Madison Square Garden Sports Corp. (NYSE:MSGS) Q2 2024 Earnings Call Transcript

Madison Square Garden Sports Corp. (NYSE:MSGS) Q2 2024 Earnings Call Transcript February 6, 2024

Madison Square Garden Sports Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. Thank you for standing by and welcome to the Madison Square Garden Sports Corp. Fiscal 2024 Second Quarter Conference Call. [Operator Instructions] I would now like to turn the call over to Ari Danes, Investor Relations. Please go ahead.

Ari Danes: Thank you, operator. Good morning and welcome to MSG Sports’ Fiscal 2024 Second Quarter Earnings Conference Call. Our President and COO, David Hopkinson, will begin this morning’s call with an update on the company’s strategy and 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 forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Please refer to the company’s filings with the SEC for a discussion of risks and uncertainties. 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 David.

David Hopkinson: Thank you, Ari and good morning, everyone. With the ’23, ’24 NBA and NHL seasons now more than halfway complete, I’m pleased to say that our positive operating momentum from last year has carried forward into fiscal ’24. This momentum is reflected in our fiscal second quarter results, with revenues of approximately $327 million and adjusted operating income of $37 million. While reported results reflect nine fewer Knicks and Rangers home games at the Garden versus the prior year period, per game revenues across nearly every key category, including tickets, suites, food and beverage and merchandise were up compared to the fiscal ’23 second quarter. These results highlight the sustained enthusiasm we continue to see from our sales and partners and the strength of our marquee sports franchises.

It also reflects our ongoing success in executing on opportunities to grow our business, including maximizing ticket revenue through season ticket renewals, increases in ticket yield and sell-through, introducing new premium hospitality products and forging deeper relationships with our fans. We also continue to benefit from contractual growth in media rights. With these successful initiatives and numerous avenues for growth ahead, we believe we are very well-positioned to create long-term value for shareholders. Now let’s discuss our business in more detail. Both the Knicks and Rangers have had strong starts to their seasons. In December, the Knicks qualified for the quarter finals of the NBA’s first ever in-season tournament. This was followed by a significant trade for OG Anunoby, Precious Achiuwa and Malachi Flynn, and we’ve been very pleased with how the team has performed since then.

More recently, we were proud to see Julius Randle and Jalen Brunson selected as 2024 NBA All-Stars. And for the Rangers, just this past weekend, Igor Shesterkin, Vincent Trocheck and our head coach, Peter Laviolette, represented us in the NHL All-Star game. With a couple of months left to go in the regular season, both teams are in playoff contention and we look forward to watching the remainder of the seasons unfold. Complementing strong team performance has been the sustained enthusiasm from our fans. As you know, season tickets comprise the significant majority of our ticket revenue. And this season, our average combined renewal rate was above 94%. This is particularly notable, as it takes into account a larger renewal base than last year and season ticket price increases for both teams.

Combined with group tickets and individual tickets, we saw year-over-year increases in both average ticket yields and average paid attendance on a per game basis in the fiscal second quarter. The enthusiasm from our fans has also been evident at the arena, with food and beverage and merchandise per capita spending up almost 10% as compared to the fiscal ’23 second quarter. In addition to our in-arena success, we continue to look for ways to drive deeper fan engagement and build the next generation of fans, including through original merchandise offerings, as well as exciting fan experiences and digital content. On the merchandise front, we continue to focus on introducing compelling offerings that our fans value. Whether it’s this year’s third jersey for the Rangers, their special edition jersey for next week’s outdoor stadium series game, or our exclusive one-off collaborations like with Siegelman Stable for the Knicks and global rock-band kits for the Rangers.

Our innovative initiatives this season have generated tremendous fan interest. We also saw robust fan interest when we welcomed thousands to the Knicks ’23, ’24 season tip-off event at the Garden in October. In addition to watching the Knicks practice, this free event included a celebrity basketball game and Knicks alumni meet and greets. It also demonstrates how we’ve been leveraging opportunities to create engaging content for our broader fan community on our digital platforms. In total, content covering our season tip-off event generated more than 29 million impressions, including over 18 million video views on social media and digital platforms. We’ll continue to look for unique avenues to deliver compelling content to our digital platforms that highlight our players and teams in an effort to forge stronger connections with both our avid and casual fans.

