Madison Square Garden Sports Q4 2023 Earnings Call Transcript

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August 17, 2023

There are 8 speakers on the call.

Operator

Good morning. Thank you for standing by, and welcome to the Madison Square Garden Sports Corp. Fiscal 2023 4th Quarter and Year End 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.

Operator

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

Speaker 1

Good morning, and welcome to MSG Sports' fiscal 2023 4th quarter and year end earnings conference call. Call. Our President and COO, David Hopkinson, will begin this morning's call with an update on the company's strategy and operations. Call. This will be followed by a review of our financial results with Victoria Mink, our EVP, Chief Financial Officer and Treasurer.

Speaker 1

Call. After our prepared remarks, we will open up the call for questions. If you do not have a copy of today's earnings release, call 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.

Speaker 1

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. Call. 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 45 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.

Speaker 1

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

Speaker 2

Thank you, Ari, and good morning, everyone. As we look back on fiscal 2023, I'm pleased to say it was another exceptional year for MSG Sports, highlighted by strong financial results and exciting seasons including playoff appearances from both the Knicks and Rangers. For full year fiscal 2023, we reported revenues of $887,000,000 a new record for the company, as well as adjusted operating income of $115,000,000 Growth was broad based with every key revenue category, including tickets, suites, marketing partnerships and media rights exceeding fiscal 20 22's record level results. These results are a testament to the strength of our marquee sports franchises and the enthusiasm we continue to see from our fans. They also reflect the sustained demand from corporate partners for our valuable team sponsorship assets and premium hospitality offerings of The Garden.

Speaker 2

As we embark on a new fiscal year, our strategy for the business remains unchanged. We are focused on capitalizing on the strong performance of our teams, while at the same time executing superbly on the many opportunities we see to grow our business. That includes maximizing ticket revenues through increases in both ticket yield and average per game attendance, introducing new premium hospitality products to meet robust ongoing corporate demand building on our strong relationships with our fans, which benefits almost every revenue line across our company, expanding our marketing partnerships business with our premium inventory and benefiting from continued contractual growth in MediaRite. We will also continue our opportunistic approach to capital allocation, which this past year include our first ever return of capital since becoming a pure play sports company in fiscal 2020. Call.

Speaker 2

So with positive operating momentum heading into fiscal 2024 and numerous growth opportunities ahead, we are well positioned to create long term value for our shareholders and we remain as confident as ever in the value of owning 2 of the most recognized franchises in professional sports. Both the Knicks and Rangers had strong regular seasons this past year, resulting in playoff appearances for both teams. Call. For the Rangers, we were encouraged to see the team in the playoffs for the 2nd consecutive year. The team has since had a productive off season, including naming Stanley Cup winning Peter LaViolette as the team's new head coach and adding several talented players in the draft and free agency.

Speaker 2

For the Knicks. The season concluded with the team advancing to the Eastern Conference Semifinals and with a number of key players secured under long term contracts, We're looking forward to building on last year's success in the upcoming 2023 2024 season. And it's clear our fans are excited too, following another season of their unwavering support. In fact, average paid attendance and average ticket yield were both up this past regular season as compared to fiscal 2022, which drove substantial ticket revenue growth year over year. And while season tickets, which comprise the significant majority of our ticket revenue, certainly had a lot to do with it.

Speaker 2

We were also pleased to see average tickets sold per game for individuals and groups not only exceed the prior year, but also the pre pandemic fiscal 2019. As we look forward to next season, we're already seeing this ticket momentum carry forward. For example, the average combined season ticket renewal rate for the Knicks and Rangers upcoming seasons has climbed to approximately 93%, which is on a larger renewable base than last year and also reflects season ticket price increases for both teams. And our fans have continued to demonstrate their excitement to root on their favorite teams in person beyond ticket sales. This includes through food and beverage and merchandise per capita spending, where we saw high single digit percentage increase as compared to fiscal 2022, which if you recall had exceeded pre pandemic levels by a double digit percentage.

