Sphere Entertainment Co. (formerly Madison Square Garden Entertainment Corp.) — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2021. The filing was submitted under the registrant name Madison Square Garden Entertainment Corp.; the business comprised Entertainment, MSG Networks and Tao Group Hospitality. Results include MSG Networks following the July 9, 2021 merger, with prior periods presented retrospectively on a combined basis.
Business context
The Company operates iconic entertainment venues, live productions, regional sports networks, dining and nightlife venues, Boston Calling Music Festival activities and the MSG Sphere development project in Las Vegas. Operations remained materially affected by COVID-19, although venue events, full sports schedules and hospitality operations largely resumed during the period.
Key financial metrics
| Metric | Three months ended Dec. 31, 2021 | Three months ended Dec. 31, 2020 | Six months ended Dec. 31, 2021 | Six months ended Dec. 31, 2020 |
|---|---|---|---|---|
| Revenue | $516.4 million | $168.8 million | $810.9 million | $339.3 million |
| Operating income (loss) | $35.4 million | $(46.8) million | $(48.0) million | $(105.5) million |
| Operating margin | 6.8% | (27.7%) | (5.9%) | (31.1%) |
| Net income (loss) | $5.0 million | $(60.1) million | $(71.6) million | $(100.4) million |
| Net income (loss) attributable to stockholders | $2.3 million | $(55.8) million | $(77.0) million | $(91.6) million |
| EPS | $0.07 | $(1.64) | $(2.25) | $(2.70) |
| Adjusted operating income | $76.1 million | $9.8 million | $86.4 million | $16.6 million |
Cash flow and liquidity: Six-month operating cash flow was $132.8 million versus $(102.5) million in the prior-year period. Investing cash flow was $(332.5) million, including $313.1 million of capital expenditures, while financing cash flow was $(57.6) million. Cash, cash equivalents and restricted cash totaled $1.282 billion at December 31, 2021, including $1.258 billion of cash and cash equivalents, down from $1.540 billion at June 30, 2021. Approximately $264 million of cash represented advance proceeds primarily related to tickets, suites and sponsorships.
Debt: Principal debt outstanding was approximately $1.693 billion, comprising $1.023 billion under the MSG Networks term loan, $643.5 million under the National Properties term loan and $26.3 million under the Tao term loan. Net debt reported on the balance sheet, after deferred financing costs, was approximately $1.663 billion. All principal credit facilities were in covenant compliance at quarter-end. The National Properties facility required minimum liquidity of $200 million because trailing-twelve-month adjusted operating income remained negative.
Margins and segment performance:
| Segment | Q2 2021 revenue | Q2 2021 operating income (loss) | Q2 2021 adjusted operating income | Six-month adjusted operating income |
|---|---|---|---|---|
| Entertainment | $247.6 million | $(10.3) million | $15.0 million | $(56.4) million |
| MSG Networks | $160.0 million | $35.1 million | $43.8 million | $99.6 million |
| Tao Group Hospitality | $117.1 million | $16.7 million | $17.5 million | $43.7 million |
Material changes versus the prior comparable period
- Revenue increased 206% in the quarter and 139% for the six-month period, principally reflecting the return of live events, the 2021 Christmas Spectacular, higher Arena License Agreement fees, the Hakkasan acquisition and resumed sports programming.
- Entertainment revenue increased to $247.6 million from $12.7 million in the quarter. The 2021 Christmas Spectacular welcomed more than 400,000 guests across 101 performances; the 2020 production had been cancelled.
- MSG Networks quarterly revenue increased 9% to $160.0 million, but six-month revenue declined 1% to $301.5 million. Advertising revenue benefited from a regular NBA and NHL schedule, while affiliation revenue declined following Comcast’s non-renewal and subscriber losses.
- Tao Group Hospitality revenue increased to $117.1 million in the quarter and $236.6 million for six months, largely due to the Hakkasan acquisition and reopening of venues. At December 31, 53 venues were open and six remained closed.
- Operating results improved substantially from COVID-affected prior-year levels. However, six-month consolidated operating loss remained $48.0 million and Entertainment remained loss-making on both reported and adjusted bases.
- Miscellaneous expense was $17.1 million in the quarter and $19.6 million for six months, primarily due to unrealized losses on the Company’s DraftKings investment. The prior-year six-month period included $26.4 million of miscellaneous income, largely from investment gains.
- The Company recorded a $8.0 million net gain in the quarter from Hakkasan-related lease extinguishments, modifications and a venue disposal. It recorded a $7.8 million Hakkasan long-lived-asset impairment charge in the first quarter.
- MSG Sphere construction in progress increased to $1.547 billion from $1.195 billion at June 30, 2021. Six-month capital expenditures were $313.1 million, including substantial Sphere spending.
Guidance, outlook, risks and unusual items
- Management expected MSG Sphere at The Venetian to open in the second half of calendar 2023. The estimated cost, including core technology and soft costs, was approximately $1.865 billion, net of a $75 million Sands contribution and excluding certain content, labor, capitalized-interest, furniture and equipment costs. Approximately $1.131 billion had been incurred through December 31, 2021, including $146 million accrued but unpaid.
- Management stated that existing cash and operating cash flows were expected to fund operations, debt service and Sphere development for the foreseeable future, but acknowledged that additional capital, including incremental debt, could be required if cash resources prove insufficient.
- COVID-19 variants could cause venue closures, capacity limits, vaccination or masking requirements, staffing challenges, event postponements or cancellations, reduced attendance and weaker hospitality, advertising and sponsorship demand.
- Comcast stopped carrying MSG Networks effective October 1, 2021. Management estimated that non-carriage reduced subscribers by approximately 10% and could reduce revenue and segment operating income by comparable amounts while the dispute remains unresolved.
- Tao’s covenant suspensions expired January 1, 2022. Management warned that a slower pandemic recovery could require covenant waivers; failure to obtain them could result in default, debt acceleration and a demand under the Company’s guarantee.
- The Company had approximately $3.646 billion of off-balance-sheet contractual obligations, primarily MSG Networks media-rights agreements, as of June 30, 2021, with no material changes during the period other than the inclusion of these obligations following the merger.
- Merger-related stockholder litigation remained unresolved. The Company could not estimate potential liability and recorded no accrual; it was advancing defense costs under indemnification rights.
- Disclosure controls and procedures were ineffective as of December 31, 2021 because a previously identified material weakness related to capitalized interest had not been fully remediated. The Company corrected an immaterial capitalized-interest accounting error and continued remediation.
- The filing does not provide formal consolidated revenue or earnings guidance for fiscal 2022.
Most important facts for investors to verify
- Whether MSG Networks reaches a new carriage agreement with Comcast and how subscriber and affiliation-fee trends develop.
- Whether COVID-19 restrictions, new variants or event cancellations affect venue attendance, Christmas Spectacular results, Tao operations and Arena License Agreement payments.
- Sphere construction progress, total project cost, funding needs, cost overruns and the expected second-half-2023 opening.
- Tao Group Hospitality’s ability to satisfy post-suspension debt covenants and maintain required liquidity.
- Cash conversion after considering advance ticket and suite proceeds, capital expenditures, debt amortization and lease obligations.
- Status and potential exposure from merger-related litigation and the Company’s unremediated material weakness in internal controls.
- The sustainability of reported improvements after removing non-GAAP adjustments, investment valuation changes, Hakkasan acquisition effects and unusually weak prior-year comparisons.