Madison Square Garden Sports Corp.

Good morning. Thank you for standing by and welcome to the Madison Square Garden Sports Corp. Fiscal 2023 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. 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 followed by the number one on your telephone keypad. I would now like to turn the call over to Ari Daines, Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to MSG Sports' fiscal 2023 second quarter earnings conference call. To begin, I'd like to welcome our new president and COO, David Hopkinson, to today's earnings call. David will provide 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 investor 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 four and five of today's earnings release, we provide consolidated statements of operations and a reconciliation of operating income to adjusted operating income, or AOI, a non-GAAP financial measure. And with that, I'll now turn the call over to David.

Thank you, Ari, and good morning, everyone. I'm delighted to be here speaking with all of you today.

I look forward to meeting with many of you in the coming months. I am honored to have taken on this new leadership role at MSU Sports. Our company has a collection of iconic professional sports assets, and with significant opportunities for growth ahead, I am excited to drive the business forward and realize its potential. Our portfolio is highlighted by the Knicks and the Rangers, who kicked off their 22-23 regular season in October. And following on last year's record financial performance, I'm pleased to say that we have continued to build on that positive momentum this season, as consumer and corporate demand remains robust. The strength of our business is reflected in our fiscal second quarter results, with revenue of $354 million, an increase of 22% year-over-year, and adjusted operating income of $77 million, up 38% as compared to the prior year period. This growth was broad-based with total revenues as well as per-game revenues across tickets, Sweets, sponsorship, food and beverage, and merchandise all up year over year as compared to the fiscal 22 second quarter. As we look ahead, our strategy remains focused on continuing to execute on our many opportunities for growth, from offering new ticketing and premium hospitality products to forging deeper relationships with our fans

to strengthening our brand globally.

Based on our current trajectory, we are positioned to deliver year-over-year growth across key revenue lines this fiscal year. And our announcement in October to return $250 million to our shareholders reflected this momentum, coupled with our confidence in the underlying value of our marquee professional sports franchises. And now let's discuss in detail how our business is performing. Our teams are more than halfway through the NBA and NHL regular season. And both the Knicks and Rangers have talented rosters, including the Rangers' Igor Shcherkin, Adam Fox, and Artemi Panarin, who participated in the NHL All-Star Game this past weekend. And the Knicks' Julius Randle, who was recently selected as a 2023 NBA All-Star. Both teams are currently in playoff contention, and we look forward to the coming month of exciting competition. We continue to be energized by our fans, whose enthusiasm for our teams has only grown stronger during the last few years. Our average combined season ticket renewal rate is above 90%. and we have also seen strong sales of new season ticket packages. As a reminder, season tickets represent the significant majority of our ticketing revenue. We're also pleased to say that our group and individual ticket sales have returned in full force, which reflects improving tourism as well as our enhanced results across dynamic pricing and improved efficiencies in data analytics and marketing. In fact, average tickets sold per game for individuals and groups through the fiscal second quarter has not only significantly exceeded the prior year quarter, but has also exceeded the pre-pandemic second quarter of fiscal 20. This robust demand, combined with higher average ticket yields, drove substantial year-over-year growth in ticketing revenue this quarter, with both the Knicks and Rangers maintaining their position amongst the league leaders

in average state receipts so far this season.

Beyond ticket sales, we have seen the enthusiasm from our fans again lead to increases in per capita spending across food and beverage and merchandise in the fiscal second quarter relative to last year, which, as you may recall, was a robust year for guest spending. We are strengthening and growing our fan community using a multi-product approach to forge impactful, to rest relationships with our customers at multiple touch points in their experience. On the merchandise front, we have continued to introduce bespoke product offerings to build connections with guests while driving business results. We are once again partnering with popular streetwear fashion brands such as Jeff Staple with the Rangers and KISS with the Knicks to create new collaborative collections this season following prior year's success. In fact, in November, we also named KIF founder and CEO, Ronnie Feig, as our first ever Knicks creative director. In addition to developing an in-house line of products, Ronnie is focused on helping to provide a distinctive look and feel across our marketing, content, and merchandise initiative. We're extremely excited to have Ronnie join us for this continued and expanded collaboration that we believe will further develop a global community around our iconic Knicks brand. On the Rangers side, we recently welcomed thousands of our fans to watch the team's first ever open practice at the Garden, giving them the opportunity to get up close and personal with their favorite players and another great example of the unique ways in which we look to connect with and develop our next generation. of fans. And our efforts to foster our fan community also extend outside of the arena. Across our social media platforms, we've been rolling out compelling exclusive content, including behind the scenes player interactions, locker room footage, and lifestyle look-ins. It's clear this content is resonating. So far this fiscal year, we have added over 600,000 net new social followers across both teams, bringing our combined total following to over 17 million across our social channels. As we continue to demonstrate through co-branded social media content, our global marketing partners view this social content as a unique avenue to connect with both our avid and casual fans Our marketing partners have also continued to demonstrate solid demand across all of our assets in fiscal 23. In partnership with M&T Entertainment, the first half of the fiscal year was highlighted by extensions with signature partners, Verizon and Spectrum, as well as with other brands such as Dunkin' and Jagermeister. At the same time, the company has made strides in expanding into new categories and we welcomed leading insurance brokerage firm Hub International as a signature partner earlier this year. As a reminder, this fiscal year for the first time, we're also realizing the full run rate impact of our extensive deals with sports gaming companies at MGM, Caesars Sportsbook, and DraftKings.