Speaker 2

On the merchandise front, we continue to showcase bespoke offerings, some of which is exclusively available at The Garden. We completed another successful year of collaborations with Jeff Staple with the Rangers and with Kith with the Knicks. And it's clear that these offerings are resonating with fans as merchandise revenue in the regular season hit new highs in fiscal 2023. We will continue innovating our products and potential partnerships in the year ahead. As we do with merchandise, when it comes to our fans, we are always looking for Fresh ways to deepen our connections with them, while also creating opportunities for new fans to join our community.

Speaker 2

That includes our Fan First program, which is aimed at leveraging innovative technologies to get tickets directly into the hands of our fans. We piloted this program during the playoffs and intend to roll this initiative out more broadly this coming year. It also included special events this past season, such as our playoff watch party at the Garden during the next 2nd round against the Miami Heat, as well as Rangers open practice at the arena, both of which welcomed thousands of fans. On a similar note, We've been increasing fan engagement outside The Garden, including across our digital platforms. We launched our 1st order podcast this past fiscal year, hosted by legendary Rangers goalie, Henrik Lundqvist.

Speaker 2

We'll continue to enhance our social media presence through compelling content and a diverse roster of influencers. In total, we added over 1.7 net new social media followers this past year, bringing the Knicks and Rangers combined following to over $18,000,000 as of the end of the fiscal year, an increase of more than 10% for fiscal 2023. Turning to marketing partnerships, Looking back at fiscal 2023, we continued to benefit from sustained sponsorship demands for our valuable assets. We saw robust renewal activity from existing Signature partners, including Verizon and Spectrum. And we also welcome the new partners to our roster, including signature partner Hub International, as well as MSC Cruises.

Speaker 2

In fact, MSC Cruises became our 1st official global partner of the Knicks, demonstrating the international appeal of the Knicks brand. As we build on this momentum, we'll continue to pursue other valuable sponsorship opportunities, including potential global partners for the Knicks and jersey patches for either team. Robust corporate demand has also extended to our premium hospitality business, where we once again saw record revenues for the year. Our strong renewal rates and new sales activity have positioned us well for fiscal 2024 with the majority of our suites under multi year agreements. And in partnership with MST Entertainment, we expect to further capitalize on that demand with the addition of 2 new event level suites for the upcoming seasons.

Speaker 2

Turning to media rights, in fiscal 'twenty three, we benefited from ongoing contractual escalators from our local and national media rights fees. At the same time, fans continue to show their enthusiasm to watch their favorite teams live with strong viewership trends across traditional media. For example, the NBA playoffs, which were aired on ABC, ESPN and TNT were the most watched post season for the league in the past 5 years. And on the NHL side, this year's postseason was reported as the most watched ever on cable for the league. So it's clear enthusiasm to watch live sports remains strong.

Speaker 2

And with the upcoming NBA media rights renewals after the 202425 season, we remain bullish on the opportunity ahead. With the positive momentum we've seen in our business, the growth opportunities in front of us and the record level franchise transactions we see across the professional sports landscape, we remain extremely confident in the underlying strength of our iconic franchises and our ability to drive long term shareholder value. With that, I'll now turn the call over to Victoria.

Speaker 3

Thank you, David, and good morning, everyone. In a moment, I'll discuss our financial results for both the full year and 4th quarter and then provide an update on our balance sheet. Before I do so, I would like to note that we have revised our definition of adjusted operating income as it relates to the Arena license fees with MSG Entertainment. We are no longer adding back the non cash section of the Arena license fees in our reconciliation of operating income to adjusted operating income, which is reflected in the financial results we reported today for all periods presented. As you know, The Arena license fees are recognized on a straight line basis over the life of the 35 year agreements, which equates to approximately $68,000,000 in annual rent expense.

