Business Context and Reporting Period
The Madison Square Garden Company, the predecessor entity to Madison Square Garden Sports Corp., filed this unaudited Form 10-Q for the three months ended September 30, 2019, the first quarter of fiscal 2020. The company operated two segments: MSG Entertainment, including venues, concerts, Tao Group Hospitality and Boston Calling Events; and MSG Sports, including the Knicks, Rangers, other sports franchises and esports businesses. The New York Liberty was included in the prior-year period but was sold in January 2019.
Results are seasonal: MSG Entertainment typically generates a disproportionate share of revenue and operating income in the second fiscal quarter because of the Christmas Spectacular, while MSG Sports is generally stronger in the second and third fiscal quarters.
Key Financial Metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Revenue | $214.8 million | $218.1 million | Down 2% |
| Operating loss | $89.3 million | $50.8 million | Loss increased $38.5 million |
| Net loss | $80.7 million | $34.0 million | Loss increased $46.6 million |
| Net loss attributable to stockholders | $80.0 million | $32.2 million | Loss increased $47.8 million |
| Loss per share | $3.36 | $1.36 | Loss increased $2.00 |
| Adjusted operating loss | $41.1 million | $9.9 million | Loss increased $31.2 million |
| Net cash used in operating activities | $34.2 million | $44.7 million | Use decreased $10.4 million |
| Capital expenditures | $93.0 million | $42.0 million | Increased $51.0 million |
Revenue consisted of $159.0 million from MSG Entertainment and $56.0 million from MSG Sports. Entertainment revenue declined 2%, while Sports revenue increased 1%.
Operating margin was approximately negative 41.6%, compared with negative 23.3% in the prior-year quarter. The filing does not present a consolidated EBITDA measure; adjusted operating loss excludes share-based compensation, depreciation and amortization, and purchase accounting adjustments and is a non-GAAP measure.
At September 30, 2019, cash and cash equivalents were $952.2 million, short-term investments were $104.6 million, and cash, cash equivalents and restricted cash totaled $983.5 million. Total debt, net of deferred financing costs, was approximately $52.2 million, consisting principally of Tao debt and a BCE note. The company had no borrowings under the Knicks or Rangers revolving facilities. Operating lease liabilities totaled $250.1 million following adoption of ASC Topic 842.
Total assets were $4.0 billion and total liabilities were $1.3 billion. Deferred revenue, including the non-current portion, was $427.7 million, compared with $305.8 million at June 30, 2019.
Material Changes Versus the Prior Comparable Period
- Revenue declined modestly, but operating expenses increased substantially: direct operating expenses rose 7% and selling, general and administrative expenses rose 24%.
- MSG Sports operating loss increased to $20.2 million from $4.1 million. Direct operating expenses rose 59%, primarily because of $10.2 million of team personnel transaction expense, compared with a $0.7 million credit in the prior-year period. Sports SG&A increased 19%.
- MSG Entertainment operating results declined to a $2.6 million loss from $1.7 million of operating income. The comparison was affected by the absence of a large-scale Radio City event held in the prior-year period, the wind-down of Obscura’s third-party production business and higher SG&A.
- Corporate and Other operating loss increased $17.3 million, primarily due to higher employee compensation and increased investment in MSG Sphere content development and technology.
- Equity-method results shifted from $10.5 million of earnings to a $1.5 million loss, primarily because the company no longer owned interests in AMSGE and Tribeca Enterprises. The company sold its Tribeca interest for $18.0 million in August 2019.
- Net interest income increased to $5.5 million from $3.1 million, mainly reflecting Tao Group Hospitality’s May 2019 refinancing and lower interest expense.
- Capital expenditures more than doubled, with $83.8 million allocated to Corporate and Other, substantially for the planned MSG Spheres in Las Vegas and London.
- Operating cash use improved year over year, partly because the company received $37.5 million from Las Vegas Sands toward the Las Vegas Sphere pedestrian bridge.
Guidance, Outlook, Risks and Unusual Items
- The company’s preliminary Las Vegas MSG Sphere construction estimate was $1.2 billion, while AECOM’s initial benchmark proposal, including additional core technology and estimated soft costs, implied an estimate of approximately $1.7 billion. Management stated that it was reviewing and challenging the estimate and provided no assurance that the final cost would be reduced.
- Approximately $187 million of Las Vegas Sphere construction costs had been incurred through September 30, 2019, excluding the benefit of Las Vegas Sands funding. The company targeted a calendar-year 2021 opening but stated that the project remains subject to delays, cost overruns and other complications.
- The London Sphere planning process was extended into calendar 2020. The previously expected opening approximately one year after Las Vegas was no longer achievable, and management had not established a new target opening date.
- Management stated that additional capital would be needed beyond cash on hand, operating cash flow and revolving-credit capacity to fund the Sphere projects; there was no assurance that such capital could be obtained.
- In October 2019, the board changed the contemplated separation structure. Rather than retaining an approximately one-third interest in a sports spin-off, the company planned to pursue a pro rata distribution of 100% of a new entity containing the entertainment assets, leaving the existing company focused on sports. Completion remained subject to league approvals, a tax opinion and final board approval, and was not assured.
- The company adopted ASC Topic 842 on July 1, 2019, recognizing $261.1 million of operating lease right-of-use assets at adoption and $250.1 million of lease liabilities at September 30, 2019, with no retained-earnings adjustment.
- The company recorded $10.0 million of cumulative translation loss in other comprehensive income during the quarter and a $5.3 million unrealized gain on its Townsquare investment. Goodwill and indefinite-lived intangible asset impairment tests identified no impairment.
- Risks include sports-team performance and personnel costs, league rules and work stoppages, seasonality, venue competition, economic conditions, sponsorship demand, Sphere construction and financing, security incidents, litigation, regulatory changes, acquisition integration, Tao Group performance and the potential Entertainment Distribution.
- A derivative stockholder lawsuit alleges fiduciary-duty breaches related to executive compensation. The litigation was stayed through December 19, 2019; management did not believe the matter would have a material adverse effect, although the ultimate outcome was uncertain.
Most Important Facts to Verify
- Confirm the final corporate structure and reporting implications of the proposed Entertainment Distribution and the subsequent status of the MSG Sports entity.
- Track the Las Vegas Sphere’s approved budget, construction spending, financing needs, schedule and expected opening date.
- Assess whether recurring operating performance improves after excluding team personnel charges, higher corporate investment, share-based compensation and other non-GAAP adjustments.
- Monitor liquidity after capital expenditures, operating cash use, lease obligations and any additional financing or debt issuance.
- Review the effect of seasonality and the timing lag for Tao Group Hospitality on quarterly comparisons.
- Evaluate exposure to team performance, player transactions, league revenue sharing, salary rules and potential NBA or NHL work stoppages.
- Confirm the resolution and financial impact, if any, of the executive-compensation derivative litigation and other legal proceedings.