Madison Square Garden Sports Corp.

Good morning. My name is Christy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Madison Square Garden Sports Corp. fiscal 2021 fourth quarter and year end earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I will now turn the call over to Ari Daines, Investor Relations. Please go ahead, sir.

Thank you, Christy. Good morning, and welcome to MSG Sports Fiscal 2021 Fourth Quarter and Year-End Earnings Conference Call. Our President and CEO, Andy Lustgarten, will begin this morning's call with an update on the company's operations. 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 investor section of our corporate website. Please take note of the following. Today's discussion may contain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties, and that actual results, developments, and events may differ materially from those in the forward-looking statements as a result of various factors. These include financial community perceptions of the company and its business, operations, financial condition, and the industry in which it operates. as well as the factors described in the company's filings with the Securities and Exchange Commission, including the sections entitled Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations contained therein. The company disclaims any obligation to update any forward-looking statements that may be discussed during this call. On pages 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 Andy.

Good morning, and thank you for joining us. I'm much happier to be speaking with you in today's operating environment versus the same time last year. Last August, our focus was on navigating our business through the pandemic. We took a series of actions. including reducing expenses and refinancing debt to safeguard our balance sheet. And despite the challenges our business and industry faced, this difficult period also served as a powerful reminder of the significant value of professional sports franchises. For example, our fourth quarter results included our pro rata share of the Seattle Kraken $650 million expansion fee, the highest ever for an NHL franchise. In addition, the NHL completed a new national media rights agreement, which represents a significant increase from the prior deal. We'll discuss this more a little later. And on the NBA side, we've seen substantial interest in the acquisition of ownership stakes in recent months. For example, there have been transactions for minority stakes with no public market liquidity involving the Los Angeles Lakers and the Golden State Warriors. that according to press reports, reflect team valuations of $5 billion and above. This is an interesting comparison to the current enterprise value of just over $4 billion for our company, which includes not only the Knicks, but also the Rangers, two of the most iconic franchises in professional sports in the nation's largest market. Our focus now is on the upcoming seasons. And while we know we're not completely out of the woods with regard to the pandemic, we feel confident for a number of reasons about where our company is headed as we make our way towards a return to normal. It starts with our market, where we have a large and passionate fan base who want to cheer on their teams in person. It's also a market that's taking proactive steps to help curb the impacts of the pandemic. Earlier this month, New York City announced that all guests for indoor events must show proof of at least one vaccination shot, which we think is a positive for us. Our market already has one of the highest vaccination rates in the country. And through surveys, which we've been used to continue and engage with our fans, we've learned that over 85% feel most comfortable at events that require vaccinations. We saw this firsthand during the next first round playoff series, as we sold all available seats for our three home games. This included more than 15,000 tickets for the first game, and with revised NBA protocols to safely create additional capacity, more than 16,000 tickets for the next two games, with nearly 90% of those in attendance being fully vaccinated. So as we look towards the upcoming seasons, we are preparing for full capacity crowds and full 82-game seasons for both the NBA and NHL. For the Knicks, last year was an exciting season with Tom Thibodeau winning NBA Coach of the Year and forward Julius Randle being named both an All-Star and the league's most improved player. Aiming to build on this success, earlier this month, the Knicks completed a multi-year contract extension with Julius, while re-signing a number of key members from last season's roster. The team also welcomed two significant new players, four-time All-Star Kemba Walker and Evan Fournier. For the Rangers, Adam Fox was also recognized this past season, winning the NHL's Norris Trophy Award as the best all-around defenseman. Adam is part of a talented roster now led by President and General Manager Chris Drury and Head Coach Gerard Gallant, This past month, the team signed its highly skilled goaltender, Igor Shosturkin, to a four-year