Earnings Call Transcript - MSGS Q3 2022

Operator, Operator

Good morning. Thank you for standing by, and welcome to the Madison Square Garden Sports Corp. Fiscal 2022 Third 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 like to turn the call over to Ari Danes, Investor Relations. Please go ahead.

Ari Danes, Investor Relations

Thank you. Good morning, and welcome to MSG Sports Fiscal 2022 Third 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 to 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 will now turn the call over to Andy.

Andy Lustgarten, President and CEO

Good morning, and thank you for joining us. As we near the completion of our fiscal year, we are thrilled to be here today discussing the strong operating momentum and financial results we are seeing in our business. As you know, at the time of our last call, we were coming off the height of the Omicron variant, yet another example of the ever-changing environment we have continued to face throughout the fiscal year. Thankfully, the impact from Omicron was relatively short-lived. And as you can see in today's results, our business has proven to be resilient, performing exceedingly well when faced with another challenge. For the fiscal third quarter, we delivered exceptionally strong performance, including revenues of $338 million and adjusted operating income of $81.5 million, driven by robust consumer and corporate demand. In fact, our total revenues as well as our per game revenues across tickets, suites, sponsorship, food and beverage and merchandise were well above results, both from the fiscal 2019 third quarter, which was the last full third quarter prior to the pandemic, and the fiscal 2020 third quarter, prior to the suspensions of the '19, '20 seasons due to COVID. Based on our current trajectory, we continue to expect total revenues for this fiscal year, even excluding growth in media rights and the impact of the playoffs, to exceed our last full pre-pandemic year, pro forma for the spin-off. We're incredibly proud of how we've successfully navigated our business through the uncertainties created by the pandemic and believe the challenges we have faced have made us a stronger organization. As I will discuss in more detail shortly, we see numerous opportunities on the horizon to continue driving sustained growth for our business as well as generate long-term value for our shareholders. Looking at our business in more detail. Last month, both the Knicks and Rangers completed full regular season schedules with no capacity restrictions at the Garden. For the Knicks, fan enthusiasm remained high right through the end of the season, keeping the building full for the team's final stretch of home games. For the Rangers, the first round of the Stanley Cup playoffs kicked off Tuesday with the team taking on the Pittsburgh Penguins, and we're looking forward to tonight's pivotal game. Looking into the future, with many of our core players under multi-year contracts and several young, talented players continuing to develop, we anticipate success in the years ahead. Both franchises are fortunate to have fan bases that are among the most dedicated and loyal in all of sports, and this has been on display throughout the pandemic. The percentage of ticket holders attending games, after dipping in late December and early January due to Omicron, saw an overall improvement into February and essentially returned to pre-Omicron levels in March. We saw the same momentum in average tickets sold per game and ended the quarter on a high note, with March having the highest level for any month this season. Looking ahead, while still early, the enthusiasm is already extending into next season, with both season ticket renewals and sales of season ticket packages to new members both off to a strong start. In fact, the average combined season renewal rate is already above 85% and rising. Based on our current trajectory, we now expect to see solid growth in ticket revenue next year as we benefit from the introduction of new ticket inventory and the increase in Ranger season ticket prices as well as greater sell-through with the continued improvement in tourism and office occupancy. The enthusiasm from our fans has created an exciting environment inside the Garden, which has contributed to sustained strong guest spending levels. During the third quarter, we again saw double-digit percentage increases in food and beverage and merchandise per caps compared to pre-pandemic levels. Engaging with our fans remains a priority, and we've continued to focus on building a more direct relationship with them while innovating how we deepen that connection, including through our social media channels and unique team products. For example, over the last eight Knicks games, we launched an NFT initiative featuring collectibles that could only be purchased while inside the Garden. We've also been partnering with niche fashion brands to enhance our merchandise offerings, such as Kith and Jeff Staple. In fact, our exclusive One Night Only Rangers and Staple capsule collection drove one of the highest merchandise per caps