Q1 2022 Madison Square Garden Sports Corp Earnings Call

Good morning, Thank you for standing by and welcome to the Madison Square Garden Sports Club for fiscal 2022 first quarter earnings Conference call.

At this time all participants are in a listen only mode.

After the Speakers' remarks, there will be a question and answer session.

Ask a question at that time. Please press Star then the number one on your telephone.

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I would now like to turn the call over to Ari Danes Investor Relations. Please go ahead.

Thank you operator, good morning, and welcome to MSG Sports fiscal 2022 first quarter earnings Conference call.

Our president and CEO, Andy Lustgarten will begin this morning's call with an update on the Companys 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 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.

<unk> 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 and.

Non-GAAP financial measure and with that I'll now turn the call over to Andy.

And thank you for joining us.

As you know when we became a Standalone sports company, we announced in keeping with the cadence of our business that we would conduct earnings calls for the fiscal second and fourth quarters all of them.

While that remains our plan going forward given the still fluid operating environment due to the pandemic. We thought it was important to provide an update on our business <unk>.

Including some positive signs we're seeing across the company.

Which we expect will be reflected in our results over the balance of this fiscal year.

This positive shift is being driven by both consumer and corporate demand, which is continuing to improve any number of areas.

Take you through more details shortly but these areas include season tickets per caps for food beverage and merchandize suites and marketing partnerships.

We are not out of the woods yet.

There remain lingering effects of the pandemic in select areas of softness in the business. However, we are as confident as ever.

And our fundamentals and that we are on the path back to normal operations.

At the center of it all are tremendously valuable assets.

And Rangers.

Chronic franchises with dedicated fan basis that play in the largest media market in the world as.

As we discussed on our last earnings call.

They have recently been several precedent transactions across our leagues that highlight the robust value of professional sports teams. These.

These include minority stake sales with no public market liquidity.

Involving the Los Angeles, Lakers and golf Golden State Warriors.

Ported valuations of $5 billion.

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And since we spoke last quarter, there have been additional data points, specifically for our company.

Last month Forbes published its annual list of NBA team valuations with the Knicks, leading the league of five 8 billion.

In addition, <unk>.

Recently released its NHL team valuations listening the Rangers as the second most valuable franchise at nearly $1 9 billion.

These two valuations when combined are obviously well in excess of our current enterprise value of just over $5 billion.

And speak to the enormous and still untapped value of our marquee assets.

Let's now turn to our business operations.

The NBA and NHL 'twenty, one 'twenty two regular seasons are underway.

With both the Knicks and Rangers, having signed a number of key players to new contracts.

Since our last call. This includes the Rangers, reaching long term extensions with me because advantage Ed and Adam Fox.

We're extremely happy with the composition of our rosters in the direction of both teams.

After the disappointment of to shorten the seasons due to the pandemic. Both teams are scheduled to play full seasons. This year with no capacity restrictions at the garden.

And the response from our France fans has been tremendous.

We are extremely pleased with where we are on season tickets, which is the significant majority of tickets sold for both the Knicks and Rangers.

<unk> have a combined season ticket renewal rate of 94%.

We have also experienced strong sales for new customers season ticket packages.

The pandemic impact on international Tourism has however had a lingering effect on our group and individual tickets, which make up a minority of our overall ticket sales.

We are hopeful this will be mitigated by the loosening of international travel restrictions into the U S, which took effect this week.

Closer to home, we see other possible tailwind for ticket sales.

Office occupancy in New York City, while still very low has increased significantly in the past month and a half.

And according to a recent survey of major city employers by the partnership for New York City is expected to improve substantially by January.

In addition, the percentage of adults in New York State that have received at least one vaccination dose is now nearly 90% and.

And rising.

And the Cdc's recent approval of vaccinations for children could bring more families back to games.

So we think all signs are pointing in the right direction and we're also seeing particular strengths in other areas.

For example, the enthusiasm we've seen from fans who have been eager to watch their team in person has been terrific.

Not only are they bringing an incredible amount of excitement to the garden theyre spending and while it's still early in the season. This has led to strong double digit percentage increases in F&B and merchandise per caps compared to pre pandemic levels.

You've also seen this enthusiasm extend the corporate hospitality.

As our suite holders have started to entertain again at the garden.

