Q4 2021 Madison Square Garden Sports Corp Earnings Call
Good morning, My name is Christie and that will be your conference operator today.
At this time I would like to welcome everyone to the Madison Square Garden Sports Corp, fiscal 2021 fourth quarter and year end earnings conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.
If you would like to withdraw your question press the pound key.
Thank you I will now turn the call over to Ari Danes Investor Relations. Please go ahead Sir.
Thank you Christy good morning, and welcome to MSG Sports fiscal 2021 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.
I'll 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 on 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 four and five of today's earnings release, we provide consolidated statements of operations and a reconciliation of operating income to adjusted operating income or AOI or.
Non-GAAP financial measure.
And with that I'll now turn the call over to Andy.
Good morning, and thank you for joining us.
Im much happier to be speaking with you in today's operating environment versus the same time last year.
Last August our focus was on navigating our business through the pandemic, we took a series of actions, including reducing expenses and refinancing debt to safeguard our balance sheet.
And despite the challenges our business and industry faced this difficult period also served as a powerful reminder of the significant value of professional sports franchises.
For example, our fourth quarter results included our pro rata share of the Seattle crack and $650 million expansion to the highest ever for NHL franchise.
In addition, the NHL completed a new National media rights agreement.
Which represents a significant increase from the prior deal.
We will discuss this more a little later.
And on the NBA side, we've seen substantial interest in the acquisition of ownership Stakes in recent months.
For example, there have been transactions for minority Stakes with no public market liquidity involving the Los Angeles Lakers and the Golden State Warriors.
According to press reports reflect team valuations of $5 billion and above.
This is an interesting comparison to the current enterprise value of just over $4 billion for our company.
Which includes not only the next but also the Rangers two of the most iconic franchises in professional sports in the nation's largest market.
Our focus now is on the upcoming seasons.
And while we know we're not completely out of the woods with regards to the pandemic, we feel confident for a number of reasons about where our company is headed as we make our way towards a return to normal.
It starts with our market.
Where we have a large and passionate fan base, who want to cheer on their teams in person.
It's also a market that is taking proactive steps to help curb the impacts of the pandemic.
Earlier this month in New York City announced that all guests for indoor events must show proof of at least one vaccination shot.
Which we think is a positive for us.
Our market already has one of the highest vaccination rates in the country.
Through surveys, which have you been used to continue engage with our fans.
That over 85% feel most comfortable at events that required vaccinations.
We saw this firsthand during the next first round playoff series.
As we sold all available seats for our three home games.
This included more than 15000 tickets for the first game and with revised MBA protocols to safely create additional capacity more than 16000 tickets for the next two games with nearly 90% of those in attendance being fully vaccinated.
So as we look towards the upcoming seasons, we are preparing for full capacity crowds and full 82 game seasons for both the NBA and NHL.
For the Knicks last year was an exciting season with Tom Thibodaux, winning NBA coach of the year and forward Julius Randle being named both an all star and the league's most improved player.
Aiming to build on this success earlier this month, the Knicks completed a multi year contract extension with Julius while re signing a number of key members from last season's roster.
The team also welcomed two significant new players four time all-star Campbell, Walker and ebb and forney yet.
For the Rangers Adam Fox was also recognized this past season, what are you seeing any Charles Norris Trophy award as the best all around defenseman.
Adam as part of a talented roster now led by President and General manager, Christopher Ari and head coach Gerard gallant.
This past month, the team signed its highly skilled goaltender Igor <unk> to a four year contract and added several new players who are expected to bring both physicality and depth.
We look forward to watching both teams continue to develop and compete this upcoming season.
In terms of ticketing for next season. After careful consideration. The decision was made to raise knicks season ticket prices for the first time in seven years, while reading you never season ticket prices will remain unchanged.
I would also note that in looking at the secondary market. We believe there's ticket revenue upside over time as we continue to add value.
