Madison Square Garden Sports Corp

NYSE:MSGS

Earnings Call Analysis

Positive Momentum Despite Decreased Income

The company reported revenues of approximately $327 million, with an adjusted operating income (AOI) of $37 million, a decrease of $27.4 million compared to the previous year, mainly due to reduced revenues. The fewer games at the Garden played a role, but per game revenues are up, signaling healthy demand and successful growth initiatives. They expect robust revenue growth and increased operating costs due to inflation in compensations this fiscal year. They also have $233 million in liquidity to assist in financial operations. The teams have high season ticket renewal rates of over 94%, indicating strong fan support. Looking forward, there's a focus on engagement and innovative merchandise, underpinned by rising valuations of sports franchises, which bolster confidence in long-term value creation for shareholders.

Revenue and Earnings Performance

The company reported revenues of approximately $327 million and adjusted operating income of $37 million. While overall revenues were down from $353.7 million in the prior year period to $326.9 million, there was an increase in revenues across key categories, with significant growth seen in tickets, suites, food and beverages, and merchandise compared to the previous fiscal year's second quarter. The company's continued efforts to optimize ticket revenue, including high season ticket renewals and improved average ticket yields, contributed positively to these results, with per capita spending on food and beverages and merchandise up by almost 10%.

Fan Engagement and Valuation Increases

Fan engagement has translated into strong financial metrics, exemplified by an impressive average combined renewal rate above 94%. This upsurge in fan loyalty, despite larger renewal bases and increased ticket prices, has led to improvements in both ticket yields and attendance. Adding to the company's financial prowess is the 33% year-over-year increase in average team value, demonstrating the company's growth and the enduring attractiveness of its sports franchises to investors.

Cost Management and Future Expectations

Adjusted operating income witnessed a decrease of $27.4 million due to reduced revenues and increased direct operating expenses, though partly counteracted by reduced SG&A expenses. The increase in operating expenses primarily reflects higher personnel compensation and revenue sharing expenses, whereas the decrease in SG&A expenses was mainly driven by lower employee compensation. Peering into the future, the company anticipates delivering revenue growth in fiscal '24, but it expects this will be coupled with heightened team operations expenses and league-related costs. A robust liquidity position, inclusive of $38 million in unrestricted cash and sizable borrowing capacity, underpins the company's confident business trajectory.

Strategic Partnerships and Sales Performance

The announcement of new strategic partnerships and additional event-level suites shows the company's initiative in maximizing revenue streams and enhancing fan experiences. With record revenues from suite sales and strong renewal rates of season tickets, bolstered by these strategic moves, the company is leveraging all avenues of growth to further solidify its market position.

Capital Allocation and Shareholder Returns

Addressing the gap between stock price and intrinsic asset values, the company has executed capital allocation strategies, including the return of $250 million to shareholders as part of its capital return policy last year. This approach underpins the company's commitment to enhancing shareholder value.

Media Rights and Long-term Contracts

Looking ahead at the NBA national rights renewal, the company stands ready to benefit from any uptick in national media rights fees when the current deal concludes after the '24-'25 season. All teams, including the company's franchises, would share equally in potential increases, while acknowledging that players are entitled to roughly 50% of all league-wide revenues, including these national media fees. The long-term local broadcast agreements secure consistent distribution and revenue for the foreseeable future, offering financial stability and attractiveness to potential investors.

Earnings Call Transcript 2024-Q2

[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, executive]

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, executive]

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 9 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 tick 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 is 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 Siegleman Stable for the Knicks and global rock band KISS for the Rangers. Our innovative initiatives this season have generated tremendous fan interest.

We also saw robust fan interest when we welcome 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 platform 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 figure partners.

And this past fall, to 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 2 new event-level suite products, which have been very well received. The first, an event-level suite has already been licensed to the multiyear agreement. And the second, which is a luxury club space is nearly sold out. We're 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 releases 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 2 iconic sports franchises. We're 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, executive]

Thank you, David, and good morning, everyone. I would like to start by reviewing our fiscal 2024 2nd quarter financial performance and then provide an update on our balance sheet.

