towards the end of December, the omicron variant slowed some of this positive momentum and also caused a small dip in attendance. But signs are pointing in the right direction again, as the impact on sales has leveled off, and the percentage of ticket holders attending games is already approaching pre-omicron levels. For those of you who have attended the Knicks or Rangers game this season, you have seen firsthand the Garden is rocking, which is a testament to how tremendous our fans have been. Their engagement has also translated into strong spending levels inside the arena. In the second quarter, we saw double-digit percentage increases in food and beverage and merchandise per-caps compared to pre-pandemic levels. And as of early December, Knicks jersey sales at The Garden had already exceeded sales for each of the entire '18, '19 and '19, '20 seasons. We're also seeing that enthusiasm extend to corporate hospitality. During the quarter, average usage of suites for Knicks and Rangers games steadily improved, essentially returning to full occupancy. While it took a temporary step back at the end of the quarter due to omicron, average usage levels have been trending back up again over the past several weeks. In terms of marketing partnerships, our deal momentum has continued. As you know in November, we announced our first partnership in the mobile sports gaming space with BetMGM, which was followed soon after by a partnership with Caesars Sportsbook. Both agreements are expansive multiyear deals done in partnership with MSG Entertainment that span the breadth of our combined portfolio and include deep integration with the Knicks and Rangers. With mobile sports gaming now live in New York state, our partners have hit the ground running and are already seeing the value we provide in helping to drive their business. We anticipate further opportunities to increase our exposure to the sector. But mobile sports gaming isn't the only growth category. We also recently completed multiyear deals with two companies in the blockchain space; Coinbase and Socios, and are actively pursuing new opportunities in other categories. The league's ongoing commitment to introduce new inventory also provides additional potential upside for our marketing partnerships. For instance, the NBA recently announced the expansion of its jersey patch program to now include player warmup shirts and jackets. This is on top of the in-game jersey patch, which was introduced in 2017, and has only continued to increase in value as demonstrated by several recent deals across the league in comparable cities. In addition, as you know, the NHL previously announced the introduction of a jersey patch beginning next season, which we also believe will generate significant interest from potential partners. Before I turn things over to Victoria, I'd like to briefly touch on something we've spoken about in the past. That’s the substantial underlying value of our two iconic franchises, the Knicks and the Rangers. Since we last spoke, there have been additional transactions which demonstrate the continued demand that exists for professional sports teams. These include a private equity firm reportedly increasing its illiquid minority investment in the Golden State Warriors at a valuation above $5 billion and the majority stake sale of the Pittsburgh Penguins at a reported valuation of approximately $900 million. Closer to home, in December, Sportico published a ranking of NBA team valuations with the Knicks leading the league at $6.1 billion according to their list. That same month, Forbes updated its NHL team valuations with the Rangers retaining the top spot, while also becoming the publication's first NHL franchise valued at $2 billion. As we pointed out in the past, these estimated team valuations continue to significantly exceed our current enterprise value, further highlighting the untapped value of these assets. In closing, with more than half of the fiscal 2022 already behind us, we are proud of how our business is performing. Based on our current trajectory, our revenues for this year are on pace to exceed our pro forma results from our last full pre-pandemic season. On the heels of this momentum, we see a bright future for our company with substantial opportunities for growth. Our sponsorship business has come roaring back as partners reengage with our assets and brands. With additional categories that target valuable new inventory being introduced, we see a real opportunity to take this business to record levels in the future. On the media side, our local and national rights fees provide steady contractual growth. We have started to benefit from the NHL's new U.S. media deals. There's even further upside potential when the NBA national rights come up for renewal in a few years. We also look to commercialize new digital opportunities as we pursue fresh and innovative ways to engage with our fans, including NFTs, where we have already made inroads with several Knicks and Rangers products. As our teams improve their on-court and on-ice performance, nearly every aspect of our business could see revenue acceleration. We are excited about the path ahead for our business and remain confident in our ability to generate long-term value for our shareholders. With that, I'll now turn the call over to Victoria.