We remain grateful for our family support and are pleased to report that to date, we've had an average combined renewal rate of approximately 94% for the Knicks and Rangers season tickets.
We've also been encouraged by sales of season ticket packages to brand new customers, which have been very strong.
Last season, we began began requiring the use of digital ticketing as part of our Covid protocols, which we also found provided benefits from our operation perspective, and it's something we intend to continue utilizing for the upcoming seasons.
Yeah.
In addition, we remain focused on finding other innovative ways to engage our fan bases.
For example last month, the next launch small and if T pilot, which focused on five of the team's best home games during the 21.
2021 season, and which generated tremendous interest and sold out.
Another way, we connect with our fans is through merchandise. This past season, we launched a new online website, providing us with another channel to engage directly with Knicks and Rangers fans and.
In addition to a more streamlined process. We are now able to offer our fans are more robust selection of merchandise.
The more direct interactions we have with her fans the more we learn which in addition to driving our business enables us to enhance the fan experience.
These insights also become important for our marketing partners, who are always looking for greater fan engagement.
As you know one of the reasons, we've been able to form long lasting relationships with world class companies is because we're committed to finding solutions that drive our partners business.
In fact through our relationship with MSG Entertainment, we recently renewed our marquee partner Jpmorgan Chase for a multiyear period.
We're also having <unk> ongoing discussions with existing and potentially new marketing partners and expect to have more positive news to share in the months out.
The legalization of mobile sports gaming is another meaningful opportunity for our company.
As you know mobile sports gaming has already been approved in New York and while we await the outcome of the state's application process. We are excited about what it could mean for our business.
Including our ability to offer gaming partners unrivaled exposure and impacted our market.
Yeah.
You've heard US say several times that we believe sports gaming will help drive fan engagement and viewership.
This could in turn benefit media rights, which we continue to increase which continued to increase in value.
This past year, the NHL completed two new seven year National media rights deals with Disney and Warner Media.
Which in addition to being significantly higher than the prior deals align the NHL with two leaders in sports programming.
We expect will drive increased viewership and further raise the nhl's profile.
The agreements, which will be reflected in our results starting in fiscal 'twenty two.
Include the Nhl's return to ESPN, while also expanding the league's reach across several Turner sports properties, including linear and streaming platforms.
As a reminder, the.
<unk> Canadian deal with Rogers communication runs through the 'twenty five 'twenty six season, while the Nba's U S deal with Disney and Warner Media run through the 'twenty four 'twenty five season.
And as you know the Knicks and Rangers local media rights agreements with MSG networks have 14 years remaining providing us with significant long term visibility and growth.
Televising our games is how we reached the majority of our fans.
And even with the evolving media landscape. This past year. The Knicks local regular season ratings increased approximately 45% while Rangers ratings increased 17% both compared to last season's averages.
Another area, where we see increased viewership as esports.
Our counter logic gaming team continue to have competitive presence in games such as league of legends that are among the top 10, most watched games on Twitch, which so far in 2021 has seen a 35% increase in average concurrent viewers compared to last year.
This growing level of engagement is just one of the reasons why we continue to invest in E sports and remain excited about the long term monetization opportunity.
I'll end today by saying that we remain confident in our company's future and our ability to build long term value for our shareholders as always I would like to thank our employees fans partners and shareholders for helping us through this past year.
We look forward to the 'twenty, one 'twenty two seasons and proving once again that theres nothing like live professional sports to bring people back together and.
And with that I'll turn the call over to Victoria.
Thank you Andy and good morning, everyone.
I'd like to start by touching on our fiscal 2021 fourth quarter financial performance and then provide an update on our liquidity and balance sheet.
Results for the fiscal fourth quarter reflect the timing of the shortened 2021 NBA and NHL regular seasons as well as the Knicks participation in the first round of the NBA playoffs.
I'd also remind you that the fiscal 2024th quarter was impacted by the suspension of the 1920, NBA and NHL seasons in March of last year.