In fact, so far this season average suite usage for the Knicks and Rangers is back to nearly 85% of historical levels.

This renewed interest and corporate hospitality has also helped axilla accelerate activity around suite renewals and new sales.

Our team has been working hard to return suite revenue to pre pandemic levels and we're pleased to say that.

Is that on a go forward run rate basis, we have achieved that goal.

Another proof point of corporate confidence has been engagement, we're seeing by our marketing partners.

<unk> been extremely supportive over the past 20 months and as we make our way back to normal operations. We are pleased to find the readiness to embrace existing partnerships, while also adding new ones.

As we mentioned on our last earnings call. This past summer, we renewed our marketing marquee partnership with Jpmorgan Chase.

Since then we've also successfully renewed deals with a number of our existing signature marketing partners, Lexus Anheuser Busch and square space.

While also adding a new signature partner to our roster infosys.

Infosys, a global leader in digital services.

In addition, we continued to complete other important marketing partnership deals, including our recent extension with Keith.

And our announcement that Benjamin Moore has joined as an official partner and helmet sponsor of the Rangers.

We applaud the NHL and NBA for their ongoing efforts to introduce new marketing partnership opportunities.

In addition to the NHL helmet sponsor last year also brought the introduction of a second NBA practice Jersey patch and virtual signage on the court for the NBA and on ice for the NHL.

The MBA has also expanded international sponsorship rights, increasing the number of sponsors a team can have while the NHL has approved the jersey patch for team starting next season.

We're actively in the market now for much of this new inventory.

The league's efforts also extend to embracing new sponsorship categories, such as sports gaming.

Just this week, we completed an agreement with that MGM, which represents our first significant partnership related to mobile sports gaming in New York State.

This expansive multiyear deal, which was done in partnership with MSG Entertainment <unk>.

<unk> deep integration with the Knicks and Rangers as well as across MSG entertainments portfolio, most notably at the world's most famous arena.

And this announcement is just the beginning.

That MGM is our first major sponsor in this important category.

Although we don't expect them to be our only partner.

As we begin to realize this tremendous opportunity this space represents for our company.

As you can see we are experiencing real momentum across our business driven by the strong desire of our customers and partners to fully engage with our assets and with each other.

We also see substantial upside.

<unk> across nearly all of our major revenue lines as our on court and on ice performance improve over time.

And while challenges remain as we continue to navigate this unique environment. We believe strongly in the value of our brands the incredible energy and excitement of our games and the enduring connection between our franchises and their fans.

And we are confident in our ability to drive long term value for our shareholders and with that I'll turn the call over to Victoria.

Thank you Andy and good morning, everyone.

I'll start by very briefly touching on our fiscal first quarter results.

Total revenues for the quarter were $18 8 million as compared to $57 million in the prior year quarter.

We also generated an adjusted operating loss of $28 1 million as compared with a loss of $17 8 million in the prior year period.

I would note that year over year comparability for the fiscal first quarter was impacted by the NHL and NBA <unk> returned to play in the prior year period.

Additionally, we held two pre season games in the current quarter versus none in the prior year period as the 1920 returned to play last year also caused delayed starts to the 2021 seasons.

More detail on our first quarter financial results can be found in our Form 10-Q, which we filed yesterday after market close.

In terms of liquidity, we continue to prudently manage our balance sheet.

As of September 30th we had $278 $6 million of liquidity.

Comprised of cash and cash equivalents and available borrowing capacity under our existing credit facilities.

And our total debt outstanding at quarter end was $385 million.

Looking ahead.

The balance of the fiscal year will primarily reflect the financial results of the 'twenty one 'twenty two seasons for the Knicks and the Rangers.

And as Andy discussed we are seeing positive momentum across virtually every revenue line of our business.

Food beverage and merchandise sales have been strong while suites and sponsorship revenue has essentially returned to pre pandemic levels on a go forward run rate basis.

In addition media rights revenue this fiscal year on the NHL side will reflect a significant increase as a result of the leagues, new National media rights agreements with Disney and Warner Media.

In summary, we feel very good about the trajectory of our business for the remainder of fiscal 2022.

And I believe our company is on the path back to normalized results.

With that I will now turn the call back over to Ari.