Turning to marketing partnerships. We’ve also brought in a number of new marketing partners so far this season, including Beyond Meat, Pfizer, NEXEN TIRE and Oura ring, amongst others. At the same time, we continue to benefit from our existing agreements with our strong roster of core marquee and signature partners. And this past fall, through our sponsorship sales representation agreement with MSG Entertainment, we began a new relationship with Oak View Group and Crown Properties Collection that presents new opportunities to expand our sponsorship business over the long-term. In terms of premium hospitality, this fiscal year, we are seeing record suite revenues driven by strong new sales and robust renewal activity as well as the addition of new premium products at the arena.

In October, the Garden opens two new event-level suite products, which have been very well received. The first, an event-level suite has already been licensed through the multiyear agreement. And the second, which is a luxury club space is nearly sold out. We are pleased with our momentum in premium hospitality and remain poised for continued growth in this area of our business. Turning to media rights. We continue to benefit from increases in local and national media rights fees due to ongoing annual contractual rate escalators. At the same time, we continue to see enthusiasm from audiences for live sports. The NBA’s viewership across ESPN, ABC and TNT remains strong. And with the NBA’s national media rights agreements coming up for renewal after the ’24, ’25 season, we remain optimistic about the media rights opportunity ahead.

At the local level, both Knicks and Rangers have seen robust viewership trends this season with local ratings for both up double digits compared to the same time last year. Before I turn the call over to Victoria, I’d like to touch on the recent third-party valuations across our leagues. In December, Sportico published its annual ranking of NBA team valuations, with the average team value up 33% from last year. That same month, Forbes released it updated NHL team valuations, with average team values increasing 29% year-over-year. These rising third-party valuations reflect not only the scarcity of these assets, but the strong underlying business fundamentals and significant growth opportunities for both of our leagues, all of which reinforces our confidence in the value of owning these two iconic sports franchises.

We are pleased with how our business is performing and remain confident in our ability to deliver long-term shareholder value. With that, I will now turn the call over to Victoria.

Victoria Mink: Thank you, David, and good morning, everyone. I would like to start by reviewing our fiscal 2024 second quarter financial performance and then provide an update on our balance sheet. Results for the fiscal second quarter reflects preseason play and the start of the ’23, ’24 regular seasons for the Knicks and Rangers. In aggregate, we hosted 32 pre- and regular season games across both teams as compared to 41 games last year, which impacted the year-over-year comparability of results. I’d also note that our fiscal third and fourth quarters will reflect nine additional home games in total as compared to the prior year periods. Turning to our results for the fiscal second quarter. Total revenues were $326.9 million as compared to $353.7 million in the prior year period, which reflected the impact of fewer home games at the Garden versus the prior year, partially offset by increases across nearly every key revenue category on a per game basis.

Event-related revenues of $122.4 million, which mainly consists of ticket, food, beverage and merchandise revenue decreased 14% year-over-year, while suites and sponsorship revenues of $69.3 million also decreased 14% year-over-year. National and local media rights fees of $122.5 million increased 4%, primarily due to the impact of contractual rate increases on our local and national media rights deals. Adjusted operating income decreased $27.4 million to $37 million, primarily due to the decrease in revenues and to a lesser extent, an increase in direct operating expenses partially offset by lower SG&A expenses. AOI for our fiscal ’24 second quarter includes $9 million of noncash arena license fee expense as compared to $12.2 million in the prior year period.

The increase in direct operating expenses primarily reflects higher team personnel compensation as well as higher revenue sharing expenses net of escrow. This was partially offset by lower arena license fee expenses due to the nine fewer regular season games played at the Garden during the current year period and other net cost decreases. The decrease in SG&A expenses was primarily due to lower employee compensation, a result of executive management transition cost recognized in the prior year period and lower other general and administrative expenses. As we look ahead, we continue to expect our business to deliver revenue growth in fiscal ’24, excluding the impact of the playoffs. Our AOI will reflect the growth in revenues, along with higher team operations’ expenses and league-related costs.

Turning to our balance sheet. As of December 31, our cash balance was approximately $38 million and our debt balance was $360 million. This was comprised of $275 million under the Knicks’ senior secured revolving credit facility, $55 million under the Rangers’ senior secured revolver credit facility and $30 million advanced from the NHL. Our cash and debt balances both reflect a total of $40 million of repayments under our senior secured revolving credit facilities during the quarter. Regarding liquidity, as of December 31, we had $233 million of liquidity, comprised of $38 million of unrestricted cash and cash equivalents and $195 million in borrowing capacity under the team’s revolving credit facilities. Based on the momentum we’ve have seen in fiscal ’24 and the opportunities ahead to drive long-term growth, we remain confident in the trajectory of our business.

