Business Context and Reporting Period
Madison Square Garden Entertainment Corp. (now Sphere Entertainment Co.) reported its fiscal first quarter ended September 30, 2020. The company operates live entertainment venues, entertainment content, Tao Group Hospitality dining and nightlife venues, Boston Calling, and the MSG Sphere development projects. The company became a standalone public company on April 17, 2020; therefore, the 2020 results are consolidated while the 2019 comparison is presented on a carve-out combined basis and may not be directly comparable.
Results were materially affected by COVID-19. Most entertainment venues remained closed, events were postponed or canceled, the 2020 Christmas Spectacular and Boston Calling festival were canceled, and Tao Group Hospitality operated with reduced capacity.
Financial Performance and Liquidity
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Revenue | $14.4 million | $178.0 million | Down 92% |
| Operating loss | $126.6 million | $68.1 million | Loss increased $58.5 million |
| Net loss | $94.4 million | $56.6 million | Loss increased $37.8 million |
| Net loss attributable to shareholders | $89.8 million | $56.0 million | Loss increased $33.9 million |
| Loss per share | $3.69 | $2.33 | More negative |
| Adjusted operating loss | $67.7 million | $30.1 million | Loss increased $37.5 million |
| Cash used in operating activities | $163.8 million | $19.2 million | Use increased $144.7 million |
| Capital expenditures | $112.1 million | $86.4 million | Up $25.7 million |
Calculated operating margin was approximately negative 881%, compared with approximately negative 38% in the prior-year period. Net margin was approximately negative 656%, compared with approximately negative 32% in the prior-year period. These margins are distorted by the severe revenue decline and should be interpreted with the carve-out comparability limitation.
- Entertainment revenue was $7.6 million, down 94%, and the segment reported a $110.7 million operating loss versus a $67.4 million loss.
- Tao Group Hospitality revenue was $7.2 million, down 88%, and the segment reported an $11.3 million operating loss versus $3.3 million of operating income.
- Cash, cash equivalents and restricted cash totaled $953.6 million at September 30, 2020, including $925.8 million of cash and cash equivalents and $38.9 million of short-term investments.
- Reported long-term debt, including the current portion and net of deferred financing costs, totaled $31.6 million. Tao had $24.25 million of undrawn revolving availability, subject to conditions.
- Total operating lease liabilities were $217.6 million.
- Total assets were $3.59 billion and total equity was $2.78 billion at quarter-end.
Material Changes Versus the Prior Comparable Period
- Revenue declined by $163.6 million, primarily because venue events, sports-related activity, sponsorships, suite licenses and advertising were largely unavailable.
- Direct operating expenses declined 74% to $34.2 million and selling, general and administrative expenses declined 31% to $60.3 million, but cost reductions did not offset the revenue collapse.
- The company recorded $19.9 million of restructuring charges related primarily to the reduction of approximately 350 full-time positions.
- Operating cash flow deteriorated to a $163.8 million use, reflecting the larger loss, income tax payments, restructuring payments, working-capital changes and reduced advance billings.
- Investing cash flow was a $194.3 million source, primarily because $300.0 million of short-term investments matured; capital expenditures remained substantial and were principally related to MSG Sphere projects.
- Miscellaneous income increased to $34.2 million from $7.0 million, primarily due to $33.7 million of unrealized gains on DraftKings and Townsquare investments. This was non-cash and market-sensitive.
- Construction in progress increased to $797.8 million from $685.4 million, primarily reflecting MSG Sphere development.
Guidance, Outlook, Risks and Unusual Items
- Management estimated an average monthly operational cash burn of approximately $25 million for the remainder of fiscal 2021. This measure excludes severance, capital expenditures, MSG Sphere content and technology spending, and working-capital changes.
- The company expected MSG Sphere in Las Vegas to open in calendar 2023 after extending the construction timetable and reducing near-term spending. The estimated total cost was approximately $1.66 billion, excluding certain content, internal labor, furniture and equipment costs; approximately $556 million had been incurred through September 30, 2020.
- On November 12, 2020, a subsidiary entered into a five-year $650 million senior secured term loan facility. The facility provides additional liquidity but imposes minimum-liquidity requirements, security interests, guarantees, mandatory prepayment provisions and restrictive covenants.
- The Tao credit agreement amendment suspended certain financial maintenance covenants through December 31, 2021 but increased liquidity requirements and resulted in a company guarantee and a reserve account initially funded with approximately $9.8 million. A prolonged recovery could require further waivers and could create default or acceleration risk.
- Management believed available liquidity was sufficient for the next 12 months, but approximately $191 million of cash represented advance customer proceeds that could require credits, refunds, make-goods or rescheduled events.
- All venue events had been postponed or canceled through at least December 2020 and could be affected into 2021. The NBA and NHL seasons might not generate normal Garden license payments, particularly if games were not played at the venue or were played with limited attendance.
- Sixteen Tao venues were open at limited capacity as of September 30, 2020, while twelve remained closed; Avenue and Vandal in New York had permanently closed.
- The company reported no goodwill or indefinite-lived intangible-asset impairment in the quarter, but warned that the pandemic could cause future impairment charges. Tao had recorded $105.8 million of impairment charges in fiscal 2020.
- A legal settlement became effective October 8, 2020. A related equity award cancellation was expected to reverse approximately $11.5 million of share-based compensation expense in the second quarter of fiscal 2021.
- The company had authorization to repurchase up to $350 million of Class A common stock, but no shares had been repurchased as of September 30, 2020.
Most Important Facts to Verify
- Whether venue operations, attendance levels, Garden license payments and Tao capacity recovered sufficiently to reduce the stated cash burn.
- The terms, interest cost, collateral and covenant compliance of the $650 million senior secured term loan facility.
- Actual MSG Sphere construction spending, total project cost, financing needs and progress toward the 2023 opening target.
- Whether further impairment charges, restructuring costs or customer refunds arise from the continuing pandemic disruption.
- The sustainability and valuation sensitivity of the DraftKings and Townsquare investments underlying the $33.7 million unrealized gain.
- The effect of the standalone-company cost structure and the limited comparability of the carve-out 2019 results.