Business context and reporting period
Madison Square Garden Entertainment Corp. (MSG Entertainment) filed this unaudited Form 10-Q for the quarter and nine months ended March 31, 2023, its fiscal third quarter and nine-month period of fiscal 2023. The company operates one reportable segment, comprising venues including Madison Square Garden, Radio City Music Hall, the Beacon Theatre and The Chicago Theatre, plus the Christmas Spectacular and live-event bookings. The financial statements are historical carve-out statements prepared while the business was part of Sphere Entertainment; they include allocated corporate costs and may not reflect the costs or results of a standalone public company.
After the reporting date, on April 20, 2023, Sphere Entertainment distributed approximately 67% of MSG Entertainment to its shareholders and retained approximately 33%. Sphere itself remained with Sphere Entertainment and is not part of MSG Entertainment’s business.
Financial performance and position
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Three months ended March 31, 2023 | Nine months ended March 31, 2023 |
|---|---|---|
| Revenue | $201.2; +4% year over year | $703.6; +48% |
| Operating income | $24.7, versus $15.8 | $126.8, versus an operating loss of $0.1 |
| Net income (loss) | $21.7, versus a loss of $4.1 | $100.5, versus a loss of $62.5 |
| Net income (loss) attributable to MSG Entertainment stockholders | $21.7, versus a loss of $3.9 | $101.1, versus a loss of $61.9 |
| Adjusted operating income (non-GAAP) | $38.0, +13% | $175.8, versus $60.1 |
Operating margin was approximately 12.3% for the quarter, versus 8.2% a year earlier; for the nine-month period it was approximately 18.0%, versus approximately zero. These percentages are calculated from reported revenue and operating income. The company cautions that adjusted operating income is non-GAAP and should not substitute for GAAP measures.
For the nine months, operating cash flow was $132.3, compared with $60.3; capital expenditures were $12.2. Investing activities provided $13.3, including proceeds from asset dispositions, while financing activities used $85.2, primarily reflecting transfers to Sphere Entertainment and its subsidiaries. Cash, cash equivalents and restricted cash increased by $60.4 to $123.0; unrestricted cash was $122.7 at March 31.
At March 31, total debt principal was $673.2, including $16.3 current and $657.0 non-current. The National Properties facilities’ interest rate was 7.41%; $64.9 of revolving capacity remained available. The company reported compliance with credit-facility covenants. Total current liabilities were $555.1, including $258.1 of deferred revenue. Total assets were $1,545.7 and divisional equity was $43.5.
Material changes versus the prior comparable period
- Nine-month revenue growth reflected the return of live events compared with pandemic-affected 2022, higher event and concert activity, stronger Christmas Spectacular results, and higher revenues associated with Knicks and Rangers games and venue suites. The 2022 Christmas Spectacular had 101 performances; the 2022 holiday season had 181, with approximately 930,000 tickets sold and attendance per show up more than 25%.
- Quarterly revenue increased 4%, with higher MSG Sports-related arena activity and seven Christmas Spectacular performances partly offset by fewer concerts and the loss of advertising commission revenue.
- Direct operating expenses rose $5.2 for the quarter and $105.2 for nine months, reflecting event, arena and Christmas Spectacular costs. SG&A fell $2.9 for the quarter and $1.2 for nine months.
- Other income was $8.1 for the quarter and $6.8 for nine months, versus losses in 2022, principally reflecting a reversal from unrealized losses to gains on equity investments, including DraftKings. The nine-month operating results also included a $4.4 net gain on dispositions: an $8.7 gain on the Boston Calling Events sale, partly offset by a $4.4 aircraft-sale loss.
- The Networks Advertising Sales Representation Agreement ended December 31, 2022. It contributed no revenue in the current quarter and $8.8 for the nine months, compared with $9.6 and $17.0 in the prior-year periods; associated employee costs also ceased after termination.
Outlook, risks, contingencies and unusual items
The filing gives no numerical revenue or earnings guidance. Management says results are seasonal: the Christmas Spectacular and arena license fees generally concentrate revenue and operating income in the second and third fiscal quarters. It believes cash, borrowing availability and operating cash flows are sufficient to fund operations and obligations for the foreseeable future.
Risks highlighted include event demand and attendance, team performance, economic conditions, sponsorship and suite demand, competition, seasonality, public-health restrictions, labor disruptions, cyber incidents, litigation, and the company’s substantial debt and floating interest rates. A hypothetical 200-basis-point increase in floating rates persisting for a year would increase annual interest expense by an estimated $13.5. Management said it was unclear how future COVID-19 concerns might affect operations. Various lawsuits are pending; management does not expect their resolution to have a material adverse effect.
On March 29, the board authorized repurchases of up to $250 million of Class A shares; none had been repurchased by the filing date. On April 20, MSG Entertainment committed to lend Sphere Entertainment up to $65 million under an unsecured delayed-draw facility, available through October 20, 2024; no amount had been drawn as of the filing. This commitment is a potential use of MSG Entertainment liquidity. Related-party arrangements, transition services and the company’s limited standalone operating history are also relevant following the separation.
Important facts for investors to verify
- How standalone costs, transition-service arrangements and other allocations after the April 20 spin-off compare with the historical carve-out presentation.
- The ongoing impact of the terminated advertising-sales agreement, the Boston Calling and aircraft dispositions, and the resulting business mix.
- Current cash, debt, interest rates, covenant headroom and any use of the $64.9 million revolver capacity; leverage-ratio covenant testing was scheduled to begin in the quarter ending June 30, 2023.
- Whether Sphere Entertainment draws on the $65 million delayed-draw facility and whether any repayment is made in MSG Entertainment shares.
- Actual share repurchases under the $250 million authorization and their effect on liquidity and share count.
- The sustainability of event attendance, Christmas Spectacular performance, arena-related revenue and investment-related gains; the latter contributed materially to the period’s improvement in other income.