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

Ladies and gentlemen, as a reminder, at this time, if you'd like to ask a question. Please press star and then the number one on your telephone keypad.

Your first question comes from the line of David Karnofsky with J P. Morgan.

Alright, Thank you I just have one.

In light of the better outlook today is there any update you can provide on how you're thinking about capital allocation.

Or would you need the business to be to consider share repurchases. Thank you.

Hi, David It's Victoria. Thanks for the question, we've talked a bit about this before.

Of course, our number one priority is to ensure the health of our company and to protect our assets.

So as you know we took on additional debt last year to strengthen our liquidity position.

But now that our business is turning the corner, we've started to pay pay that down a bit and we're considering paying down more debt in the near term.

But looking ahead, we are very encouraged by the positive signs, we're seeing across our business and we do feel really confident about our long term outlook and overtime. We will look at all options for utilizing our free cash flow.

Yes.

Okay. Thank you.

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

Thanks, Good morning.

Andy could you talk a little bit about sort.

Sports betting as it relates to your two more key franchises in sort of the opportunity there not just what you've signed with with bet MGM, but looking longer term do you see this as a evolving.

<unk> for the leagues that have historically been a bit reticent about embracing sports betting do you think this becomes a bigger and bigger part of the business and revenue profile of the teams over the longer term and then maybe just taking another quick crack at the balance sheet is there sort of a REIT debt level for this kind of business I know the leagues.

Are involved in approving leverage or have at least a role to play there, but I don't know if theres any kind of framework you could think we could think about for.

The optimal capital structure for a business like this just to pick up on the last question. Thank you.

Thanks Ben.

Let's start with your <unk>.

Sports gaming question.

So I'll start and I start every time at the same comment because I think it's super important.

This to me sports gaming for US Sports give me reflects to offer two points one today and two tomorrow and what I mean by that is as gaming continues to take adoption it will drive viewership and engagement.

We're shipping engagement pays off.

Today with some ticket prices, but long term with what we're able to do through with our sponsors and eventually launch and even longer term with our media deals. So it's a very valuable.

[noise] tool and an inventory of driving engagement and enthusiasm for the sport.

Second today, so today, obviously, New York just opened.

Granted the nine operators their licenses bet MGM as our first partner as we mentioned we feel really good about that partnership as a sports team we have lots of ability to drive revenue out of that of those sports partner. So specifically here at MSG sports.

<unk> teams.

Have an own all premium signage so on court on ice.

Courtside rotation.

Some of our other premium assets.

His helmet stickers et cetera, right. So those are all assets that we are controlling on.

Second.

Initial partner designation that has a tremendous amount of value both in market and so depending on who our operators could even be international value.

But even the thing seems to be even more driving the gaming interest enough is our access to our consumers both through in venue and through direct relationships digitally.

Et cetera and database so.

Of course, not surprisingly that's the largest group of people the people who are most likely to game and so hence the most likely the most interested or a gamer.

Gaming company, so there's lots of opportunities for our sports team to drive revenue.

Through our relationship with MSG Entertainment.

Also Sharon.

Any exposure right here at the arena, so to remind you all fixed arena signage in all entitlements.

Our shared.

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Very robustly between the two entities between MSG sports and MSG Entertainment.

And again, MSG entertainments being able to represent across the network the arena.

MSG entertainment as well as EMS.

MSG sports, we're able to offer a partner a much larger package and offering than anybody else can and I believe it's going to be reflected in what we're able to generate in this category, because we're going to be able to deliver.

Customers and interest like nobody else can and the largest market or.

Or it's forecasted to be the largest market. So that's why we've seen what we think we have been off to a fast start we've had a lot of interest from.

The other eight remaining.

Gaming partners or licensed stores.

And we think there's going to be a really big opportunity for our company. Both as I said in the near term as well as in the long term.

Got it.

Yes, Ben It's Victoria, Let me follow up on your second part of your question there. So.

We're not going to provide.

Guidance on a leverage target, but let me just remind you just two quick points I mean first of all the amount of debt that we can incur is capped by the leagues.

That's sort of the first point and I think the second point is to just as a reminder, we are looking at paying down some of the some of the debt in the near term as we just closely track how the business continues to perform.

Got it thank you.

Your next question comes from the line of Brandon Ross with <unk> partners.

