Business Context and Reporting Period
This filing is Madison Square Garden Entertainment Corp. (now associated with Sphere Entertainment Co.), a diversified live entertainment, regional sports network, and dining and nightlife company. The filing covers the fiscal quarter and nine months ended March 31, 2022, corresponding to fiscal 2022 third quarter and year-to-date periods. The company reports three segments: Entertainment, MSG Networks, and Tao Group Hospitality.
Comparability is materially affected by the COVID-19 pandemic, the July 2021 merger with MSG Networks Inc., and the April 2021 acquisition of Hakkasan through Tao Group Hospitality. Historical periods were retrospectively presented on a combined basis for the MSG Networks merger.
Key Financial Metrics
| Metric | Three months ended March 31, 2022 | Prior year | Nine months ended March 31, 2022 | Prior year |
|---|---|---|---|---|
| Revenue | $460.1 million | $214.3 million | $1.271 billion | $553.6 million |
| Operating income (loss) | $2.0 million | $(38.7) million | $(45.9) million | $(144.2) million |
| Net loss | $(19.3) million | $(25.8) million | $(90.9) million | $(126.2) million |
| Net loss attributable to shareholders | $(17.5) million | $(18.3) million | $(94.5) million | $(109.9) million |
| Loss per share | $(0.51) | $(0.79) | $(2.76) | $(3.48) |
| Adjusted operating income | $46.5 million | $20.9 million | $132.8 million | $37.7 million |
| Cash flow from operations | Not separately provided | Not separately provided | $106.2 million | $(114.1) million |
| Capital expenditures | $206.6 million | $102.8 million | $519.6 million | $324.6 million |
Reported operating margin was approximately 0.4% for the quarter and negative 3.6% year to date, compared with negative 18.1% and negative 26.0%, respectively, in the prior-year periods. Adjusted operating margin was approximately 10.1% for the quarter and 10.5% year to date, compared with 9.8% and 6.8%.
- Entertainment revenue was $194.6 million for the quarter and $476.4 million year to date, compared with $31.0 million and $51.2 million, respectively. The segment remained loss-making, with operating losses of $43.2 million and $168.2 million.
- MSG Networks revenue was $167.6 million for the quarter and $469.0 million year to date, down 6% and 3%, respectively. Operating income declined to $45.9 million and $104.3 million.
- Tao Group Hospitality revenue was $108.6 million for the quarter and $345.1 million year to date, compared with $12.8 million and $30.5 million. Operating income was $3.0 million and $29.8 million, versus prior-year losses.
Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $999.1 million at March 31, 2022, down from $1.517 billion at June 30, 2021. Cash, cash equivalents, and restricted cash totaled $1.021 billion.
- Total debt principal was approximately $1.678 billion, consisting primarily of $1.011 billion under the MSG Networks term loan, $641.9 million under the National Properties term loan, and $25.0 million under the Tao term loan. Net debt, before other adjustments, was approximately $678.4 million.
- Operating cash flow of $106.2 million was more than offset by $547.9 million of investing cash outflows and $77.5 million of financing cash outflows, resulting in a $519.2 million decrease in cash and restricted cash.
- MSG Sphere construction accounted for a substantial portion of capital spending. Construction costs incurred through March 31, 2022 were approximately $1.327 billion, including $177.6 million accrued but unpaid.
- The company stated that available cash and expected operating cash flow should fund operations, debt service, and completion of MSG Sphere for the foreseeable future, but additional capital, including incremental debt, may be needed if cash resources prove insufficient.
Material Changes Versus the Prior Comparable Period
- Revenue increased 115% for the quarter and 130% year to date, principally as venues reopened, live events resumed, Arena License Agreement payments normalized, and Hakkasan was included in the current period.
- Entertainment benefited from concerts, sporting and live entertainment events, full arena license fees, and the partial return of the Christmas Spectacular. The prior-year periods were heavily affected by venue closures and event cancellations.
- Tao Group Hospitality benefited from the Hakkasan acquisition and the reopening of venues, moving from operating losses to operating income.
- MSG Networks performance deteriorated despite full NBA and NHL schedules. Affiliation revenue declined because Comcast stopped carrying the networks on October 1, 2021 and subscribers declined approximately 7%, excluding Comcast. Advertising revenue improved with normalized sports schedules.
- Miscellaneous expense was $8.4 million in the quarter and $28.1 million year to date, compared with miscellaneous income in the prior-year periods, primarily due to unrealized losses on DraftKings and Townsquare investments.
- The company recorded $14.7 million of restructuring charges in the quarter and year to date, including $4.6 million of share-based compensation related to employee and executive terminations.
- Adjusted operating income improved substantially, reaching $46.5 million for the quarter and $132.8 million year to date, although this non-GAAP measure excludes significant depreciation, share-based compensation, merger costs, restructuring, and other items.
Guidance, Outlook, Risks, and Unusual Items
- No formal revenue or earnings guidance is provided in the filing. Management expects MSG Sphere at The Venetian to open in the second half of calendar 2023. The company estimated total project costs at approximately $1.865 billion, excluding certain inflationary, content, internal labor, capitalized interest, furniture, and equipment costs.
- Management reported that venues were generally operating without capacity restrictions as of the filing date, but future COVID-19 variants, cancellations, staffing constraints, government restrictions, and changes in consumer demand remain material risks.
- MSG Networks faces continuing risk from Comcast non-carriage, distributor consolidation, subscriber declines, affiliation renewals, sports-team performance, and media rights costs.
- The company has substantial floating-rate debt. A hypothetical 100-basis-point increase in applicable floating rates was estimated to increase annual interest expense by approximately $14.8 million.
- Tao Group Hospitality must comply with reinstated financial maintenance covenants and minimum liquidity requirements. A future covenant breach could result in debt acceleration and demands under company guarantees.
- Merger-related stockholder litigation remains pending, with tentative trial dates in April 2023. The company cannot estimate potential liability and has recorded no accrual.
- Disclosure controls and procedures were ineffective as of March 31, 2022 because a material weakness related to the identification, calculation, and disclosure of capitalized interest had not been fully remediated.
- The company corrected an immaterial accounting error involving capitalized interest associated with MSG Sphere. Prior-period interest expense was reduced by $13.3 million for the quarter and $21.2 million for the nine-month period.
Most Important Facts for Investors to Verify
- Whether MSG Networks reaches a new carriage agreement with Comcast, and the resulting effect on subscribers, revenue, and operating income.
- Actual remaining construction costs, schedule, financing requirements, and opening timing for MSG Sphere.
- Whether post-pandemic attendance, event bookings, advertising, and Tao Group Hospitality demand remain sustainable without capacity restrictions.
- Compliance with the National Properties and Tao credit facility liquidity and leverage covenants, especially as interest rates rise.
- Progress in remediating the material weakness in internal controls and whether additional accounting corrections are required.
- Potential exposure from pending merger litigation and other commitments, including approximately $3.646 billion of media-rights obligations and significant long-term lease commitments.