of the season, demonstrating one of the novel ways we could connect with our fans while also driving our business. We continue to engage with fans by offering original and compelling content on our team's social media channels, which added approximately 700,000 net new followers across both teams' channels this year. Demand for corporate hospitality, even in the face of the pandemic, has also been strong and is only increasing. Per game suite revenue this quarter is now above pre-COVID levels. While the average usage of our suites for Knicks and Rangers games took a temporary step back due to Omicron in December, levels started trending up again in the back half of January. By the end of the quarter in March, we were at the highest monthly level for the season, exceeding average pre-pandemic levels. The strong momentum in suite usage and sales came despite New York City office occupancy rates that, although improving, are still meaningfully below pre-pandemic levels. But as employees return to the office in greater numbers, we anticipate an equally strong return to corporate entertainment, which we are well positioned to capitalize on going into next season. We've also seen continued growth in marketing partnerships, driven by our ability to strengthen relationships with existing partners while expanding into new categories and taking advantage of new inventory. It starts with mobile sports gaming where, during this quarter, we welcomed DraftKings as our third major partner in a multi-year agreement done in partnership with MSG Entertainment. Mobile sports betting now represents our largest revenue category and marketing partnerships on a run rate basis. As we move into fiscal 2023, we will see the full impact of these three new partnerships in our results. We've spoken before about the significant exposure we offer our partners. With BetMGM, Caesar Sportsbook and DraftKings representing over 50% of the mobile sports wagering handle in New York in March, we are excited to continue helping them reach new audiences. Companies and other emerging industries continue recognizing the value we provide in connecting with consumers. Last quarter, we signed deals with Coinbase and Socios. We continue to see incremental opportunities across the blockchain space and are actively exploring potential new partnerships. Sports betting and blockchain aren't the only areas of growth in new sectors. During the quarter, we officially welcomed both DoorDash and Future, a digital fitness coaching company, to our slate of marketing partners. Another avenue of sponsorship growth is a new marquee inventory created by the leagues. For example, the NHL's introduction of a jersey patch beginning next season provides us with an opportunity to deepen our relationship with an existing partner or engage a new company eager to build brand awareness by developing a broader program with one of the most recognizable franchises in professional sports, centered around this new premium high visibility asset. The introduction of the NHL jersey patch follows the 2017 debut of the NBA patch, which, as we noted on our last call, has only continued to increase in value, highlighted by several recent significant deals across the league, including in Brooklyn and in Los Angeles. The leagues have done an outstanding job in opening additional opportunities, including the NBA's decision to increase the number of permitted international sponsors for teams next season and the NHL's new digitally enhanced DasherBoards, also launched next season, which will create significant incremental exposure for our partners during Rangers telecasts on MSG Networks. As we look to maximize the value of this new inventory, we will take a deliberate approach to the sale process, and we see a bright future ahead for our marketing partnership business for the upcoming fiscal year and beyond. This adds to the list of growth opportunities we've highlighted before, including playoffs and media rights. A playoff run by either team generates significant incremental value. With the Rangers now in the first round of the NHL postseason, we expect a boost to our results in the fiscal fourth quarter. The benefit will also extend beyond this fiscal year as we expect the buzz associated with the playoffs to increase demand for tickets, suites and sponsorship next year. On the media side, we've seen a significant lift from the NHL's new U.S. media rights deal, which started this season. With the NBA's national rights coming up in just a few years, further upside potential is possible. In closing, as I'm sure you're aware, I recently stepped down as President of MSG Entertainment, enabling me to focus my full attention on leading and growing MSG Sports. With the seasoned management team we have in place, we are more excited than ever about the future. With two of the most iconic franchises in professional sports, which continue to have untapped value and numerous catalysts for growth ahead, I'm confident our business will continue to thrive and generate long-term value for shareholders. With that, I'll now turn the call over to Victoria.