Our sponsorship momentum

demonstrates the strength of our brand and our expansive reach in the New York market and beyond. And with the NBA's expanded international sponsorship opportunity beginning this year, we are increasingly focused on growing our commercial opportunities globally for the Knicks. To that end, we recently announced MSC Cruises, as the official cruise line partner and first official global partner of the next. We fully expect this global partnership will be the first of many as we remain confident in the reach and appeal of the next international. Corporate demand has also extended to our premium hospitality business. We have seen robust renewals and new sales of suite licenses through the first half of the year, positioning us for continued growth in this category. On the media rights side, we continue to see increases in local and national media rights fees due to annual contractual rate escalators. And with the NBA media rights renewals coming due after the 24-25 season, we remain confident in the opportunity ahead. Before we turn the call over to Victoria, I'd like to touch on the recent third-party valuation for the Knicks and Rangers. In December, Sportacode published its annual ranking of NBA team valuations, with the Knicks coming in at an estimated $6.6 billion, up 8% from last year. That same month, Forbes updated its NHL team valuations, with the Rangers maintaining the top spot at $2.2 billion, a 10% increase year-over-year. And there continue to be record transactions for professional sports franchises, as evidenced by the recent Phoenix Suns news. Just two months ago, the Suns were valued by Forbes at an estimated $2.7 billion. And now, with a reported sale price of $4 billion, the Suns are delivering the highest-ever sales for an NBA team. We feel great about our position, owning two iconic franchises that have dedicated fan bases and play in the largest media market in the country. We remain encouraged by the continued increases in estimated team valuations, along with the transaction to continue to come in well above those estimates. Our recent shared buyback program is a demonstration of that confidence, recognizing the gap that persists between the current trading price of our stock relative to the intrinsic value of our marquee force franchises. And so, with more than half of fiscal 2023 already behind us, we're proud of how our business is performing, and we remain confident in our ability to generate long-term shareholder value.

With that, I'll now turn things over to Victoria.