Hi, good morning.

I know we discussed this a lot yesterday MSG E call, but there's lots going on with our sense now with especially with the MSG and Comcast dispute and all the rhetoric out of the leagues with potential alternative local broadcast models and.

I wanted to ask you Andy how you see the arts and go system playing out over the next several years and what do you think the impact will be on your teams and then more specifically is there a scenario where you see needing to renegotiate your deal with networks and what are you.

Your overarching goals.

The arts and business takes on new models.

Alright, thanks, Thanks, Brandon So let's start at the top so.

Let's just some simple facts right, we have a very long term local media contract with annual escalators.

<unk> is strong.

For both teams that are not subject to any economic changes based on distribution right.

And I'd say, we have the utmost confidence in our partner in MSG network ability to.

Drive distribution and drive value right. So taking a step back so that's from a team point of view.

Taking a step back I think at a macro point of view.

We strongly believe in the value of professional sports content.

Especially premium sports content like the Knicks and Rangers.

If you take any point in time over the history of sports media rights have been created if you've been an investor in and you've succeeded it's been a great investment over any sustained periods of time can there be hiccups in any some short per order sure, but when you take a long term view about what sports media rights are.

Great asset to own.

Right now we have a long term partner, who owes who hold those rights.

But I love being the Grand tour of those rates.

And when you take a look again just to.

I think the point about the great long term investment look at the latest the NHL deal very strong.

Deal for out of the NHL.

We expect a very strong deal out of the NBA when their rights come up.

And so yes, the landscape is evolving yes, there is some.

Noise in the market right now.

But having those rights and the ability to exploit it.

There's going to be more than enough ways to monetize our content.

And so.

We feel very good about it I would get to your question about.

Uh huh.

How we see it feel about it how.

How do we feel here about Knicks and Rangers.

So one I would say look our goal is obviously to maximize distribution to drive revenue sponsorship ticket distribution drives on your question about a renegotiation.

I'll start by saying.

Again, we feel very strong about what the value of owning rights. So that's the first point, but secondly, just in terms of thinking about our ability to renegotiate or not renegotiate remember that first any changes to our contract would go through have to go through the leagues and then go through our independent board.

So.

I think there is a very strong view that we have we feel very good about our rights here and our rights fees.

And I would also speak say that while I can't speak for other leagues.

We feel very confident in both the NBA and NHL is understanding and recognition of the importance of the <unk> and are very focused on finding a path forward to protect this overall ecosystem for both which includes the belief the teams and their networks. So I think this.

We feel very good about being <unk>.

It'd be a beam rights holder just to conclude Friedman.

Thanks, and just one more.

For the first time in a long time, both the Rangers and the Knicks are off to really good start.

And was wondering if you could remind us or help us.

About the buckets of financial upside from good team performance I know most of the tickets for bulk games are sold in advance, but and sponsorships locked in but what are the other buckets that could really accelerate.

Financial performance from the teams playing well.

So I'm going to split that in your question Brandon into two part short term long term short term there's always.

As we've talked about in the past, we're very focused on having a direct relationship with our customer and going after the high volume of sellers. So we.

We do sell independent tickets and we very much variably priced those tickets. So there is upside in our independent tickets individual tickets as team performs in any single season.

Let's take a more macro point of view and what it what it would look like a sustained team performance because I think thats really what your question is.

And how that could impact positive positively impact value.

Right. So let's just start let me remind you we have a number of revenue streams that are fixed and contractual media rights.

<unk>.

Both set from our leagues.

Our.

And MSG network.

Set escalators our suites in our sponsorships those are locked the ones are currently signed are locked also long term set with escalators, obviously theres ability to sell incremental sponsorship and open up new categories or new are fine.

Assets to sell we've mentioned about how the league's focus on releasing new assets for us. So again, we're able to go and monetize those and that will be impacted by team performance.

Sure.

But over time.

And again, I guess I would say in the short order is obviously theres playoff performance and during the playoffs.

All of US are very valuable in terms of incremental gate.

And it's actually if you go deeper in the playoffs you earn big.

Big pieces of incremental revenue.

But that also has a long term impact because as team performance not only do you increase from that year's playoffs, but you'll have follow on follow on benefits from.

Increasing.

Season ticket renewals and as you know historically.