Victoria Mink, EVP, Chief Financial Officer and Treasurer

Thank you, Andy, and good morning, everyone. I would like to start by reviewing our fiscal 2022 second quarter financial performance, and then provide an update on our balance sheet, including our recent debt refinancing. Results for the fiscal second quarter reflect preseason play as well as the start of the '21, '22 regular seasons for the Knicks and Rangers. I'd remind you that the fiscal 2021 second quarter reflected the impact of the COVID-19 pandemic, including delayed starts to the 2021 seasons and fan attendance restrictions at The Garden, which affect the year-over-year comparability of results. In the prior period, the Knicks played four home games without fans, while the Rangers played none. This compares to 35 total pre and regular season home games without capacity restrictions in the current year period. As a result, total revenues for the quarter were $289.6 million as compared to $28.8 million in the prior year period, with significant increases in every major revenue line. In particular, national and local media rights fees represented $112.3 million of revenue this quarter, which reflects a return to normal levels of local media rights fees anticipating full seasons for both teams, contractual escalators on the NBA national media deals, as well as the impact of the NHL's new U.S. media rights deals which began this season. For the balance of our revenue, the majority was ticket-related, which was in line with pre-pandemic levels on a per-game basis as well as suites and sponsorship, which as Andy mentioned earlier, are above pre-pandemic levels. This quarter sponsorship results also reflect our new partnerships in sports betting, a category which we expect to be a significant contributor for the rest of the fiscal year with additional growth as we look ahead to fiscal 2023. Adjusted operating income increased $74.7 million to $55.7 million as compared to the prior year period. This improvement was due to the increase in revenues, partially offset by an increase in direct operating expenses and to a lesser extent higher SG&A expenses. The increase in direct operating expenses mainly reflects the impact of the COVID-19 pandemic in the prior year quarter, including delayed starts to the 2021 NBA and NHL seasons. This included increases in team personnel compensation, other team operating expenses and arena license fees. The increase in SG&A expenses was primarily due to higher marketing costs as well as fees related to the company's sponsorship representation agreements and services agreement with MSG Entertainment. Now turning to our balance sheet. In December, we enhanced our financial flexibility by refinancing the Knicks and Rangers senior secured revolving credit facilities at lower interest rates. Both facilities, which were previously set to mature in November 2023 were extended for another 3 years to December 2026. Additionally, the next $75 million unsecured revolving credit facility, which was also set to mature in November 2023 was extinguished. This refinancing demonstrates both the quality of our assets and the confidence in the long-term outlook for both our teams and leagues. At the end of the quarter, we had $360 million of total debt outstanding comprised of $330 million under the Knicks and Rangers senior secured revolving credit facilities, and $30 million advance from the NHL. This debt balance reflects a $25 million repayment on the Rangers senior secured revolving credit facility during the period. Turning to our liquidity. As of December 31, we had $249.8 million of liquidity comprised of $54.8 million of unrestricted cash and cash equivalents and $195 million in borrowing capacity under the team's revolving credit facility. Our quarter-end cash balance of $54.8 million represented a net increase of $21.2 million compared to our September 30 balance of $33.6 million. I would also add that this week we paid down an additional $25 million on the Rangers revolver from cash on hand and cash flow from operations, which reflects our confidence in the trajectory of our business given the momentum we're seeing for the remainder of fiscal 2022 and beyond.

Ari Danes, Investor Relations

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

Operator, Operator

Your first question comes from the line of David Karnovsky with JPMorgan.

David Karnovsky, Analyst

Hi. Thank you for the question. Andy, as we look at your share price since you last reported in November, it has underperformed against some of those positive catalysts you mentioned, like the Forbes value or the Penguin sale. When you see this disconnect, what are some tools that you have, either capital allocation or otherwise, that are in your control to potentially help narrow that gap to asset value?