As a result total revenues for the quarter were $146.9 million as compared to negative $7 million in the prior year period.
League distributions and local media rights fees increased as a result of the impact of the 1920 seasons suspensions in the prior year period as well as the timing of the 2021 regular seasons.
In addition.
Lead distribution benefited from the recognition of the NHL expansion fee associated with the Seattle cracking, while local media rights fees were negatively impacted in the current period by the reduced NBA and NHL 2021 regular season schedules.
The increase in sponsorship and signage as well as ticket related revenue reflects the Knicks and Rangers playing a combined 24 regular season home games at 10% sand capacity during the quarter as compared to no gains in the prior year period.
The increase in playoff related revenues reflects the impact of the Knicks three home playoff games at the garden during the current year quarter.
Adjusted operating loss decreased $27.8 million to a total loss of $5.8 million.
This improved loss was due to higher 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 suspension of the 1920, NBA and NHL seasons on the prior year quarter as well as the timing of the shortened 2021 NBA and NHL regular seasons in the current year period.
This was reflected in increases across team compensation and revenue sharing expense net of escrow payments as well as other team operating expenses.
This quarter's results also include arena license fees as well as play off related expenses.
Note that the arena license fees were significantly reduced as compared to a full season at 100% capacity due to attendance restrictions at the garden.
The increase in SG&A expenses was primarily due to higher teens employee compensation and related benefits, including severance related to team executives play off related expenses and fees related to the company's sponsorship sales and service representation agreement with MSG Entertainment.
Which were partially offset by lower corporate overhead costs.
As a reminder results for the prior year fourth quarter reflect a number of items, including the impact of the 1920, NBA and NHL seasons suspension as well as discontinued operations accounting for the period through April 17th 2020, which was the date of the MSG.
And spin off.
Results from April 1st through the spin off date are therefore, not directly comparable as they includes certain corporate overhead expenses that we no longer incur following the spin, but which did not meet the criteria for inclusion in discontinued operations.
Now turning to our company's liquidity position and balance sheet.
As of June 30th we had $309.9 million of liquidity comprised of $64.9 million of cash and cash equivalents.
$245 million of available borrowing capacity under existing credit facilities.
Our quarter end cash and cash equivalents of $64.9 million represented a net decrease of $4.2 million compared to our March 31st ballots.
This net decrease was primarily due to 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 a repayment of $25 million on the Ranger senior secured revolving credit.
Facility.
These outflows were largely offset by a number of items.
Including local and National media rights fees related to the 2021 NBA and NHL seasons.
Nick's playoff ticket sales as well as season ticket payments for the 'twenty, one 'twenty two seasons.
The NHL expansion fee related to the Seattle cracking and sponsorship revenue.
As a result of the Rangers revolving credit facility partial repayment, our total debt outstanding at quarter end was reduced to $385 million.
The company's debt balance at June 30 was comprised of $355 million under the Knicks and Rangers senior secured revolving credit facilities and $30 million advanced from the NHL.
As of June 30th.
Deferred revenue balance net of billed but not yet collected revenue was approximately $146 million as.
Fair to approximately $133 million as of March 31st.
The increase in this balance was primarily due to collections of season ticket deposits, partially offset by the recognition of local and national media rights revenue during the quarter.
The deferred revenue balance as of June 30th was primarily comprised of tickets and suites, which will be addressed through games played and to the extent necessary through make goods credits and refunds.
In addition, our deferred revenue balance included $30 million from the MBA.
With that I will now turn the call back over to Ari.
Victoria, Christy we would now like to open up the call for questions.
Certainly and as a reminder, if you would like to ask a question Press Star then the number one on your telephone keypad.
And your first question is from Ben Swinburne of Morgan Stanley.
Hey, good morning.
Andy you talked about it at the.
In your prepared remarks, I wanted to come back to the sort of obvious disconnect between the value of the assets at MSG sports and your stock price I think one concern.
