Business Context and Reporting Period
This unaudited Form 10-Q is for Madison Square Garden Entertainment Corp. (now known as Sphere Entertainment Co. in the request metadata) for the three and six months ended December 31, 2020, the second quarter of fiscal 2021. The company operates live-entertainment venues, entertainment content, Tao Group Hospitality dining and nightlife venues, Boston Calling Events, and is developing MSG Sphere in Las Vegas and London.
The company became a standalone public company on April 17, 2020 following its distribution from Madison Square Garden Sports Corp. Consequently, 2020 results are consolidated, while 2019 results are combined carve-out results and may not be directly comparable because of allocated corporate costs and other presentation differences.
Key Financial Metrics
| Metric | Three Months Ended December 31 | Six Months Ended December 31 |
|---|---|---|
| Revenue | $23.1 million vs. $394.1 million | $37.5 million vs. $572.0 million |
| Operating income (loss) | $(112.5) million vs. $69.6 million | $(239.1) million vs. $1.4 million |
| Net income (loss) | $(129.1) million vs. $82.6 million | $(223.5) million vs. $26.1 million |
| Net income (loss) attributable to company stockholders | $(124.9) million, or $(5.17) per share | $(214.7) million, or $(8.91) per share |
| Adjusted operating income (loss) | $(64.0) million vs. $108.5 million | $(131.6) million vs. $78.3 million |
| Net cash from operating activities | Not separately disclosed for the quarter | $(215.6) million vs. $103.8 million |
| Capital expenditures | $107.2 million | $219.3 million vs. $208.0 million |
Revenue declined 94% for the quarter and 93% for the six-month period. The filing does not present a conventional consolidated gross margin; operating expenses remained substantially above revenue, producing significant operating losses. Adjusted operating loss is a non-GAAP measure and excludes, among other items, depreciation and amortization, share-based compensation, restructuring charges, and certain purchase accounting adjustments.
At December 31, 2020, cash and cash equivalents were $1.451 billion, restricted cash was $26.2 million, and cash, cash equivalents and restricted cash totaled $1.478 billion. Total assets were $4.122 billion, total liabilities were $1.412 billion, and total debt was approximately $688 million in principal, excluding the Tao subordinated intercompany balance eliminated in consolidation.
Debt included a new $650 million senior secured National Properties Term Loan Facility, with a 7.00% interest rate at quarter-end and maturity in November 2025, plus approximately $37.8 million of Tao senior secured debt. The company had $6.5 million drawn on Tao’s revolving facility and $17.75 million of remaining borrowing availability, after letters of credit. Operating lease liabilities totaled $210.4 million.
Material Changes Versus the Prior Comparable Period
- Entertainment revenue fell 96% for the quarter and 95% for the six months, primarily because venues were closed or severely restricted, the 2020 Christmas Spectacular and Boston Calling festival were canceled, and suite-license and event revenue largely disappeared.
- Tao Group Hospitality revenue declined 85% for the quarter and 86% for the six months. At December 31, eight venues operated with outdoor or limited-capacity indoor dining, four offered delivery or takeout only, and sixteen remained closed. Avenue and Vandal were permanently closed.
- Adjusted operating results shifted from income of $108.5 million in the prior-year quarter and $78.3 million in the prior-year six-month period to losses of $64.0 million and $131.6 million, respectively.
- Operating cash flow changed from $103.8 million provided in the prior-year six-month period to $215.6 million used, reflecting operating losses, restructuring payments, taxes and working-capital changes.
- Financing activities provided $614.4 million, primarily from the new term loan, compared with $40.9 million used in the prior-year period. Investing activities provided $146.7 million, primarily from maturities of short-term investments, despite $219.3 million of capital expenditures.
- The company recorded $21.3 million of restructuring charges for workforce reductions, including approximately 350 full-time positions eliminated in August 2020 and 10 additional positions in November.
- Interest expense increased materially following the new debt issuance. Six-month net interest expense was $7.4 million versus net interest income of $12.3 million in the prior-year period.
- Construction in progress increased to $895.5 million from $685.4 million at June 30, 2020, primarily due to MSG Sphere development.
Guidance, Outlook, Risks and Unusual Items
- Management estimated average monthly operational cash burn of approximately $25 million for the remainder of fiscal 2021. This excludes severance, capital expenditures, MSG Sphere content and technology spending, and working-capital changes.
- Management expected MSG Sphere in Las Vegas to open in calendar 2023. The company revised the construction schedule to reduce near-term spending and set September 30, 2023 as the outside completion date under an amended ground lease. The reported construction cost estimate was approximately $1.66 billion, excluding certain content, internal labor, furniture and equipment costs; approximately $645 million had been incurred through December 31, 2020.
- New York announced that large arenas could reopen beginning February 23, 2021 at 10% capacity subject to testing, social distancing and other protocols. The company expected limited attendance at Knicks and Rangers games, but continued restrictions were expected to reduce Arena License Agreement payments.
- Virtually all entertainment venue operations remained suspended as of the filing date, and events had been postponed or canceled through at least March 2021, with potential disruption through the remainder of fiscal 2021.
- The company believed it had sufficient liquidity for operations, debt service and planned venue development over the next twelve months, but approximately $190 million of cash represented customer advances that could require credits, make-goods, refunds or rescheduled dates.
- Tao’s financial maintenance covenants were suspended through December 31, 2021, but the company guaranteed Tao’s obligations and agreed to maintain minimum liquidity of at least $75 million. Management warned that a slower recovery could require future covenant waivers; failure to obtain them could result in default and acceleration.
- The National Properties facility requires minimum liquidity, includes restrictive covenants, bears floating-rate interest and materially limits financial flexibility. The company identified interest-rate and LIBOR-transition risks.
- The company recorded no goodwill or indefinite-lived intangible-asset impairment in the current period, but stated that a prolonged pandemic could result in future impairment charges. Tao had recorded $105.8 million of impairment charges in fiscal 2020.
- Unusual items included a $29.1 million six-month net unrealized gain on equity investments, a $7.2 million quarterly miscellaneous loss largely associated with DraftKings and Townsquare investments, and $11.1 million of previously unrecognized share-based compensation expense related to an executive settlement.
Important Facts for Investors to Verify
- Whether venue reopenings and attendance limits support a sustainable recovery in ticketing, sponsorship, suite, advertising and Arena License Agreement revenue.
- The company’s actual monthly cash burn, including capital expenditures, customer refunds or credits, debt service and MSG Sphere spending.
- Compliance with the National Properties minimum-liquidity covenant and Tao’s amended credit-facility requirements.
- The timing, total cost and financing needs of MSG Sphere in Las Vegas, including potential construction delays or cost overruns.
- The recoverability of goodwill, intangible assets and other long-lived assets if pandemic-related restrictions persist.
- The comparability of 2020 consolidated results with 2019 combined carve-out results and the effect of standalone public-company costs.
- Exposure to floating interest rates, LIBOR replacement risk, foreign currency movements and customer advance obligations.
- Related-party arrangements with MSG Sports, MSG Networks and entities controlled by the Dolan family, including Arena License Agreements and transition-service arrangements.