Speaker 3

In fiscal 2023, this $68,000,000 of expense was comprised of approximately $42,000,000 of cash expense $26,000,000 of non cash expense. We will continue to provide the non cash component of the Arena license fee on a quarterly basis as part of our discussion of results of operations. Turning to our financial results. For fiscal 2023, we generated total revenue of $887,400,000 and adjusted operating income of $115,000,000 which, as David mentioned earlier, included growth in every key revenue line. Now turning to our fiscal 2023 Q4.

Speaker 3

Our results for the quarter continued to reflect robust demand for our teams as they completed their 2022, 2023 regular seasons followed by playoff appearances from both the Knicks and the Rangers. I would like to remind you that the prior year quarter reflected extended timing of the 2021-twenty 2 NHL regular season, which impacted both game count as well as certain revenues and expenses being recognized over a longer time frame in the prior fiscal year. In total, there were 8 fewer Knicks and Rangers regular season home games played in the current year quarter than the prior year period. In addition, there were 2 fewer playoff home games this year as compared to the prior year period. These factors affected year over year comparability and as a result, total revenues for the quarter were $126,900,000 as compared to $175,200,000 in the prior year period.

Speaker 3

Event related revenues of $70,200,000 which mainly consists of ticket, food, beverage and merchandise revenue inclusive of the playoffs decreased 29% year over year, while suites and sponsorship revenues of $20,300,000 also inclusive of the playoffs decreased 41% year over year. These decreases reflect the fewer games played at The Garden during the current year period. In addition, the decrease in event related revenues also reflects lower average per game playoff revenues for the Rangers, primarily a result of the team advancing to the Eastern Conference finals in the year ago quarter. Call. In addition, national and local media rights fees represented $28,600,000 of revenue this quarter.

Speaker 3

Adjusted operating income decreased $37,300,000 to a loss of $7,800,000 primarily due to the decrease in revenues, partially offset by lower direct operating expenses. AOI for our fiscal 2023 4th quarter includes $1,400,000 of non cash Arena license fees expense as compared to $3,700,000 in the prior year period. The decrease in direct operating expenses included lower arena license fee expenses and other team operating expenses, quarter, both primarily due to fewer regular season games played at The Garden during the current year period, as well as increase in net provisions for league revenue sharing expense, net of escrow. These decreases were partially offset by higher net provisions for certain team personnel transactions. Guidance.

Speaker 3

As we look ahead, we believe our business is poised to deliver revenue growth in fiscal 2024, Turning to our balance sheet. At the end of the quarter, we had $325,000,000 of total debt outstanding comprised of $235,000,000 under the NICS senior secured revolving credit facility, dollars 60,000,000 under the Rangers senior secured revolving credit facility and $30,000,000 advanced from the NHL. Our quarter end cash balance of approximately $40,000,000 represented a net decrease of $25,000,000 compared to our March 31 balance of $65,000,000 Our cash and debt balances both reflect a total of $55,000,000 of repayments under our senior secured revolving credit facilities during the quarter, which brought our total debt pay down in fiscal 2023 to $140,000,000 With regards to liquidity, as of June 30, we had $270,000,000 of liquidity comprised of $40,000,000 of unrestricted cash and cash equivalents and $230,000,000 in borrowing capacity under the team's revolving credit facilities. Based on the momentum we're seeing heading into fiscal 2024 and the opportunities to drive long term growth, call. We remain confident in the trajectory of our business.

Speaker 3

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

Speaker 1

Thanks, Victoria. Operator, can we now open up the call for questions?

Operator

Press star, then the number one on your telephone keypad. And your first question comes from the line of David Karnovsky from JPMorgan. Your line is open.

Speaker 1

Hey, thank you. David, we're seeing a number of sports teams kind of rethink their local distribution, they're taking control of DTC, some are adding broadcast to bring on more reach. Your contracts are locked up I think to 2,035. There's obviously going to be a lot of change before then and probably more cord cutting. How do you think about the need or opportunity to restructure kind of local delivery of your content over the next few years?