contract and added several new players who are expected to bring both physicality and depth. We look forward to watching both teams continue to develop and compete this upcoming season. In terms of ticketing, for next season, after careful consideration, the decision was made to raise next season ticket prices for the first time in seven years. while ratings and season ticket prices will remain unchanged. I would also note that in looking at the secondary market, we believe there's ticket revenue upside over time as we continue to add value. We remain grateful for our fan support and are pleased to report that, to date, we've had an average combined renewal rate of approximately 94% for the Knicks and Rangers season tickets. We've also been encouraged by sales of season ticket packages to brand new customers, which have been very strong. Last season, we began requiring the use of digital ticketing as part of our COVID protocols, which we also found provided benefits from our operation perspective, and it's something we intend to continue utilizing for the upcoming seasons. In addition, we've remained focused on finding other innovative ways to engage our fan bases. For example, last month, the Knicks launched a small NFT pilot, which focused on five of the team's best home games during the 2021 season, and which generated tremendous interest and sold out. Another way we connect with our fans is through merchandise. This past season, we launched a new online website, providing us with another channel to engage directly with Knicks and Rangers fans. In addition to a more streamlined process, we are now able to offer our fans a more robust selection of merchandise. The more direct interactions we have with our fans, the more we learn, which in addition to driving our business, enables us to enhance the fan experience. These insights also become important for our marketing partners, who are always looking for greater fan engagement. As you know, one of the reasons we've been able to form long-lasting relationships with world-class companies is because we're committed to finding solutions that drive our partners' business. In fact, through our relationship with MSG Entertainment, we recently renewed our marquee partner, JPMorgan Chase, for a multi-year period. We're also having ongoing discussions with existing and potentially new marketing partners and expect to have more positive news to share in the months ahead. The legalization of mobile sports gaming is another meaningful opportunity for our company. As you know, mobile sports gaming has already been approved in New York, and while we await the outcome of the state's application process, we are excited about what it could mean for our business, including our ability to offer gaming partners unrivaled exposure and impact in our market. You've heard us say several times that we believe sports gaming will help drive fan engagement and viewership. This could, in turn, benefit media rights, which continue to increase in value. This past year, the NHL completed two new seven-year national media rights deals with Disney and WarnerMedia, which, in addition to being significantly higher than the prior deals, align the NHL with two leaders in sports programming, which we expect will drive increased viewership and further raise the NHL's profile. The agreements, which will be reflected in our results starting in fiscal 22, include the NHL's return to ESPN, while also expanding the league's reach across several Turner Sports properties, including linear and streaming platforms. As a reminder, the NHL's Canadian deal with Rogers Communication runs through the 25-26 season, while the NBA's U.S. deal with Disney and WarnerMedia runs through the 24-25 season. And as you know, the Knicks and Rangers local media rights agreements with the MSG networks have 14 years remaining, providing us with significant long-term visibility and growth. Televising our games is how we reach the majority of our fans. And even with the evolving media landscape this past year, the Knicks' local regular season ratings increased approximately 45%, while Rangers' ratings increased 17%, both compared to last season's averages. Another area where we see increased viewership is esports. Our Counter Logic Gaming team continue to have competitive presence in games, such as League of Legends, that are among the top 10 most watched games on Twitch, which so far in 2021 has seen a 35% increase in average concurrent viewers compared to last year. This growing level of engagement is just one of the... reasons why we continue to invest in esports and remain excited about the long-term monetization opportunity. I'll end today by saying that we remain confident in our company's future and our ability to build long-term value for our shareholders. As always, I would like to thank our employees, fans, partners, and shareholders for helping us through this past year. We look forward to the 21-22 seasons and proving once again that there's nothing like live professional sports to bring people back together. And with that, I'll turn the call over to Victoria.