And with that, I will now turn the call back over to Ari.

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

See also 10 Best Cheap Car Insurance in New York for 2024 and 11 Companies that Just Started Paying Dividends.

Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of David Karnovsky from JPMorgan. Your line is open.

David Karnovsky: Hi. Thanks for the question. First, on your RSN distribution, your partner MSG Networks has a material debt maturity coming up in October. And I wanted to see if you think there’s a role or opportunity for you to play in that process, just given your — the largest cost item for them. And then secondly, on the Sphere jersey patch agreement, are there any incremental details you’d be willing to share here financial, deal length or maybe even just relative to the prior partnership you had there? Thank you.

David Hopkinson: Hi, David. Thanks for the questions. With respect to MSG Networks, if we take a step back, we all know the media landscape is evolving, but we believe strongly in the value of live professional sports content and especially in the case of premium content like the Knicks and Rangers. We are also fortunate that we operate in the nation’s largest media market, so that benefits us and MSG Networks. So we have the long-term local media contracts in place with MSG Networks, the agreements that provide exclusive local distribution of all of our live content, including the digital and they’re a great partner of ours. We are supportive of what they’re doing on the distribution front, including their new direct-to-consumer offering MSG+.

I think you know MSG+ allows sports fans in our market that do not currently subscribe through a traditional linear TV package to access live Knicks and Rangers games. So, look, we believe having sports rights has proven to be a great investment, especially over the long-term and we remain confident in that as we continue to look ahead. Your question on Sphere and the Patch, we don’t discuss the specifics of any individual marketing partnership detail of any deal. So we are not going to share any details on that, but what I will tell you is that we’re proud of this agreement, which brings together two globally recognized sports entertainment brands. And we think this creates an exciting partnership, right at the intersection of sports and entertainment.

David Karnovsky: Thank you.

Operator: Your next question comes from the line of Brandon Ross from LightShed Partners. Your line is open.

Brandon Ross: All right. I’ll spare you my trade deadline questions, but your stock still trades at a pretty sharp discount than PMV. I know you’re bullish about the values of sports teams in the future. But right now, there’s a pretty big gap to close. And you definitely have tools to help close that gap. In the past, you’ve talked about minority sales. And last year, you did a pretty successful buyback, do you intend to employ any of these tools in the near future? And just generally, how do you think about closing that gap in short order?

David Hopkinson: Sure. Thanks, Brandon. Yes, you used the word confident and that’s how we feel, and I referenced in my earlier remarks, those third-party valuations, which — I mean those just really affirm our conviction. We agree with you. We don’t think that our stock price today appropriately reflects the value of our assets, which are incredibly scarce but also with really strong business fundamentals. So specifically, our job is to maximize ticket revenue through season ticket renewals, increases in ticket yield, sell-through, continue to build on renewal and new sales momentum in premium hospitality, while also introducing new premium products like the two event-level suites. We’ve got a new relationship with Oak View Group and Crown Properties Collection to maximize our valuable sponsorship inventory and expand our sponsorship business over time.

And we continue to work on focusing on building new and even more direct relationships with our fans, which drive enhanced results across every aspect of our business. Our media rights are strong and continuing to benefit from annual contractual growth and we talked about an upcoming renewal in the NBA after next season. So we are as confident as ever in the value of our teams. You asked about a minority stake sale. And while we would never rule out the possibility of a minority stake sale, I have nothing to report at this time. Victoria, do you want to take about capital allocation?

Victoria Mink: Sure. Good morning, Brandon. So when it comes to how we think about capital allocation and the sort of the disconnect between our stock price and the values, our priorities remain the same. First, we want to maintain appropriate liquidity to fund our operations and invest in our core business. Second, we want to make sure we have a strong balance sheet. And to that extent, we have been prioritizing debt pay down, given the high interest rate environment that we are in, including the $40 million of repayments under our senior secured revolving credit facilities that we did during this fiscal second quarter. But third, we plan to be opportunistic about our uses of our cash flow and we will keep all options open, right?

As you mentioned, last year, we did return $250 million to shareholders through the $173 million cash dividend and the $75 million accelerated share repurchase program, that leaves us today with still approximately $185 million remaining under our share repurchase authorization. And that first ever return of capital to our shareholders was really a reflection of the strength of our business and the confidence in the value of the sports franchises, as Hop was talking about. And we are pleased to see that positive operating momentum has carried forward. So we feel really good about our business and the opportunities ahead to continue to drive long-term value for our shareholders.