Thank you, David, and good morning, everyone. I would like to start by reviewing our fiscal 2023 second 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 22-23 regular seasons for the Knicks and Rangers. In aggregate, we hosted 41 pre and regular season games across both teams as compared to 35 games last year for six more games, which positively impacted this quarter's results. I'd also note that our fiscal third quarter will reflect two additional home games, while our fourth quarter will reflect eight fewer regular season home games, both as compared to the prior year periods. Turning to results for the fiscal second quarter, total revenues were $353.7 million as compared to $289.6 million in the prior year period, with increases across all key revenue lines. Event-related revenue of $142.3 million increased 30% year-over-year. This mainly consists of ticket-related revenue as well as food, beverage, and merchandise sales, both of which saw higher average per-game revenue driven by the enthusiasm from our fans. The increase in event-related revenue also reflected the additional games played at the Garden during the current year quarter as compared to the prior year period. National and local media rights fees of $118.2 million increased 5%, primarily due to the impact of contractual escalators of both our local and national media rights agreements. Suites and sponsorship revenues of $81 million increased 38%, due to a higher number of games year over year, as well as an increase in per-game revenue for both suites and sponsorships. These results reflect the demand we have seen for new suite licenses at the garden and robust renewals, while sponsorship includes the full run rate impact of our sports betting partnerships and the impact of the NHL's new digitally enhanced dashboards. Adjusted operating income increased 38% to $76.6 million as compared to the prior year period. This improvement was driven by the increase in 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 reflects higher team personnel compensation as well as other team operating expenses. The increase in SG&A expenses was primarily due to higher employee compensation reflecting executive management transition costs recorded in the current year period, as well as higher marketing costs. As we look ahead, we continue to expect our business to deliver growth across key revenue lines in fiscal 23, while our AOI will also reflect higher team operations expenses. Turning to our balance sheet, as David mentioned earlier, in October, we implemented a program to return approximately $250 million to our shareholders. This was comprised of an approximately $173 million special cash dividend and a $75 million accelerated share repurchase program, which was completed in January. In total, the company repurchased approximately 456,000 shares at an average price per share of approximately $164, representing about 2% of Class A common shares outstanding prior to the buyback. We now have approximately $185 million remaining under our existing share repurchase authorization. In connection with the special dividend and share repurchase, the company borrowed an additional $55 million under the NICS revolving credit facility and $160 million under the Rangers facility, of which $30 million in total was subsequently repaid during the quarter. At the end of the quarter, we had $435 million of debt outstanding, comprised of $260 million under the NICS Senior Secured Revolving Credit Facility and $145 million under the Rangers Senior Secured Revolving Credit Facility and $30 million advanced from the NHL. I would also add that in addition to the $30 million of total debt repayment in the quarter, last week we paid down an additional $15 million on the Rangers revolver. Our quarter end cash balance of approximately $44 million represented a net decrease of $37 million compared to our September 30th balance of $81 million. With regards to liquidity, As of December 31st, we had $164 million of liquidity comprised of $44 million of unrestricted cash and cash equivalents and $120 million in borrowing capacity under the team's revolving credit facilities. Based on the momentum we continue to see in the business and the growth opportunities ahead, we remain confident in our ability to drive long-term value creation for our shareholders. With that, I will now turn the call back over to Ari.

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

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. And your first question comes from the line of Brandon Ross from LightShed Partners. Your line is open.

Hey, good morning. David, you mentioned the Forbes valuations and those recent sales of teams at pretty hefty prices, most relevantly the Phoenix Suns sale. But that's nothing really but illustrative for investors without a sale of the Knicks or Rangers or at least a minority sale as a mark. Are either of those things in your consideration, Seth?

Well, hi, Brandon.

Good morning. Look, let me start by saying that we're as confident as ever in the value of our teams. You know, these are incredibly scarce assets. They've got strong business fundamentals that we just reviewed, and we believe they've got significant opportunities for long-term growth. So, as I mentioned in my remarks, we just don't think that is appropriately reflected in our current stock price. And that was one of the reasons that we made the recent share repurchase. There's also changes in the ecosystem. The NBA has recently allowed for private equity to come into the marketplace, as well as sovereign wealth funds. So we've got new pools of capital available. So to answer your question, we have no plans to sell either team. And since you asked about the Knicks, no current plans there, but we would certainly not rule out the possibility of selling a minority stake in the Knicks or the Rangers.

Got it. Thank you.

Your next question comes from a line of David Karnofsky from JP Morgan. Your line is open.

Thank you. David, just given the potential for major bankruptcies in the RSN space that could significantly impact distribution for the NHL NBA, how are you thinking about risk to your own distribution over the next several years and the potential need to maybe adjust existing terms or payments you receive, if only to establish a wider or more sustainable carriage for your games?

Yeah, thanks, David.

That's a good question. If we take a step back, we all know and we can see that the media landscape is evolving. We believe strongly in the value of live professional sports content, and especially in the case of premium content like the Knicks and the Rangers. We're happy that we operate here in the nation's largest media market, So that benefits us, and it benefits our partner, MSG Networks. You know, sports rights we've seen proven over and over as a great investment, especially over the long term. So we have confidence as we look ahead. In answering your question specifically, you know, I want to flag for you that we've got long-term local media contracts in place with our partner, MSG Networks. And those agreements provide exclusive local distribution of all of our live content, including our digital rights. MSG Networks have been great partners and we're really supportive of what they've been doing on the distribution front, including in terms of new digital offerings. Recently, MSG Network announced plans to launch a direct-to-consumer offering in our market. a product that's designed to appeal to sports fans that do not currently subscribe through a traditional linear package. We're also pursuing a variety of additional ways to increase engagement and grow our reach amongst our fan base, especially on social media. A priority for us is delivering compelling, exclusive social media content, giving our fans behind the scenes player interactions, locker room footage, live look-ins, and we think it's working. We've added 600,000 new social followers across both teams so far just this season alone, and now have a total social media ecosystem of 17 million followers across all our social channels. Social is a priority for us, and as the media landscape evolves, With DTC offerings, we're going to complement distribution outreach using social media.