Andy Lustgarten, President and CEO

Thanks, David. So, before I turn over to Victoria, who will talk a little bit more about capital allocation, I think we should just take a step back. As you mentioned, we agree that our stock price does not appropriately reflect the value of our assets. The pandemic has clearly been a difficult operating environment for every business, especially live entertainment. I'm really proud of how quickly we've bounced back to pre-pandemic levels. However, as we saw with omicron, it came very quickly, and we believe we're mostly through, if not totally through it. We don't know what's going to come around the corner next. So, we need to maintain our financial flexibility to handle it. But I do feel really good about the business. Our sponsorship business has returned and is already at record levels. We believe we can continue to drive it to further levels in the future. Our media rights fees continue to grow, and we think there's future upside in renewals. As the team's performance accelerates both on ice and on court, we believe there are other ways to grow across every area of business. So as our operating business continues to perform, we think that our shareholders will come along with that as well. To your point, there are capital allocation decisions, and Victoria will elaborate on that.

Victoria Mink, EVP, Chief Financial Officer and Treasurer

Yes, sure. Good morning, David. Yes, so in terms of capital allocation, you will recall that we spoke in the last few quarters about how paying down debt is our near-term focus. That’s what we've been doing, reducing our revolver borrowings by $25 million on the Rangers facility in the quarter, as well as an additional $25 million that we've paid down just this week. As part of our recent refinancing, we've lowered our borrowing costs, freed up some restricted cash, extended our maturities, and also extinguished the next $75 million unsecured revolver, showcasing the increasing strength of our liquidity position. While omicron is a reminder that we need to be prudent and maintain flexibility until the pandemic meaningfully recedes. As Andy said, we feel really good about the trajectory of our business. Over time, we'll evaluate all options for utilizing our free cash flow.

David Karnovsky, Analyst

Okay. And then I know you mentioned renewals. The NHL is heading into the latter part of a 12-year deal with Rogers in Canada. Could you provide any high-level thoughts on the landscape for rights in that market, and whether you think the league could similarly be positioned for an increase like they realized in the U.S. Thank you.

Andy Lustgarten, President and CEO

Pleasure, David. I love being a rights holder, a premium media rights holder. I believe sports are the most premium of media assets, and there will always be demand for it. In Canada, the NHL is the most premium of sports assets, and has done very well in that market for a long time. I look forward to what the NHL and the league office will be able to achieve when the rights expire—not until '25, '26. However, owning such premium rights in a premium market will deliver value for us.

Ari Danes, Investor Relations

Thanks, David. Operator, we'll take the next question.

Operator, Operator

Your next question is from Brandon Ross with LightShed Partners.

Brandon Ross, Analyst

Hey, Andy. You mentioned additional sports betting opportunities to come in the prepared remarks beyond the MGM and Caesars deals that you announced. Could you size that opportunity for us, even if it's relative to the deals that you already signed, and tell us maybe what inventory is still available to be sold?

Andy Lustgarten, President and CEO

Thanks, Brandon. I always want to start by saying sports betting is fabulous for fan engagement, and we're going to see this across many aspects of our business. The sponsorship revenue we're generating from it has been great for us. Now, let's turn to the sponsorship. In New York, the largest launch of any market has occurred, and it's in one of the most restrictive legal frameworks around sports betting with the highest tax rate. That suggests there is upside here. We've hit the ground running, and BetMGM and Caesars have been great partners who are very excited about what we've been able to achieve. We believe in reaching our fans through on ice, on court, signage, digital assets, and hospitality has been a very big part of it. While we're not going to open up to every partner, we do think there's space to potentially add another at the right time with the same vision for driving this business.

Brandon Ross, Analyst

Great. And then beyond sports betting, are there new categories of sponsorship we should be thinking about, or areas that are under-penetrated where there could be larger opportunities to really grow sponsorship from here?

Andy Lustgarten, President and CEO

I think we should start from where it's been as you come out of the pandemic. I applaud the leagues working with the team to find new inventory to deliver so that we're able to find partners. Premium inventory is significant. Whenever you offer something like a jersey patch, it not only drives revenue from the patch itself but also from a holistic partnership perspective. The NBA launched its patch, bringing in new partners that didn’t exist or didn't spend here in New York before. Squarespace has been an amazing partner for us, and we expect to continue to grow our relationship. The NHL is also introducing jersey and helmet patches, leading us to expect continued growth in new categories. Categories like health insurance, fitness, and home improvement still have upside for us. Blockchain is evolving rapidly as well, and we expect new opportunities to emerge. We feel confident about driving our sponsorship business forward; we have great assets and we're in the greatest city.