Results for the fiscal second quarter reflect 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 9 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 renew 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 9 fewer regular season games played at the Garden during the current year period and other net cost decreases. Decrease in SG&A expenses was primarily due to lower employee compensation, a result of executive management transition costs 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 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, executive]

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

[Operator]

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

[David Karnovsky, analyst]

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 [indiscernible] or maybe even just relative to the prior partnership you have there?

[David Hopkinson, executive]

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're 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, [ low ] 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're 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 margin partnership detail of any deal. So we're 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 2 globally-recognized source entertainment brands. And we think this creates an exciting partnership right at the intersection of sports and entertainment.

[Operator]

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

[Brandon Ross, analyst]

All right. I'll spare you my trade deadline questions, but your stock still trades at a pretty sharp discount to 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, executive]

Sure. Thanks, Brandon. Yes, you would use 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 2 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 sponsor 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're 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 that about capital allocation?

[Victoria Mink, executive]

Sure. 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 paydown, given the high interest rate environment that we're 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'll 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's first -- have a 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're 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.

[Operator]

Our next question comes from the line of Logan Angress from Wolfe Research.

[Logan Angress, analyst]

I guess, first, on demand. You mentioned per caps and per game revenues a little bit. I'm curious to what extent are you seeing the Knicks and in Rangers benefit from strong demand for live entertainment more broadly. And I guess, if you could dig in a little bit more into specific per caps or specific kind of revenue sources that are seeing sort of the biggest tailwinds? And then in terms of costs, can you provide any more color on the cost forecast for this year? And do you expect the revenue growth you mentioned to outpace growth in costs?

[David Hopkinson, executive]

I'll start and dig in, as you said, on the specifics for the demand and how that's translating into our business.

As we said in the opening remarks, we're up across almost every line on a per-game basis, but with some granularity here. Ticketing, our average season ticket renewal rate was over 94%. And again, that was on a larger renewable base and with season ticket price increases for both teams. So that's a huge lever for us. And as a result, we're seeing growth in overall per game revenue, ticket attendance and total ticket yield so far this season, for this seasons, pardon me.

If I think about suites, we're seeing record revenues from suites driven by both strong new sales and robust renewal activity. And then we're also benefiting from the addition of those 2 new event-level suites at the Garden. On sponsorship, we've welcomed a number of new partners this year. Joining our strong roster of signature partners and looking to -- we've also got headroom there. We look to continue to pursue valuable growth opportunities, the jersey patch for the Rangers, international sponsorship for the mix.

We're focused on maximizing the value of these opportunities, and that's one of the reasons that we've entered our new relationship with Oak View Group and Crown Properties Collection who we believe will help us expand this area of the business over the long term. We're also really focused on fan engagement and driving deeper relationships with fans result in enhanced performance across every aspect of our business.

So it seems like that third jersey for the Rangers, the special edition jersey that we're going to wear next week at the outdoor game at the NHL Stadium series, our Siegelman Stable collection with the Knicks, the partnership we did -- on the merchandise partnership we did with KISS. These are all things that excite and engage our fans. And one of the reasons that we're experiencing food and beverage and merchandise per capital spending, which is up almost 10% over the same period last year.

So we're really bullish on our business for the remainder of this fiscal and beyond. Victoria, do you want to take the second half of that question?

[Victoria Mink, executive]

Sure. Let me talk a little bit about revenue and expenses in this fiscal year. So taking a step back, right? We do expect to again deliver robust revenue growth on a year-over-year basis, excluding the impact of the playoffs. And as you could see in our second quarter results today, we saw higher average pro game revenues across tickets, suites, food and beverage and merchandise. So we're seeing overall positive momentum across our business and expect that to continue for the remainder of the fiscal year.