We only reevaluate chicken prices after a playoff run so again further upside as teams perform.

The other place that is both effective today as is or in an individual suite sales.

But over the long term when suite licenses or in sponsorship deals come up we're able to drive different prices.

Through both of those types of through both of those either renewals or new sales.

Memberships as well I'd say the same so.

To conclude I'd say look we've got a number of this business that we feel very strong about this business. We have a number of fixed revenue streams that provide a really strong ballast for our company and to performance in any given year, but with sustained team performance.

Over time, I could certainly accelerate revenue growth and new revenue growth for this company.

Great. Thanks, so much.

Thanks, Brandon operator, we have time for one last caller.

Your last question comes from the line of John <unk> with Wolfe Research.

Thank you Andy this may be somewhat related but given your comments on.

New marketing partners can you give more color on upside from here you talked about that even more are there any other categories, where you're underpenetrated and how meaningful could that Cherokee patch opportunity might be for the Rangers and with that revenue potentially had next season.

Sure. So lets you asked a few questions in there I think I'm going to move through it.

I'll try to answer them, all and if I missed one John just to just jump in and let me know.

Let's start with the NHL pass because I think it ties into your question about what our opportunities in categories.

What's great about it NHL patch or anything or any type of anytime a league opens up some premium new inventory, it's not only the revenue we're able to drive from that actual asset or that inventory, it's what you're able to deal with the whole partnership. So I'll give you. The example of square space in the Knicks Jersey patch, we're able to generate a nice.

Have a nice partnership through both through the patch of the sale of the patch, but enabled us enabled us to open up a whole new category of signature partner and sell a whole number of other assets.

And drive our rate card there. So it's not only about the actual inventory, it's about what youre able to do with the inventory and what we find is when you have the premium inventory youre able to go and create new partnerships based around ownership of that premium inventory. So the NHL patch when it comes online next year will drive revenue there but.

Our expectation is we will be selling it this year sometime through the year to get into place next year, we could reach a partner earlier and start selling some assets around that obviously the big the big piece of it will be when the patch opens up next season, but there is opportunity this year.

Promising that we're going to reach it because we do want to figure out how to maximize that category and maximize that asset so.

So we will be patient because what we do also understand is that premium assets to sell them correctly, you want to be a little patient you don't want to rush to market or else you will not drive the maximum revenue from it.

But when we take a more macro point of view about marketing partnerships categories. Other types of assets that we have we think there is.

We think we have a lot of upside still.

I think we already mentioned our marketing partnership business is back to pre pandemic levels already we're very proud of that on a go forward basis.

Sports betting took us to exceeding our pre pandemic level.

Yes.

When we measure ourselves against number of metrics, we're able to see across different categories, where people are spending there are certain categories. We have yet to tap into crypto currency, it's a very big opportunity both.

The leagues have already reached a certain teams theres been a naming rights partner in Miami I mean, it's been it's pretty significant category and it's one we're focused on right now fitness and health companies such as peloton, what fitbit, they're all looking to reach.

<unk>.

Customers and our customers' health insurance.

Home improvements. These are all categories, we really haven't tapped into yet.

We have a number of premium assets, we already talked about the NHL patch coming but international rights in the MBA, that's a big big asset we have in <unk>.

We haven't fully maximized, yet and I mentioned also in the in the MBA.

While we have a current patch partner when that patch comes to market. We believe there is huge upside there as the market seems to really have moved in that space in terms of what some of the teams who just recently.

Signed deals where there had been able to realize so we think there's big upside there as well.

And we think there is a huge advantage in the way we go to market being able to sell across with our partner and MSG entertainment being able to sell across the network across the arenas across fixed assets and across the teams and being able to provide.

And to be able to provide a holistic solution for our partner enables us to drive premium revenues for both for the sports for our teams. So we think it's a great opportunity here.

So we think just to reiterate we feel really good about where we are but we feel even better about where the future is.

Yes.

Alright, thank you.

I'd like to turn the call back now over to Ari Danes for any closing remarks.

Thank you all for joining US we look forward to speaking with you on our next earnings call have a great day Goodbye.

Goodbye.

Ladies and gentlemen, this concludes today's conference call. We thank you for your participation you may now disconnect.

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Yes.

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Operator.

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