Thank you, Andy, and good morning, everyone. I'd like to start by touching on our fiscal 2021 fourth quarter financial performance and then provide an update on our liquidity and balance sheets. Results for the fiscal fourth quarter reflect the timing of the shortened 2021 NBA and NHL regular seasons, as well as the Knicks participation in the first round of the NBA playoffs. I'd also remind you that the fiscal 2020 fourth quarter was impacted by the suspensions of the 1920 NBA and NHL seasons in March of last year. As a result, total revenues for the quarter were $146.9 million, as compared to negative $7 million in the prior year period. League distributions and local media rights fees increased as a result of the impact of the 1920 season suspensions in the prior year period, as well as the timing of the 2021 regular seasons. In addition, league distributions benefited from the recognition of the NHL expansion fee associated with the Seattle Kraken, while local media rights fees were negatively impacted in the current period by the reduced NBA and NHL 2021 regular season schedules. The increase in sponsorship and signage, as well as ticket-related revenues, reflects the Knicks and Rangers playing a combined 24 regular season home games at 10% fan capacity during the quarter as compared to no games in the prior year period. The increase in playoff-related revenues reflects the impact of the Knicks' three home playoff games at the Garden during the current year quarter. Adjusted operating loss decreased $27.8 million to a total loss of $5.8 million. This improved loss was due to higher revenues partially offset by an increase in direct operating expenses, and to a lesser extent, higher SG&A expenses. The increase in direct operating expenses mainly reflects the impact of the suspensions of the 19-20 NBA and NHL seasons on the prior year quarter, as well as the timing of the shortened 2021 NBA and NHL regular seasons in the current year period. This was reflected in increases across team compensation and revenue sharing expense, net of escrow payments, as well as other team operating expenses. This quarter's results also include arena license fees, as well as playoff related expenses. I would note that the arena license fees were significantly reduced as compared to a full season at 100% capacity due to attendance restrictions at the Garden. The increase in SG&A expenses was primarily due to higher team employee compensation and related benefits, including severance related to team executives, playoff related expenses, and fees related to the company's sponsorship sales and service representation agreements with MSG Entertainment, which were partially offset by lower corporate overhead costs. As a reminder, results for the prior year fourth quarter reflect a number of items, including the impact of the 1920 NBA and NHL season suspensions, as well as discontinued operations accounting for the period through April 17, 2020, which was the date of the MSG Entertainment spinoff. Results from April 1st through the spinoff date are therefore not directly comparable as they include certain corporate overhead expenses that we no longer incur following the spin, but which did not meet the criteria for inclusion in discontinued operations. Now turning to our company's liquidity position and balance sheet. As of June 30th, we had $309.9 million of liquidity comprised of $64.9 million of cash and cash equivalents and $245 million of available borrowing capacity under existing credit facilities. Our quarter end cash and cash equivalents of $64.9 million represented a net decrease of $4.2 million compared to our March 31st balance. This net decrease was primarily due to normal operating expenses, such as compensation for our teams, as well as our corporate and administrative staff, payments to MSG Entertainment under our various commercial agreements, and a repayment of $25 million on the Ranger Senior Secured Revolving Credit Facility. These outflows were largely offset by a number of items. including local and national media rights fees related to the 2021 NBA and NHL seasons, Knicks playoff ticket sales, as well as season ticket payments for the 21-22 seasons, the NHL expansion fee related to the Seattle Kraken, and sponsorship revenue. As a result of the Rangers' revolving credit facility partial repayment, our total debt outstanding at quarter end was reduced to $385 million. The company's debt balance at June 30th was comprised of $355 million under the NICS and Rangers Senior Secured Revolving Credit Facilities and $30 million advanced from the NHL. As of June 30th, our deferred revenue balance Net of billed but not yet collected revenue was approximately $146 million as compared to approximately $133 million as of March 31st. The increase in this balance was primarily due to collections of season ticket deposits partially offset by the recognition of local and national media rights revenue during the quarter. The deferred revenue balance as of June 30th was primarily comprised of tickets and suites, which will be addressed through games played, and to the extent necessary, through make goods, credits, and or refunds. In addition, our deferred revenue balance included $30 million from the NDA. With that, I will now turn the call back over to Ari.