Speaker 1

Thanks.

Speaker 2

Hi, David. Thanks. Thanks for the question. Good morning. Look, as you identified, if we take a call.

Speaker 2

Step back, we all know the media landscape, pardon me, is evolving. But we believe strongly in the value of live professional sports content, Especially for premium content like the Knicks and Rangers. We also operate in the nation's largest media market, Which benefits us and our local media rights distributor MSG Networks. As you mentioned, we have long term local media contracts in place with MSG Networks. And those agreements provide exclusive local distribution of all of our live content, including digital.

Speaker 2

MSG Networks is a great partner of ours and we're supportive of what they're doing on the distribution front, including their recently launched direct to consumer offering MSG Plus. So that allows sports fans in our market that do not currently subscribe to a traditional linear TV package to access live Knicks and Rangers games. So we believe having sports rights is proven to be a great investment, especially over the long term and we remain extremely confident in that continued value as we look ahead.

Speaker 1

Okay. Thank you.

Operator

And your next question comes from the line of Brandon Ross from LightShed Partners. Your line is open.

Speaker 4

Sure. Thanks for taking the question. I just wanted to ask about your willingness in the past to sell minority stakes in the teams. Was wondering where that stood and maybe What the challenges have been for you to get something done there that would result in there not being a transaction at this quarter?

Speaker 2

Hi, Brandon. Well, as we've said in the past, we would not rule out The possibility of a potential minority stake in either team, but we have no update at this time. We continue to be as confident as ever in the value of our teams. They are incredibly scarce assets with strong business fundamentals we just talked about and significant opportunities for long term growth, which we don't think is appropriately reflected in our current stock price. In fact, our return of capital in fiscal 2023 was a reflection of the strength of our business and our confidence and the value of our sports franchises.

Speaker 2

We also continue to be mindful of the premium evaluations at which transactions across the sports ecosystem have taken place including the Washington Commanders $6,000,000,000 sale, which was the highest ever for a professional sports team, as well as the expanded pools of capital now allowed by our leagues to invest in teams, includes private equity in both leagues and on the NBA side additionally pension funds, endowments and Southern Wealth Funds.

Speaker 4

So do you feel confident that at some point, there could be a minority sale?

Speaker 2

Yes, we're just not going to speculate on that at the moment, Brandon. Thanks.

Speaker 5

Okay.

Operator

And your next question comes from the line of Ben Swinburne from Morgan Stanley. Your line is open.

Speaker 6

Thanks. Good morning. David, when you think about the revenue opportunities for the business and you mentioned some in your prepared remarks, I think including some new suites you guys are adding. What would you how would you sort of rank order what you're most excited about in terms of driving the top line beyond the stuff happening with sort of The national media rights and some of the stuff outside of your control. And then I just wanted to ask Victoria, it sounded like you well, you did say you expect revenue growth in 2024, But the AOI commentary was a little less clear.

Speaker 6

Should we not expect AOI growth in 2024?

Speaker 2

I just want to come

Speaker 6

back to your prepared remarks where you talked about revenue and AOI in the outlook? Thank you, guys.

Speaker 2

Thanks, Ben. Look, I'll take the first part when you're asked about incremental revenue opportunities. As I get into this, let me say how proud we are to have delivered another year of strong results including record revenues. As I talked about, the momentum was broad based with every key revenue line That's tickets, suites, marketing partnerships and media rights all up as compared to fiscal 2022's record results. So we really think this is a testament to the strength of our business and the underlying value of the assets.

Speaker 2

As we look forward to FY24 and And are working every day on FY 2024. We think it will be broad based. With respect to ticketing, I mentioned earlier, At the moment, our combined average season ticket renewal rate is about 93%. And that's on a larger renewable base than last year And also includes season ticket increase in price for both teams. So as we think about FY 2024, we see an opportunity for a growth in average per game paid attendance and in ticket yield.