Victoria Mink, EVP, Chief Financial Officer

Thank you, Andy, and good morning, everyone. I would like to start by reviewing our fiscal 2022 third-quarter financial performance and then provide an update on our balance sheet. Our third-quarter results reflect strong ongoing consumer and corporate demand for the Knicks and the Rangers as our teams continued their '21, '22 regular seasons, the first full season back following the onset of the COVID-19 pandemic. I would remind you that the fiscal 2021 third quarter reflected the impact of the pandemic, including fan attendance restrictions at the Garden and the compressed timing of the shortened 2021 NBA and NHL regular seasons, which affected the year-over-year comparability of results. In the prior year period, the Knicks and Rangers played a combined 16 home games with fan attendance restricted to 10% capacity and 22 games without any fans. This compares to the same total number of regular season home games in the current year period, but without capacity restrictions. As a result, total revenues for the quarter were $337.8 million compared to $183 million in the prior year period. National and local media rights fees represented $124.8 million of revenue this quarter. This reflected a $15.2 million decrease compared with the prior year period, primarily due to higher revenue recognized over 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 U.S. media rights deals, which began at the start of the '21, '22 season, as well as contractual rate increases on our local media rights and the NBA's national media deals. For the balance of our revenue, the majority was related to tickets, suites and sponsorship which, as Andy mentioned, are now above pre-pandemic levels on a per game basis. Adjusted operating income increased $51.4 million to $81.5 million compared to the prior year period. This improvement was primarily due to the increases 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 lifting of fan attendance restrictions at the Garden which were in place in the prior year quarter. This includes higher revenue-sharing expense net of escrow, reflecting a return to normal levels compared to a net credit in the prior year period, as well as higher other team operating expenses and arena license fees. These expenses were partially offset by higher estimated NBA luxury tax receipts. We are not a luxury taxpayer this season, but benefit from the taxes paid by other teams. The increase in SG&A expenses was primarily due to higher employee compensation and related benefits, marketing costs, and commissions related to the Company's sponsorship sales and service representation agreements with MSG Entertainment. Turning to our balance sheet. At the end of the quarter, we had $315 million of total debt outstanding comprised of $285 million under the Knicks and Rangers senior secured revolving credit facilities and $30 million advanced from the NHL. Our quarter-end cash balance of $49.2 million represented a net decrease of $5.6 million compared to our December 31 balance of $54.8 million. Our cash and debt balances both reflect $45 million of repayments on the Ranger senior secured revolving credit facility during the period. With regards to liquidity, as of March 31, we had $289.2 million of liquidity comprised of $49.2 million of unrestricted cash and cash equivalents and $240 million in borrowing capacity under the team's revolving credit facilities. I would also add that in addition to the $45 million of debt repayments in the quarter, last week, we paid down an additional $15 million on the Rangers revolver for a total of $60 million since the start of the third quarter, which reflects our continued confidence in the trajectory of our business, including what is anticipated to be a strong end to the fiscal year with the benefit of the Rangers playoff run and the runway we seek to deliver sustained growth in the long term.

Ari Danes, Investor Relations

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

Operator, Operator

The floor is now open for questions. Your first question comes from the line of David Karnovsky from JPMorgan.

David Karnovsky, Analyst

Andrew, just on the higher per caps you mentioned for food and merchandise. Just wondering if you can walk through some of the drivers of that versus pre-pandemic, mainly price increases? Are you seeing people order more? Is there a mix of customers impacting that? And then do you see any risk to these levels, maybe as pent-up demand eases or from potential economic process?

Andy Lustgarten, President and CEO

David, there are a few drivers that are pushing the per caps. On the ticketing side, obviously, the tickets that are sold through a season package. Prices are set before the season, so that's not a driver of an increase. But our ability to sell individual tickets which we variably price depending on demand of the game and team performance allows us to smartly and aggressively price our individual tickets. Once people come in the building, we've focused on delivering new types of merchandise products. For example, Kith designed one of our alternative jerseys and had a collection around it. Jeff Staple created a special capsule collection, The Night to Date we did in Jeff Staple capsule. That was the second highest merchandise per cap all season only behind Henrik Lundqvist's retirement night. On the food and beverage side, yes, we focused on pricing, but we've also worked on ways to deliver food and beverages faster, so we've installed cashless transactions. We've been trying to maximize stands and locations where consumers want to go so they're able to buy what they want. We aim to provide a great experience for our consumers. So far, demand has been strong, especially as teams play and as more people return to the building. Looking forward, we see that the consumer has been supportive, as evidenced in our renewal rates and the way the season concluded with the Knicks not even in the playoffs. The building was packed for almost all the games leading up to the season's conclusion. As long as we continue to deliver that great experience, I believe we can drive this business.