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

Certainly. And as a reminder, if you would like to ask a question, press star, then the number one on your telephone keypad. And your first question is from Ben Swinburne of Morgan Stanley.

Hey, good morning. Andy, you talked about it in your prepared remarks. I wanted to come back to the sort of obvious disconnect between the value of the assets at MSG Sports and your stock price. I think one concern is investors, I think, have is that management and the board might consider recombining MSU sports with entertainment. I know that you and the team have sort of publicly addressed that concern in the past. I was hoping you could revisit that. And also, just remind us why the board decided to separate sports in the first place. And then as a follow-up, is there anything that you're thinking in terms of taking proactive steps to try to address what, again, is a fairly obvious delta between what the company is worth and where the stock is? Thanks a lot.

Sure. Thanks, Ben. So let me just start and be really clear. We have no intention of merging MSG Sports and MSG Entertainment. We worked really long and hard on completing the spin-off this last year. And there was very straightforward rationale for why we did it. And we believe that still holds. They're two very different companies with two very different profiles. MSG Entertainment, it's a growth story. MSG Sports, it's an asset play with some growth. And we believe tremendously in the value of the Knicks and Rangers teams. This has been really incredibly reinforced to us by the recent transactions in both leagues, the Kraken transaction in the NHL, the NBA transactions with the Lakers and Warriors. It really shows the value of what we have of the two teams. But I will note that... the two leagues have significant impact rules around leverage, which impact our operating flexibility, really driving MSG Entertainment to be a separate company with its own separate growth plans. And we're really excited about MSG Sports Future as an independent public company. So in terms of your follow-up, I mean, look, I think this has been a real interesting year, right? This pandemic has been something that nobody's ever or no one in our lifetime has ever had to operate through before. And the most thing that we've been focused on is the health of our company. During the year, we took on some additional debt, which we started to pay down in the fourth quarter. And as we think about near-term decisions on what we do, right, we need to think about our leverage and how do we operate and be healthy during this period right now. But we're watching the market. We feel good about where things are going. We feel like we're moving in the right direction. And so on a long-term basis, I'd say that all options are on the table and using our free cash flow and helping to drive the value.

Great.

Thank you for the comments, Andy.

Thank you. Your next question is from John Genetis of Wolf Research.

Thank you. Andy, can you give us just some more color on the mobile gaming opportunity over the past few months? Has your confidence level on the size of it changed? Is the New York State tax rate relevant to that? And is there any kind of loose timeline on when you expect to see the benefits?

Sure. So I think I've got a broken record here, and I'll start with it. We love sports betting for what it simply does for fan engagement. It's great for the business. Long-term, we believe it will have an impact on media values. It's great for the consumer experience at home and in venue. But that just is the tip of the iceberg, right? So then we talk about what the marketability is here. We're thrilled with the process that New York State's undertaken. There's been some noise around some of the rules, but let me just be really clear, because I think it's important. There's a minimum of two operators, of two platforms and four operators. That's the minimum. That's not the maximum. The state can only select more, and they may and they may not. But when you look at the consortiums that have come together, it gives us a lot of of confidence that there's going to be significant competition. And even if it's the minimum, there will still be four players competing to reach eyeballs. And I don't think there's anybody who can reach a sports fan better than we can in this market. I mean, you know how far our reach is and what assets we have. When we think about... Some of the other neat facts, though, as you review some of the applications, I mean, one of the biggest consortiums, or one of the consortiums, FAM Dual Drafting, that MGM and Bailey's had a forecast where by year three, with a 50% tax rate, they believe they're going to deliver $1.3 billion to the state. That means there's $1.3 billion that they have to play with to drive that business, which, by the way, includes some value for marketing that they baked into their business models that we can't tell from what's been public so far. To me, that sounds like there's going to be a lot of competition to reach people, and I think that we're going to be here to provide that service. I'll say there might be multiple consortiums. There might be multiple operators. It's a little questionable exactly how it plays out, but I think in any which way, we feel very good that we're close with all of the major operators, both the new entrants as well as the bigger, more established, longer-term entrants, and we feel really good about what this means for our business.