Speaker 2

With respect to sponsorships, we've got strong momentum in both renewals and new sales. We continue to Phil Ross wrote and look to target areas where we're currently either areas that are emerging or where we think we're under penetrated. We think we've got opportunities in professional services, software, retail, travel, just to name a few. And we've got inventory available that will unlock additional opportunities, including patches on the uniforms of each team and international sponsorship opportunities for the mix. So we're focused on maximizing those and ensuring we find the right partners for those premium assets.

Speaker 2

Our premium hospitality continues to be in high demand and we're going to benefit this year from the addition of 2 new event level suites at the Garden, continuing to build on both our renewals and our new sales momentum. And we continue to focus on fan engagement. We work on a number of initiatives that increase our direct relationships with our fans And that's a priority for us in FY 2024, delivering compelling social content, which is good for our fans, drives our sponsorship business And we'll continue to innovate in some of the merchandise and other fan offerings and events that we can. So we see a number of significant growth opportunities ahead and it's broad based across the whole business.

Speaker 3

Hi, Ben. Good morning. It's Victoria. So sure, I'm happy to provide a little bit more color. I mean, we're not providing any specific AOI guidance, but Just a little more color.

Speaker 3

So first just taking a step back, right, as you did hear me say in my prepared remarks in term of fiscal 2024 and we expect to again deliver robust revenue growth on a year over year basis. But in addition to those higher revenues, like we do also expect our AOI results for the year to reflect the impact of higher team operation expenses. And that's going to include, number 1, the impact of our current rosters and it's also going to be impacted by higher revenue sharing expense, which includes lower projected luxury tax receipts. And I guess just also worth noting that for the upcoming season, the NBA salary cap has increased from $123,700,000 to $136,000,000 And on the NHL side, It's a modest increase, dollars 83,500,000 to $82,500,000

Speaker 5

Thank you, both.

Operator

And your next question comes from the line of Devin Briscoe from Wolfe Research. Your line is open.

Speaker 7

Thanks. I have a question on sponsorships. ESPN's licensing deal with Penn Entertainment to create ESPN Bet Earlier this month is another proof point that sports betting is still in very early innings. Could you talk about how meaningful that category is as a proportion of your to ship dollars and how fast or how big you think that category could be over time?

Speaker 2

Yes, absolutely. Thanks, Devin. You're right, it's early innings, as you said, but we've seen great momentum in our sponsorship This is past fiscal year. Overall, in fact, this was our best year yet in sponsorship revenue. I mentioned some of our significant new sales and renewals, Spectrum, Verizon, Hub, MSC Cruises.

Speaker 2

But this past year's results also included the impact of our sports gaming partnerships. So I won't get into specifics, but what I can say is that sports betting is one of our largest revenue categories in marketing partnerships this year and was a big piece of what helps drive growth in fiscal 2023 to a new revenue record. We've got 3 great partners under long term agreements. And as the landscape evolves, If New York State regulations around online sports gaming were to continue to evolve or other sports betting related opportunities were to arise, whether that would be lowering the tax rate for operators or the opening of a downstate casino, we think these would only increase the revenue potential for us. So we continue to see sports gaming as an important sponsorship category for us as we look ahead.

Speaker 2

And we're pleased with the partnerships we've established today.

Speaker 7

Thanks. And I have a follow-up question on Just how we should think about expense growth for 2024. The color on the salary cap increases was helpful. And I think the new NBA collective bargaining agreement comes into play this season. Could you talk just a little bit more about Any impacts from that and how the growth in expenses this year for fiscal 2024 might compare versus historical growth?

Speaker 3

Sure, Devin. So just a little bit more about, Again, what I indicated earlier to Ben, right, that we are looking at Higher operating expenses, again, the current rosters and then some of the league related expenses being revenue sharing expense And lower projected luxury tax receipts. And again, and then the increase in the NBA salary cap, and then the NHL cap going to 83 point $5,000,000 But just as it relates to the new collective bargaining agreement overall, we don't expect We're not anticipating any material impact to our business.