David Karnovsky, Analyst

Great. And then maybe one for Victoria. Just any update on capital allocation here? I think last time we were on the call, you kind of indicated debt pay down as a priority, just given where we were with the pandemic and Omicron at the time. Restrictions have kind of lifted somewhat since then. Just want to see if there's a change to your thinking.

Andy Lustgarten, President and CEO

So Dave, let me start with the question, and I'll pass it over to Victoria. As I've said before and I'll say it again, we're pleased with how our business has bounced back and how resilient we've been through challenges like Omicron. That said, we still remain prudent, and we want to maintain our financial flexibility. We feel really good about the trajectory of our business as we keep on discussing and what we've seen in our results. We have many tailwinds pushing our business: occupancy and tourism levels are improving, which makes us feel good. We talked about our areas of growth, including our sponsorship business and our ticketing. We feel good about our media rights deals, especially as we look forward with the NBA agreement coming up in a few years. As our business returns, we feel optimistic. Though, as we've seen, we need to be flexible, and we must be cautious regarding future uncertainties. Victoria, do you want to follow up?

Victoria Mink, EVP, Chief Financial Officer

Yes, sure. Thanks, David. I mean, you restated it correctly. Our nearer-term focus has been on paying down on the revolving credit. As a reminder, in the last quarter, we did pay down $45 million on the Rangers facility, and just last week, we paid down an additional $15 million as well. However, Omicron serves as a reminder that the environment continues to be unpredictable, and we need to maintain some level of flexibility. We feel really good about the direction of our business and the drivers of sustained long-term growth. Over time, we will evaluate all our options for utilizing our free cash flow.

Operator, Operator

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

Brandon Ross, Analyst

Andy, you quickly went through a list of potential sponsorship opportunities in the prepared remarks. I was hoping maybe you could elaborate on a few of those in more detail? First on jersey patches, I think you had done a $10 million a year deal with SquareSpace when the jersey patch sponsorship started. Recently, we've seen the Nets do a new deal for $30 million a year. There have been some incredibly high figures on soccer jersey sponsorship. When is your deal with SquareSpace up? How are you thinking about the potential upside for a renewal on the jersey patches?

Andy Lustgarten, President and CEO

Brandon, we think jersey patches represent a key opportunity for us. More key assets like this don't appear often. Regarding the Knicks, we initiated the partnership with SquareSpace when the NBA authorized it in 2017. While we typically do not comment on deal size, we agree that the market has shifted since we signed our deal. SquareSpace has proven to be a fantastic partner. We anticipate significant increases when we renew or find a new partner. On the Ranger side, we will also have the opportunity to create jersey patches starting next year. It is very important to us not only who our partner is but also how we can maximize this inventory. An integrated sponsorship that incorporates multiple assets will yield the most value. This is about finding new companies and new partners who are looking to enter the sports marketing space. The market is active for these marquee assets, and we have opportunities on both the Knicks and Rangers sides.

Brandon Ross, Analyst

Okay. The NBA is opening up international sponsorship next season. Can you dig into some details about what that involves? How will it impact potential revenue?

Andy Lustgarten, President and CEO

Sure, Brandon. The NBA has started new initiatives, and I applaud the leadership for seeking ways to grow the business. Recently, they allowed teams to have three partners in international markets. Before, we were restricted to just three, which limited our outreach. Now, with the opportunity to have up to ten partners, we can investigate new international markets and find opportunities for sponsorships there. Basketball is the second largest sport globally, and in some areas, it is even the number one sport. This offers us a great opportunity to grow our business both directly through sponsorship and by reaching new fans who may visit New York. The avenues for growth include finding sports betting partners in international markets, which we couldn't tap into before. This is truly a fantastic opportunity to expand our revenue streams and brand exposure.

Operator, Operator

Your next question comes from the line of Paul Golding from Macquarie Capital.