Thank you. Your next question is from Brandon Ross of LightShed Partners.

Hi, guys. Thanks for taking the questions. It sounds from your prepared remarks like there's pretty meaningful consumer demand for tickets for both the Knicks and Rangers. Can you talk a little bit about corporate demand, specifically suites, how those are looking? and whether corporates are interested in returning to entertaining. And then I'll follow up.

Sure. Thanks, Brandon. So, look, again, this has been quite a year during the pandemic, things that no one We operated through ways we never thought we'd operate. We had to be nimble in ways we never thought we'd have to be nimble. But I'll tell you one thing that we stayed focused on was being customer-friendly, and that's across all of our business lines. So I'm going to take a little bit more of an after-view, and then I'll get to your question specifically. So when I click across our business lines with a view of let's be consumer-friendly, The first thing, as you noted, was tickets. Those came back fastest, quickest, and gave us a lot of confidence. But even the way we went, moved from zero to 10% of speed, 10% to the playoffs, we were acting blind in terms of what consumer preference was going to be during these periods, and the ticket buyers came back. So, during that same period, when we look about suite holders, for example, we realized the number of events we were having, and to be honest, during a pandemic, corporate hospitality is not something that the corporations really were focused on. And so, we went to our suite buyers, and we offered them the ability to postpone their suite contract and take a year off, start October 1st, which will be, again, this coming October. We allowed them to buy their suite during that period. So when we were at the point of the 10%, there was not a lot of uptake. But when we started getting towards the playoffs or the back of the season, as people started feeling a little more confident, the uptake started to increase. In terms of our renewals and new sales, they're coming along. It's a little slower than ticketing and a little slower than our sponsorship business, which With the other business that we were very focused with during this period, obviously, we had less assets to deliver to our partners, but the leagues worked with us. We found new premium opportunities, and our partners wanted to be with us. It took a little bit to defrost, but they were here, and as we started looking forward, which we signed Chase is now going to stay with us as our marquee partner. We've got a number of other renewals that are right here on the horizon, as well as some new partners that are coming in. So we feel really good about the speed that we're going to come back. And the team's really working to get back to pre-pandemic levels. So all in all, I feel pretty good about this business.

Well, you got me.

My follow-up was on sponsorship, and you answered the question. So thanks.

Absolutely, Brandon. Thanks, Brandon. Christy, we'll take the next caller.

Certainly. Your next question is from David Karnovsky of JP Morgan.

Hi. Thank you. Maybe to follow up on Ben's question, you know, some NBA franchises, as you noted, have realized value of price discovery through the sale of minority positions. And, you know, there are willing buyers out there in the form of private equity now. So, you know, just wanted to ask you if that's something you would ever entertain for the Knicks or Rangers.

So let me just start. I'm not going to speculate on hypotheticals. It's just not what we do. But I should reinforce what I also said earlier, right? The primary reason or one of the primary reasons for the fifth was to better highlight our sports franchise values. We've been very mindful of those transactions in leagues. And we just feel a lot of confidence in the value of our teams. And we just don't think it's reflected right now, appropriately reflected right now in the current stock price.

Okay. And maybe can you just talk on how you expect vaccine requirements to impact overall ticket demand? And I know the city hasn't done this yet, but, you know, assuming they do bring back mask mandates for indoors, How would you expect something like that to impact attendance or even podcasts? Thank you.