And then maybe for Victoria, both the Knicks and Rangers as of today are playoff teams, which means potentially playoff revenue. I guess, how should investors think about potential use of fiscal year end cash flow, assuming you guys have deep runs?

Sure, thanks, David.

Well, first, you know, let me say we are really looking forward to the coming months of, you know, what's sure to be really exciting competition. You know, and just as a reminder, we were really pleased last year with the financial impact of the Rangers' playoff performance, which drove significant increases in revenue in AOI for the 10 home games, playoff games that we played. So we're definitely excited for the remainder of the season. But when we think about what to do with the potential of the excess cash flow, our near-term focus continues to be on paying down debt. As we've talked about, we borrowed $215 million in addition to the cash on hand that we had generated in order to return $250 million to our shareholders. As you've heard us discuss, of course, this return of capital was a reflection of the strength of our business, which has continued through this fiscal year so far, as well as our confidence in the value of our sports franchises. When we look ahead and think about our capital priorities, they're generally the same, certainly near term, as of course to maintain that appropriate liquidity to fund our operations and invest in our core business. Importantly is to keep a strong balance sheet. So we will, as I mentioned, continue to focus on paying down debt in the near term, the $30 million we paid in the quarter and then another $15 million over the last week. But third, or I guess our longer term capital considerations, we would of course consider other uses of our cash flow over time, including another return of capital potentially in the future.

Thank you.

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

Your line is open.

Thanks. Good morning. David, welcome to the call. Nice to meet you over the phone. I wanted to ask you about sort of the corporate demand backdrop. You mentioned really strong suite renewals and sponsorship trends, but we are seeing corporate spending pretty soft in the advertising marketplace. We're seeing layoffs, obviously, in a lot of sectors like tech. Can you just tell us what you're seeing when you look out into the forward bookings and also just the nature of these multi-year contracts? Would you have already seen a weakness in your business if it were to show up, or might that be ahead of us? And then I just want to ask Victoria if she could maybe pick up on her last answer. Is there a way to think about leverage at this company in terms of more traditional metrics, whether it's debt to EBITDA or debt to value the teams? Because I know you're paying debt on debt, but it would seem like you've got a lot of capacity if you wanted to use more. But obviously, the sort of league oversight plays a role as well. So I'd be curious in your thoughts there. Thank you both.

Great. Thanks, Ben. I'll tackle the first half of that, and then I'll let Victoria answer the second part of your question. the short answer is no um we're just not seeing an impact uh on our business other than a really strong demand for the product you know look like you we're really mindful of the broader macro environment but if i look across sort of three big sectors of our business all of them are really strong um ticketing As I mentioned, you know, we had season ticket rules that exceeded 90%, strong sales for both teams, strong demand for new packages, strong group and individual ticket sales. You know, as I mentioned in my remarks, you know, the group and individual ticket sales exceeded last year's Q2, but they were also above the pre-pandemic Q2 in 20. So tickets on an individual basis look better than ever. Specifically with respect to corporate demand, our business remains strong. And if I think about sponsorships, we're seeing, as I mentioned, the full run rate of mobile sports gaming with our three partners in their first full year with us. We see great demands for new offerings in the marketplace. The NHL introduced the digitally enhanced dashboards this year. We're seeing great demands on that inventory from our partners and have introduced the new partners, the renewals, and with Spectrum, Verizon, Dunkin', Jagermeister, a new deal in Hub. So we're seeing strong demand from the corporate sector. And we think we've got opportunity for headroom as well with both international as an opportunity for the Knicks and patch partners yet to come for both Knicks and Rangers. With respect to the suites and premium products, we had a great year for renewals. We're having a great year for new sales and in conclusion, Yeah, we're taking none of that for granted. We're working hard every day. We follow the economy like you do, but so far we're seeing absolutely no softening whatsoever and, in fact, really robust demand.

Great.

Want to take over from there?