Ari Danes, Investor Relations

Thanks, Brandon. Operator, your next question is from Curry Baker with Guggenheim Securities.

Curry Baker, Analyst

Hey, good morning. Thanks for the question. Andy, high level, can you help us think about the financial impact of making it to the playoffs? How should we think about home playoff games translating into incremental adjusted operating income as well as long-term value creation? Is there any difference to consider between a Knicks versus Rangers playoff game?

Andy Lustgarten, President and CEO

Thank you, Curry. We would be thrilled for both teams to make a playoff run. It provides a great experience for fans and is beneficial for New York City. A playoff run is different than a regular season. The two biggest cost components of our business are already fixed: player salaries and our arena lease. So, there's no incremental cost for that. Largely, the incremental revenue that comes from a playoff runs to the bottom line. There are always gate taxes, revenue sharing, and some bonuses, but the lion's share drops down. For premium events such as when the Lakers visit or Henrik's retirement night, we can drive significantly higher revenues. If there are multiple playoff rounds, each round would further increase revenue. Overall, a long playoff run could be very beneficial for our business. Additionally, playoffs have lasting effects beyond current revenues; they drive ticket renewals, pricing, sponsorship suite renewals, and even impact media rights in the long term.

Ari Danes, Investor Relations

Thanks for the answer. Appreciate it.

Operator, Operator

Your next question is from Paul Golding with Macquarie Capital.

Paul Golding, Analyst

Thanks so much. Andy, I was wondering if you could help us understand the potential revenue opportunity from the NFT partnerships and how you see that evolving. We've seen peers like Crypto.com Arena invest in NFTs for their franchises.

Andy Lustgarten, President and CEO

Sure. NFTs are similar to other collectibles, subject to certain rights between the teams and the leagues. I think about NFTs as a step above traditional collectibles. We have two great partners, Socios and Coinbase, and believe there are other ways to engage in the space as well, especially as blockchain continues to grow. Recently, we launched an NFT around Henrik's retirement night. The revenue generated is significant, but the key benefit is the fan engagement it fosters. Many benefits exist, especially as blockchain evolves and as the leagues engage in revenue generation through initiatives like the NBA's collaboration with Dapper Labs and Top Shot. We think it's a growing business with many ways for us to participate.

Paul Golding, Analyst

Great. Does that come through on the sponsorship side, or do we see that just in rights—another kind of right? How should we think about that hitting the P&L?

Andy Lustgarten, President and CEO

There’ll be some revenue from NFT sales reflected in our merchandise numbers. The two partnerships we have are more aligned with sponsorship and hospitality, generally how we approach our partnerships. These carry components around signage and data while maintaining our fan base through hospitality. We see potential for continued growth in this business.

Ari Danes, Investor Relations

We're moving on to the BetMGM and Caesars partnerships, which you’ve been live with now for a few weeks. Should we think about the cadence of revenue generated in this quarter being proportional to what we could see going forward as we progress through a full quarter period?

Andy Lustgarten, President and CEO

Let me add one thing, and Victoria may jump in as well. When we completed our deals with Caesars and BetMGM, they were done in early November and late November, respectively. A full quarter would yield more revenue, as this was a partial year with limited contributions. Typically, in most of our partnerships, we see revenue step ups as we progress through operational periods. There remains considerable upside within this category, as we currently operate under one of New York's most restrictive gaming laws. Discussions regarding kiosks and changes in laws are ongoing and could positively impact our business. We feel very confident about where we stand now and view further opportunities as promising.

Victoria Mink, EVP, Chief Financial Officer and Treasurer

I believe Andy covered it perfectly. We only reported limited revenue this quarter and expect to see increases as we perform through a full quarter period and onward.

Ari Danes, Investor Relations

Thank you. I would like to turn the conference back over to Ari Danes 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.

Victoria Mink, EVP, Chief Financial Officer and Treasurer

Goodbye.

Operator, Operator

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