Sure. I'm happy to. Look, I'll start with we've learned to be very flexible and to operate very nimbly and quickly and turn on a dime. But what I can say is I think we actually benefit from operating here in New York. And we're very focused on this coming season and having full seasons, which we expect to have for both the NBA and NHL. We're expecting to have full capacities, and we're always focused on making it a safe environment for our customer. So, again, we operate in New York, which benefits us in a few ways. New York City, as you mentioned, is already requiring indoor events for fans to be vaccinated. It's actually very positive for us. So our market already has a very high vaccination rate, so that's very good for us, too. This whole summer, this whole year, we've been very focused on surveying and understanding what our consumers want and believe. And when we've done our surveys, the overwhelming majority of our fans prefer a vaccinated event. So it gives us even more credence and makes us feel, you know, feels good about what's going on. And then finally, when we looked at the playoffs, so I'll give you a little inside and say basketball here instead of inside baseball. But, you know, when we went on sale initially, we talked about having 90% vaccinated. The reason we started that way, we had 10% unvaccinated, was we didn't know how the vaccinated sections were going to sell at that time. Other sports teams who have tried vaccinated zones, they were miserable failures. So we really were the first of the kind. And so we started off with a little unvaccinated, a little vaccinated, and the vaccinated was selling. And we started hearing the consumer demand. So we said, let's keep on going. And we were able to drive the capacity. And to be honest, we really were flying blind going into it. We just didn't know what consumers were going to want. And it was very clear that We hoped, we did our survey, you know, research, but again, until you actually do it, you never know the proof isn't in the pudding, and it was there. So we know that this market wants vaccinated fans. And when you look at other events that have occurred or on sales of, you know, other entertainment, Broadway, concerts, you see the vaccinated, you see the demand in this market, and so we feel good.

Very helpful. Thank you. Thanks, David. Christy, we'll take one last caller.

Certainly your final question is from David Joyce of Barclays.

Thank you. A few follow ups, please. On the sports betting side, when do you expect to start generating revenue from monetizing your data feeds, be it in overlays for broadcasts or other sources? Secondly, On esports, there was some news this week of Roc Nation starting to integrate its pro sports athlete clients in the esports world. So if you could, in light of that, could you update us on the status of the Knicks and Rangers esports brands and also assuming that esports is roughly a billion or billion and a half market now around the globe, what is the upside there? And finally, if you could just talk about what the

nixon rangers uh salary cap and luxury tax levels are for the next year thank you um let's uh why don't we work backwards i think that's probably victoria you want to take the first question and then we'll we'll go to you yeah no good absolutely and sure so david let me just um give you the information on the salary cap and the luxury tax threshold so For the 21-22 season, the NHL salary cap threshold is $81.5 million, which is flat to last season, while the NBA salary cap threshold is $112.4 million, and that reflects a 3% increase from last year. And then, finally, the luxury tax threshold will be $136.6 million.

Thanks. So from your other two questions, in terms of a mobile sports betting, I'd say actually we're beginning to start monetizing today just in the sense that we are able to, right now New Jersey is legal, so we already had, we have partners in this space now to the much smaller level right now. I think the big next step will be when the state picks its operators or picks the platform and then the operators. I could see us entering into deals before that point either exclusive or non-exclusive but it might be until that point and we're working through it we're very it's very active right now and everyone's following the timing um but i think one important point is what is the tax level and how many players and those two things will trigger what occurs in the space in terms of our final opportunity to monetize here but i do know there's an opportunity no matter what because of the forced the minimum of four um operators which i just i know we've got an opportunity here In terms of eSports, so I would say we're so pleased with the way that the eyeballs have come in on this space. When you think about panels 18 to 25 or 18 to 34, In terms of average engagement, in terms of time spent, I mean, they're up there with the big four. It's not in the other demos, but in that demo. So that to me says, okay, we've got a business here. How do we turn that into monetization has lagged a little bit because it's different than typical sport. And so finding the right endemic partner, finding ways to keep the fan, knowing that it's part of the game and it doesn't change anything The way people take in the sport is something that needs to be worked through. But the key is there's eyeballs here. And so you've got to start with the eyeballs. And so we feel really good about the long-term opportunity. I mean, I think that covers the questions.

Thanks, David. And thank you all for joining us today. We look forward to speaking with you on our next earnings call. Have a good day.

Goodbye. This does conclude today's conference call. You may now disconnect.