Investors I think have is that management and the board might consider Recombining MSG sports with entertainment.
Know that you and the team are sort of publicly address that.
<unk> in the past I was hoping you could revisit that and also just remind us why the board decided to separate sports in the first place and then as a follow up is there anything that you're thinking in terms of taking proactive steps to try to address you know what again is it fairly obvious.
Delta between what the company is worse than where the stock is thanks a lot.
Sure. Thanks, Thanks, Brian.
So let me just start to be really clear, we have no intention of emerging sport MSG sports and MSG Entertainment.
We worked really long and hard on completing the spin off this last year.
And there was very straightforward rationale for why we did it.
And we believe that still holds.
There are two very different companies with two different.
Very different profiles MSG entertainment, it's a growth story.
Sports, it's an asset play with some growth and we believe tremendously in the value of the Knicks and Rangers teams. This has been really.
We're incredibly reinforced to us by the recent transactions in both leagues.
Cracking.
Cracking transaction in NHL NBA transactions with the Lakers and.
Worriers.
It just it really shows the value of what we have of the two teams.
But I will note.
The business the two leagues have significant impacts rules around leverage which impact our operating flexibility really driving MSG entertainment should be a separate company with its own separate growth plans.
And we're really excited about MSG sports future as an independent public company.
And in terms of your follow up.
I mean look I think this has been.
This has been a real a real interesting year right. This pandemic has been something that nobody's ever no. One in our lifetime has ever had to operate through before.
The most the thing that we've been focused on is the health of our company.
During the year, we took on some additional debt.
Which we started the pay down in the fourth quarter and as we think about near term decisions on what we do right we need to think about our leverage and how do we operate health.
And be healthy during this period right now, but we're watching the market we feel good about where things are going and feel like we're moving in the right direction and so on a long term basis I'd say that all options are on the table and using our free cash flow and helping to drive the volume.
Great. Thank you for the comments.
Thank you. Your next question is from John <unk> of Wolfe Research.
Andy can you give us just some more color on the mobile gaming opportunity over the past few months has your confidence level on the size of a changed as the New York State tax rate relevant to that and is there any kind of loosen loose timeline on when you expect to see the benefits.
Sure. So I think I've been a broken record here and I'll start with it.
We love sports betting for what it simply does for fan engagement, it's great for the business there'll be long term. We believe it will have an impact on media values, it's great for the consumer experience at home and in venue.
But that's just the tip of the iceberg right. So then we can talk about what the market ability is here.
We're thrilled with the process the New York state's undertaken.
There's been some noise around.
Some of the rules, but let me just be really clear because I think it's important there is a minimum of two operators of two platforms and four operators. That's a minimum that's not the maximum.
The state can only select more and they may and they may not but when you look at the consortiums that have come together it gives us a lot of.
Of confidence that there's going to be significant competition and even if the minimum theres still before four players.
Competing to reach eyeballs and I don't think there's anybody who can reach sports fans out there for them.
We can in this market.
How far are reaches so and what assets we have when we think about.
Some of the other need facts out as well as if you review some of the applications I mean, so I'm one of the biggest consortium's, where one of the consortium spam dual drafting that MGM in bellies.
Forecast whereby year, three with a with a 50% tax rate they believe theyre going to deliver $1.3 billion to the state so that means theres $1.3 billion.
You have to play with.
To drive those that drive that business, which by the way includes some value for marketing that they baked into their business models that we don't you can tell from what's been public so far so.
To me that sounds like there's going to be a lot of competition to reach people and I think that we're going to be here or two.
To provide that service I will tell you that could be there might be multiple consortium there might be multiple operators a little question about exactly how it plays out but I think in any which way we feel very good that we're close with all of the major operators, both the new entrance as well as the.
The bigger more established longer term to entrance and we feel really good about what this means for our business.
Alright, Thanks, a lot.
Thank you. Your next question is from Brandon Ross of light shed partners.