Paul Golding, Analyst

Andy, you mentioned the fiscal 4Q potential boost coming from the playoffs, so I wanted to dive a bit deeper into the Rangers vs. Penguins match-up. What do you see in terms of economics around the playoff: presumably, ticket prices are up? Can you share insight into other aspects of the business, like incremental sponsorship opportunities?

Andy Lustgarten, President and CEO

Paul, I will let Victoria start by explaining the playoff impact today and then follow up with an overview of the multi-year implications.

Victoria Mink, EVP, Chief Financial Officer

Great, Paul. We are thrilled to have the Rangers in the playoffs. We hosted the first game in the series at the Garden on Tuesday and are excited for Game 2 tonight. Playoff games usually provide significant boosts to both revenues and AOI; on the ticket side, we can charge a substantial premium compared to regular season games. Food and beverage and merchandise sales also increase during the playoffs. There are additional expenses that we need to consider, such as day-of-game costs and higher league assessments associated with playoff gate receipts. However, we expect each home playoff game in the first round to generate around $1.5 million in AOI, and this contribution will grow if the team advances further in the playoffs with ticket prices increasing from round to round.

Andy Lustgarten, President and CEO

Regarding incremental sponsorship opportunities, I see this not only as a potential short-term gain but also a multi-year opportunity. A playoff run is an ideal time for us to engage partners by showcasing what it means to be at a Ranger game. Fan engagement increases, and this helps us in renewals and pricing for the following year. It enhances the demand for our sponsorship and suites, leading to better prices. The longer the playoffs continue, the more fan engagement we drive, impacting ratings and eventually our media rights.

Paul Golding, Analyst

Appreciate that detailed insight. A follow-up question, it seems you're experiencing success with NFTs. Have you implemented any NFT collectibles for the playoffs, and how do you intend to price them relative to the regular season?

Andy Lustgarten, President and CEO

Currently, we are not executing any NFT initiatives specifically for the playoffs. However, there are a variety of strategies for NFTs out there. For example, the Warriors successfully engaged their fan base through special editions related to past championships. While we haven't decided on any playoffs-related NFTs, we have successfully utilized NFTs during the regular season, particularly by creating exclusive offers that could only be purchased while in the building, which brought in a surprising amount of new buyers. While the revenue isn't substantial, it has provided us with valuable insights into how new fans engage with us. We plan to continue exploring NFTs and blockchain-related projects moving forward.

Ari Danes, Investor Relations

Operator, I believe we have one final analyst in the queue. Can we take that caller, please?

Operator, Operator

Yes. The last question that we have is from the line of an analyst from Jefferies.

Unidentified Analyst, Analyst

You touched on the positive outlook for season ticket sales and renewals. Can you provide insights on corporate sales for next year?

Andy Lustgarten, President and CEO

Regarding corporates, we mean our suites, premium experiences, and our sponsorship business. Demand remains strong in the corporate space. Partners recognize that we offer one of the best ways to reach fans. We feel confident about our corporate and sponsorship outlook. For suite sales, we've sold more new suites than initially expected this year, especially amidst the pandemic. Single-night sales for upcoming playoff games are proving to be strong as well. We are currently looking for new premium business opportunities within the building, and we believe there is significant demand. Overall, we feel optimistic about our future in these areas.

Unidentified Analyst, Analyst

Understood. Lastly, has there been discussion around a leverage target as debt paydown accelerates?

Victoria Mink, EVP, Chief Financial Officer

Certainly, it's a topic of internal discussion. Our near-term focus, however, remains on paying down the revolvers. As I mentioned earlier, we drew down significant debt because of COVID, and we've made it a priority to reduce that. I've outlined what we've accomplished in terms of debt repayment in the past quarter and recent week. However, I want to emphasize that the environment remains unpredictable, especially post-Omicron, so maintaining financial flexibility in the near term is still crucial. We will certainly consider all options for leveraging our free cash flow as we progress.

Operator, Operator

There are no questions at this time. I would like to turn the call over back to Mr. Ari Danes. Please go ahead, sir.

Ari Danes, Investor Relations

Thank you all for joining us. We look forward to speaking with you on our year-end call in August. Have a good day. Goodbye.

Operator, Operator

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