Business Context and Reporting Period
The Madison Square Garden Company filed this unaudited Form 10-Q for the quarter and six months ended December 31, 2017, the second quarter of fiscal 2018. The company operates two reportable segments: MSG Entertainment, including venues, live events, TAO Group, Boston Calling and original productions; and MSG Sports, including the Knicks, Rangers, Liberty, minor-league teams and other sporting events.
Results include TAO Group on a three-month reporting lag, and include acquisitions of Counter Logic Gaming (CLG) from July 28, 2017 and Obscura Digital from November 20, 2017. The quarter is seasonally important because of the Christmas Spectacular and the NBA and NHL regular seasons.
Key Financial Metrics
| Metric | Three months ended Dec. 31, 2017 | Three months ended Dec. 31, 2016 | Six months ended Dec. 31, 2017 | Six months ended Dec. 31, 2016 |
|---|---|---|---|---|
| Revenue | $536.3 million | $445.2 million | $781.5 million | $626.8 million |
| Operating income | $72.4 million | $58.3 million | $56.9 million | $25.4 million |
| Operating margin | 13.5% | 13.1% | 7.3% | 4.1% |
| Net income | $188.0 million | $57.4 million | $177.1 million | $28.5 million |
| Net income attributable to company stockholders | $189.6 million | $57.7 million | $178.5 million | $29.1 million |
| Diluted EPS | $7.96 | $2.39 | $7.48 | $1.20 |
| Adjusted operating income | $118.0 million | $96.0 million | $147.2 million | $97.6 million |
Revenue increased 20% in the quarter and 25% for the six-month period. Operating income increased 24% and 124%, respectively. Adjusted operating income increased 23% in the quarter and 51% for the six-month period. Related-party revenue was $41.1 million in the quarter and $77.0 million for the six-month period.
- MSG Entertainment revenue increased 41% to $271.2 million in the quarter and 44% to $435.5 million for the six-month period. The increases primarily reflect the inclusion of TAO Group, stronger venue activity and higher Christmas Spectacular revenue.
- MSG Sports revenue increased 5% to $265.1 million in the quarter and 7% to $346.0 million for the six-month period. Growth reflected additional Knicks and Rangers home games, higher sponsorship, media-rights and suite revenue, and league distributions, partly offset by lower revenue from other sporting events.
- For the 2017 holiday season, the Christmas Spectacular sold more than one million tickets, a low-single-digit percentage decrease from 2016, while higher average ticket prices and additional performances increased revenue.
- Net income benefited from a $116.1 million income tax benefit for the six-month period, including a $113.5 million deferred tax benefit related primarily to the Tax Cuts and Jobs Act. Reported net income and EPS are therefore not representative of recurring operating performance.
Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $1.126 billion at December 31, 2017, compared with $1.238 billion at June 30, 2017. Restricted cash was $23.3 million.
- Six-month operating cash flow was $63.3 million, down from $109.9 million in the prior-year period.
- Investing cash outflow was $143.9 million, including $127.7 million of capital expenditures, primarily the purchase of London land and venue-related investments. Financing cash outflow was $31.9 million.
- Debt consisted primarily of the $110.0 million TAO senior secured term loan, reported at $105.9 million net of deferred financing costs. The company also had $377.0 million of revolving credit capacity, all described as undrawn at December 31, 2017.
- The Knicks and Rangers revolving facilities were undrawn and their required financial covenants were satisfied. TAO’s revolving facility was also undrawn; TAO was reported in compliance as of September 24, 2017, its most recent covenant-testing date.
- The company stated that available cash, operating cash flow and revolving borrowing capacity were sufficient over the next 12 months to fund operations, venue development, investments and share repurchases.
Material Changes Versus the Prior Comparable Period
- TAO Group contributed $54.4 million of quarterly MSG Entertainment revenue and $115.1 million for the six-month period; these results were absent from the prior-year comparisons.
- MSG Entertainment operating income increased 31% in the quarter and 69% for the six-month period; adjusted operating income increased 29% and 60%, respectively.
- MSG Sports operating income increased 23% in the quarter and 39% for the six-month period; adjusted operating income increased 17% and 29%, respectively.
- Corporate and Other operating losses increased to $45.5 million in the quarter and $85.2 million for the six-month period, primarily from higher compensation, professional costs and Obscura-related retention bonuses.
- Capital expenditures increased substantially, including approximately $79.5 million for London land and related transaction taxes. Property and equipment rose to $1.235 billion from $1.159 billion at June 30, 2017.
- The company acquired a controlling interest in CLG and a controlling interest in Obscura. It also recognized $4.0 million of contingent consideration paid in connection with CLG.
- The company repurchased approximately $11.7 million of Class A common stock during the six months, leaving $259.6 million under the authorization.
- Adoption of share-based compensation guidance resulted in a $2.4 million cumulative adjustment to beginning retained earnings and additional paid-in capital.
Guidance, Outlook, Risks and Unusual Items
- Management cautioned that regular-season ticket-related revenue may be lower in the second half of fiscal 2018 because the Knicks and Rangers are scheduled to play fewer home games.
- The company plans to develop MSG Sphere in Las Vegas, an expected more-than-18,000-seat venue targeted for construction commencement in the second half of calendar 2018. It is also pursuing a large-scale venue in London and expects to require additional capital for these projects.
- Major risks include event and team popularity, team personnel costs and luxury taxes, seasonality, economic conditions, competition, construction delays and cost overruns, acquisition integration, esports execution, venue permitting, cybersecurity, debt covenant compliance and the ability of investees to repay loans.
- The company owns 50% of Azoff MSG Entertainment, which owns a majority interest in Global Music Rights. GMR is involved in antitrust litigation with the Radio Music Licensing Committee; an interim licensing arrangement was extended through March 31, 2018. Management did not believe other lawsuits would have a material adverse effect.
- A $250,000 non-cash impairment charge was recorded against a cost-method investment; the filing describes this as miscellaneous expense.
- Annual impairment testing identified no goodwill or indefinite-lived intangible-asset impairments.
- Future adoption of revenue-recognition, lease and financial-instrument standards may affect reported results and balance-sheet presentation. The revenue-recognition assessment remained ongoing, with an expected impact on the timing of certain revenue streams.
- A 5% hypothetical fluctuation in the British pound/U.S. dollar exchange rate would have changed net asset value by approximately $5.2 million, primarily because of the London land investment.
Most Important Facts for Investors to Verify
- Separate recurring operating performance from the $116.1 million six-month tax benefit generated by tax-law changes and deferred-tax remeasurement.
- Assess the comparability of year-over-year growth because TAO Group, CLG and Obscura were not included in the prior-year periods.
- Verify the timing, total cost, financing plan and return assumptions for MSG Sphere Las Vegas and the planned London venue.
- Monitor future Knicks and Rangers home-game schedules and their effect on ticket, food, beverage and merchandise revenue.
- Review TAO Group’s high-cost secured debt, required amortization beginning March 31, 2018, leverage covenants and limited recourse structure.
- Track cash conversion, elevated capital expenditures, contingent consideration and the company’s continued share repurchases.
- Follow the GMR/RMLC litigation and the expiration or replacement of the interim licensing arrangement.