Hi, guys. Thanks for taking the question it sounds from your prepared remarks, like Theres pretty meaningful consumer demands for for tickets for both the Knicks and Rangers could you talk a little bit about corporate demand specifically.
How those are looking and our whether corp. Corporates are interested in returning to entertaining and then a follow up.
Sure. Thanks Brandon.
So look again this has been a quite a year during the pandemic things that no one.
We operated three ways, we never thought we'd operate we had to be nimble in ways. We never have thought we'd have to be nimble, but I'll tell you. One thing that we stayed focused on was being customer friendly and that's across all of our business lines. So when I I'm going to take a little bit more of a macro view and then I'll get to your question specifically right. So when I look across our business lines with a view of what we consume.
Our friendly.
The first thing as you noted was ticket those came back the fastest quickest.
And gave us a lot of confidence.
But the way, even though we weren't moved from zero to 10% of speed, 10% to the playoffs.
That we were acting blind in terms of what consumer preference is going to be during these periods and the ticket buyers came back. So during that same period. When we look about suite holders for example.
We realized a number of events, we were having and.
To be honest during a pandemic corporate hospitality is not something that the corporations really we're focused on and.
And so we went to our consume our partner our our Sui buyers and we offered them the ability to postpone their suite contract can take a year off start October October one which will be again this coming October we allowed them to buy their suite during that period. So when we were at the point of the 10% there was not a lot of uptick.
But when we started getting towards the play out for the back of the season as people started feeling little more confident uptake started to increase in terms of our renewals and new sales.
They are coming along it's a little slower than ticketing and a little slower than our sponsorship business, which was.
It was the other business that we are very focused with during this during this period.
There was obviously, we had less assets to deliver to our partners, but the league's worked with US we found new premium opportunities and our partners wanting to be with us. They were a little it took a little bit to defrost, but theyre here and as we start looking forward.
We re signed chase is now going to stay with us as our marquee partner with a number of other renewals that are right in there on the horizon as well as some new partners that are coming in so we feel really good about the speed that we're going to come back and the team is really working to get back to pre pandemic levels.
So all in all I feel pretty good about our this business.
Okay.
Well you got me my follow up was on sponsorship you answered the question.
Totally Brandon.
Thanks, Brandon Christy, we'll take the next caller.
Certainly your next question is from David Karnofsky of J P. Morgan.
Alright, Thank you David to follow up on Ben's question.
NBA franchises as you noted have realized.
The price discovery through the sale of minority positions in there are willing buyers out there in the form of private equity now so.
Just wanted to ask you if thats something you would ever entertained for the next or Rangers.
So let me just start.
I'm not going to speculate on hypotheticals. So it's just it's not what we do but.
I should reinforce what I also said earlier the primary reason or one of the primary reasons for the spin was to better highlight our sports franchise values.
We've been very mindful of those transactions and leagues.
And I'll.
We just feel a lot of confidence in the value of our teams and we just don't think it's reflected right now appropriately reflected right now in the current stock price.
Okay.
Maybe can you just.
Talk on how you expect vaccine requirements to impact overall ticket demand and I know the city hasn't done this yet, but assuming they do bring back mass mass mandates for indoors.
How would you expect something like that to impact attendance or even per cash. Thank you.
Sure I'm happy to David.
Look I'll start with we've been.
We've learned to be very flexible and to operate very nimbly and quickly and turn our turn on a dime, but what I can say is I think we actually benefit from operating here in New York.
And we're very focused on this coming season, and the full having full seasons, which we expect to have for both the NBA and NHL.
We're expecting that full capacity.
And we're always focused on making in a safe environment for our customer. So again, we operate in New York, which benefits us in our fuel and a few is New York City as you mentioned is already requiring.
Indoor events for fans to be vaccinated. This is.
It's actually very positive for us so our market already has a very high vaccination.
That's very good for us too.
We were in this whole summer this whole year, we've been very focused on surveying and understanding what our consumers want and believe that and when we've done our service the overwhelming majority of our fans prefer a vaccinated event.