Speaker 1

Thanks, Devin. Operator, we'll take one last caller.

Operator

And your final question comes from the line of David Joyce from Seaport Research Partners. Your line is open.

Speaker 5

Thank you. Two questions, if I could. First is on the playoff revenues. Well, you did have a couple of fewer playoff home playoff games by this quarter. Per playoff game revenue was up maybe 8.5%.

Speaker 5

Could you dive into that some more? Was that driven

Speaker 1

Hey, David, it's Ari. You're breaking up a little bit. I think we got the gist of the question, though. You're looking for a little bit more detail on playoff revenues for the quarter. Victoria?

Speaker 3

Sure. Thanks. Hi, David. So as you know, playoffs can be a significant Significantly incremental to our business, depending on the length of the playoff run. So our playoff tickets are priced at a significant premium to our regular season games.

Speaker 3

F and B and merchandise per cap spending is typically well above the regular season averages. In this quarter, we hosted 8 playoff games at The Garden as compared to last year, which was 10 playoff home games. So as a result, our playoff related revenues for the 4th quarter were $56,200,000 as compared to $64,800,000 in the prior year period. So this is translating to roughly $7,000,000 of revenue on a per game basis. In addition, approximately $4,000,000 in per game direct operating expenses, as well as some additional marketing and administrative costs that are incurred in connection playoff participation.

Speaker 3

So it's a positive impact. And I think as we've talked about Yes, in the past that a playoff run we believe has a positive carry forward effect into future fiscal periods.

Speaker 5

Great. That's helpful. Thanks. And if you could also talk about the pacing

Speaker 1

Sorry, David, you're breaking up on. Can you repeat that question? I heard pacing.

Speaker 5

Yes. The pacing on other types of ticketing packages or individual ticketing sales for the upcoming season, how is that facing?

Speaker 2

Sure. We're really bullish on where we are at the moment. As I Mentioned in my prepared remarks, the combined average renewal rate of our season ticket packages is 93% right now and that's Continuing to rise. With respect to pacing, last year at this time, we were about 91%. So pacing ahead.

Speaker 2

And I want to remind you that that is on a larger renewal base of tickets and includes season ticket price increases for both teams. And season tickets represent a majority of our ticketing revenue for Reach team. As we look ahead to individual tickets, group sales, we're still really early in the sales cycle. In fact, We haven't played individual games or groups on sale for the Knicks yet because the NBA schedule is just set to be released later on today. We are in the market with the Rangers, and both groups and individual ticket sales are pacing ahead of this time last year.

Speaker 2

So we feel we've got really good tailwinds, strong momentum and ahead of our pacing from last year, which was a record.

Speaker 5

All right. Thank you very much.

Operator

And this concludes our question and answer session. Mr. Ari Danes, I turn the call back over to you for Some final closing remarks.

Speaker 1

Thank you all for joining us. We look forward to speaking with you on our next earnings call. Have a good day.

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Key Takeaways

  • For fiscal 2023, MSG Sports reported record revenues of $887.4 million and adjusted operating income of $115 million, with every major revenue category surpassing the prior year.
  • Both the Knicks and Rangers reached the playoffs, leading to a ~93% season ticket renewal rate and higher average paid attendance and ticket yield compared to fiscal 2022 and pre-pandemic levels.
  • Per-capita food, beverage and merchandise spending grew high single digits, while exclusive collaborations and bespoke offerings drove merchandise revenues to new highs.
  • Marketing partnerships and premium hospitality saw robust demand, including renewals with Verizon and Spectrum and new global sponsorships such as MSC Cruises, with sports gaming now a top sponsorship category.
  • Looking to fiscal 2024, the company expects revenue growth across ticketing, sponsorships, suites and media rights, though adjusted operating income will reflect higher team operating expenses, salary caps and revenue-sharing costs.
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Earnings Conference Call
Madison Square Garden Sports Q4 2023
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