Now while we're not providing more specific AOI guidance, as I mentioned earlier, AOI this fiscal year will reflect the growth in these revenues, but in addition, there will be the impact of higher team operation expenses and league-related costs. So what that really includes is, number one, the impact of our current rosters. So as a reminder, so the NHL salary cap saw a modest increase from $82.5 million to $83.5 million. While on the NBA side, the salary cap has increased over $12 million to $136 million this season.

So in addition to those costs, we're also expecting higher revenue-sharing expense and lower projected luxury tax receipts. But with that, based on the momentum we've seen, we remain confident in the trajectory of our business this fiscal year.

[Operator]

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

[Paul Golding, analyst]

Just had a quick question on the ticket sales commentary. You mentioned that combining group and individual average ticket yields were up in fiscal 2Q year-on-year. I was wondering if you could break down a bit more for us, just in terms of how group is faring relative to individual and making up that yield comment? And then secondly, just around sponsorship demand, a similar question for year-to-date or a balance of the year. Any commentary on the mix? In other words, where you're seeing the strength come through, whether it's signage, ads or otherwise?

[David Hopkinson, executive]

Sure. Paul. I'll talk about the tickets first. As I mentioned, our average combined renewal rate for season ticket packages this season was over 94%. And again, I think that's really noteworthy considering we had both the large -- pardon me, the larger renewal base and season ticket price increases for both teams. And we were strong last year where we renewed over 90%, but the 94% is -- we're really pleased about.

So with the larger season ticket base comes a reduced amount of individual tickets available for sale, but we're seeing both individual and group ticket sales also continue to be really strong. Average paid attendance for groups is up year-over-year. And overall, including the season tickets, average per game paid attendance is up as well. So our higher -- overall, we've got a higher overall average ticket yield this year. And I think this is really a combination of the enthusiasm we're seeing from our fans, and the continued improvement in tourism here in New York post pandemic. We just have really good momentum on the ticketing front.

We're seeing that shine through in the suites as well, where we've got really robust demand from our corporate partners renting suites and licensing those suites in long-term agreements. We saw that again and we capitalize on that with the 2 new event-level suites we introduced for this season, one of which has direct access and one of which has indirect access to the bull -- in a luxury sort of club-style suite, the direct access site, we licensed in a multiyear agreement, and that club space is almost sold out.

I referenced some of the new sponsorships that we have introduced this year Oura Ring, Pfizer, NEXEN TIRE next and tire. And our new partnership with Oak View Group and Crown Properties, we believe, will help us grow that business even further, in the weeks, months and years to come.

[Ari Danes, executive]

Operator, we have time for one last call.

[Operator]

Our final question comes from the line of David Joyce from Seaport Research Partners.

[David Joyce, analyst]

Going back to the upcoming NBA national rights renewal, which should come with a significant step up. Could you please help us understand -- what -- of the incremental flows from that new contract comes to the teams versus to the players, and also, are there other structural changes in the rights, be it local or digital or otherwise, that you might expect, perhaps influenced by the issues that some other RSNs are facing?

[Victoria Mink, executive]

Great. David. So looking at the national -- the NBA national rights renewal. So I guess, first, as a reminder, the current national deals run through the '24-'25 season. So we're talking about our fiscal 2026 period. But in terms of the potential financial impact, so all teams across the league will share equally in any potential increase in the national media rights fees, right? But as you know, and you alluded to, the players also receive approximately 50% of all league-wide revenues which would include the national, which does include the national media rights fees and therefore, would include any potential increase there.

And regarding sort of the second part of your question there, and I think as Hop has talked about, too. We -- it's clear that the media landscape is evolving, and we continue to believe in the value of live professional sports content. And we expect the NBA will maximize that opportunity. But specifically in terms of local rights, as you know, we have the long-term contracts in place with MSG Networks and those contracts run through the 2034-'35 seasons. So about 11 years left. So that's where our game will be shown locally.

[Operator]

This concludes our question-and-answer session. I will now turn the call back over to Mr. Ari Danes for some closing remarks.

[Ari Danes, executive]

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

[Operator]

This concludes today's conference call. Thank you for your participation. You may now disconnect.