Sure. So, yes, we have not publicly provided an official target, but I will say this is certainly something. that we're thinking about and that we are discussing internally. And you're correct, the leagues do have oversight as to the amount of debt that either one of the teams could carry. But sort of as we mentioned, we're gonna feel very good about our overall liquidity position, the amount of debt that we currently have outstanding. Again, we just think it's prudent to use our excess cash flow at this time. to just continue to pay it down given the overall cost of borrowing these days. But like I said, it is certainly something that we spend a lot of time thinking about. But at the end of the day, when I really take that step back, it's really the trajectory of the business that we feel good about and our ability to generate free cash flow. And then it's the potential as to what we can do with that cash going forward. Again, with some a variety of capital application and opportunities that are out there, including returning money to shareholders, as we did, that we were very pleased to be able to do.

Great. Thank you.

Your next question comes from the line of Devin Briscoe from Wolf Research. Your line is open.

Thanks. My question is related to the upcoming NBA National TV Rights Renewal. The values that are being talked about are multiples higher than the current deal. Could you talk about how strong the flow through of incremental revenue to cash flow could be from a new deal and if and how it would change your capital allocation priorities?

Sure, Devin.

So first off, we continue to believe in the value of large sports, and particularly as well as our league's appeal domestically and internationally. And we fully trust the NBA to maximize the opportunity when the time comes, which just as a reminder, that's going to be after the 24-25 season, which is where the current agreement runs through. So sort of what we're talking about would be out into our fiscal 26th. But specifically, to answer your question, in terms of that financial impact, all teams across the league would share equally in the increase from national media fees, with a net impact of, I would say, roughly about half before revenue sharing dropping down to increase our AOI. So certainly some good potential for a positive financial impact you know and when I talked about the capital allocation policy a little earlier you know it was sort of focused a bit more on the near term in terms of the you know potential for excess cash flow on you know with playoffs but I think you know thinking out several years I think the priorities still remain the same in terms of maintaining you know a healthy balance sheet maintaining a enough liquidity for our ongoing operating needs. And then again, you know, from a longer-term perspective, which is I think what we're talking about here is that opportunity for additional returns of capital.

Thank you.

And your next question comes from the line of Paul Golding from Macquarie Capital. Your line is open.

Thanks so much. I was hoping we could dive a little deeper into some of the comments earlier around the sponsorship space. In terms of cohort, is there any color you could give? It's apparent that the mobile sports betting cohort and seemingly media as well has been strong, but are they different? sort of mopping up any excess supplier inventory sort of in the spot market from others that might be weaker? Or is it pretty much all spoken for in terms of the strength that they're able to deliver as the largest component of your sponsorship revenue? And then secondly, I just wanted to see if we could get a little more color on the Jersey Patch sponsorship process. Thanks so much.

Yeah, sure thing, Paul. Those are really good questions. With respect to the three mobile gaming partners that we have, DraftKings, BetEd, GM, and Caesars, that was a big focus for us. When that category was introduced, We want to make sure that we were able to maximize that opportunity. And we're really happy with where we landed there, not just from a revenue perspective, but also from a brand perspective. We believe we found the right partners and the right mix to fully profit from and benefit from that new opportunity. We think about the partnerships business in those two dimensions that you mentioned. One is category and one is inventory. I was pleased to introduce Hub as a signature partner of ours, new this season, which was an important category for us. Insurance brokerage is an important strategic category, and I'm glad that we filled that opportunity with such a strong partner and good economics underpinning that deal. So we'll continue to look for key categories that we can sell to the right partner, on an exclusive basis on the right package. When it comes to inventory, the sort of second half of your question and on jersey patches, we currently are not playing with a patch on the next jersey. We've got that opportunity open and available. And we believe that when the right deal presents itself, which we're working on on a daily basis, we'll conclude that. For us, it's about the right partner, the right economics, and we're prepared to sit and work that category because it's such a strategic priority for us. We want to make sure we get the right deal done. With the Rangers, we're taking the exact same approach. The NHL introduced that opportunity just at the beginning of this year. We are watching the marketplace very closely because baseball has also introduced the sleeve opportunity this year. And so it's a noisy marketplace out there. I really believe that we've got to work this every day and conclude the right deals, not necessarily the quickest deal. However, when we do so, whether it's the Knicks or the Rangers or ultimately both, we've got material upside in our partnerships business.

Great. Thanks for the call, Eric.

And this ends our question and answer session. Mr. Ari Gaines, I'll turn the call back over to you for some final closing comments.

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

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