So it gives us even more more credence to make us feel good feel feels good about what we're doing.
And then finally, when we looked at the playoffs. So I'll give you a little inside and say basketball here instead of inside baseball, but.
When we went on sale initially we talked about having 90% vaccinated. The reason we started that way we had 10% unvaccinated was we didn't know how the vaccine where its going to vaccinate sections, we're going to sell at that time.
Other sports teams, who had tried vaccinated zones. They were miserable failures. So we really were the first of the kind and so we started off with a little unvaccinated little vaccinated in the vaccinated with selling and we started hearing the consumer demands. So we said, let's keep on going and we were able to drive the capacity and to be honest, we really were flying blind going into it we just didn't know.
What consumers were going to one and it was very clear we hope as we did our survey research, but again until you actually do it you never know the proof is in the pudding and it was there. So we know that this market once vaccinated films and when you look at other events that have occurred are on sales of other entertainment Broadway concert you see the vaccine that you see.
The demand in this market and so we feel good.
Very helpful. Thank you.
Thanks, David Christy, we will take one last caller.
Certainly your final question is from David Joyce of Barclays.
Thank you a few follow ups. Please on the sports betting side when do you expect to start generating revenue from.
Monetizing data.
Data feeds be it in overlays for broadcasts or other sources.
Lee on esports there was some news this week of Roc nation, starting to integrate its a pro sports athlete.
Clients in the esports world. So if you could in light of that could you update us on the status of the Knicks and Rangers E Sports brands and also you know.
Assuming that the esports is roughly a $1 billion 1 billion and a half market now around the globe.
Outside there and then finally, if you could just talk about what's the Knicks and Rangers salary cap and luxury tax levels are for the next year. Thank you.
Sure.
Sure.
Well, let's.
So let me work backwards I think Thats, probably this is Victoria you want to take the first question and then we'll go here yes.
Absolutely Andrew sure So David let me just.
I'll give you the information under salary cap and the luxury tax threshold. So.
But the 'twenty one 'twenty two seasons, the NHL salary cap threshold is $81.5 million, which is flat to last season.
While the NBA salary cap threshold is $112.4 million and that reflects.
<unk>, a 3% increase from last year.
And then finally, the luxury tax threshold.
It will be $136.6 million.
Thanks, So for from your other two questions in terms of our mobile sports betting.
I would say actually we are beginning to start monetizing today.
Just in the sense that we are able to right now new jerseys legal so we already had we have partners in this space now it's at a much smaller level right now.
I think the big next step will be when the state pyxis operators or have picked the platform and then the operators.
I could see us.
Entering into deals before that point, either exclusive or nonexclusive, but it might be until a point and we're working through it.
Three active right now and everyone following the timing.
But I think one important point is what is the tax level and how many players and those two things will trigger what occurs in the space in terms of our final opportunity to monetize here, but I do know there is an opportunity no matter, what because of the forest the minimum of four.
Operator, so it's I just I know, we've got an opportunity here.
In terms of esports so.
I would say.
We are so pleased with the way that the eyeballs have comment on this space. When you think about being able to 18 to 25, reaching a 34.
In terms of average engagement in terms of time spent I mean, they are up there with the big four.
It's not in the other down most of it in that demo so that to me says okay. We've got a business here.
How do we turn that into monetization has lagged a little bit because you really it's different than typical sport and so finding the right endemic partner finding ways to keep the fan.
Knowing that it's real it's part of their business is part of the game and it doesn't change the way people taken the sport is something that needs to be worked through but the key is there's eyeballs here and so you got to start with the eyeballs and so we feel really good about the long term.
Virginity.
I mean, right thing I think that probably some questions.
Thanks, David and thank you all for joining US today, we look forward to speaking with you on our next earnings call have a good day.
Goodbye.
Thank you everyone. This does conclude today's conference call you may now disconnect.
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