Business Context and Reporting Period
Madison Square Garden Entertainment Corp. filed this unaudited Form 10-Q for the quarter ended March 31, 2021 (fiscal third quarter of Fiscal Year 2021). The request metadata identifies “2020 Q3,” but the filing period is March 31, 2021. The Company operates iconic entertainment venues, live productions, Boston Calling, Tao Group Hospitality, and is developing MSG Sphere venues in Las Vegas and London.
Fiscal 2021 results are presented on a consolidated basis following the April 17, 2020 separation from MSG Sports. Prior-year results are combined carve-out results and may not be directly comparable because of allocated corporate costs and different standalone-company structures.
Key Financial Metrics
| Metric | Three Months Ended March 31 | Nine Months Ended March 31 |
|---|---|---|
| Revenue | $43.1 million, down 76% year over year | $80.6 million, down 89% |
| Operating loss | $(108.6) million | $(347.8) million |
| Net loss | $(87.2) million | $(310.7) million |
| Net loss attributable to stockholders | $(79.6) million; $(3.66) per share | $(294.3) million; $(12.51) per share |
| Operating cash flow | Not separately disclosed for the quarter | $(293.8) million |
| Capital expenditures | Not separately disclosed for the quarter | $321.6 million |
| Cash, cash equivalents and restricted cash | Not separately disclosed for the quarter | $1.302 billion at March 31, 2021 |
Implied operating margins were approximately (252%) for the quarter and (431%) for the nine-month period. The nine-month adjusted operating loss was $201.0 million, compared with adjusted operating income of $60.2 million in the prior-year period.
- Entertainment revenue declined to $31.0 million for the quarter and $51.2 million for the nine months, down 76% and 91%, respectively.
- Tao Group Hospitality revenue declined to $12.8 million for the quarter and $30.5 million for the nine months, down 75% and 83%, respectively.
- Miscellaneous income included $26.4 million of gains in the quarter and $53.3 million for the nine months, primarily from gains on Townsquare and DraftKings investments.
- Interest expense increased to $14.9 million for the quarter and $22.9 million for the nine months, principally following the new National Properties Term Loan Facility.
Liquidity, Debt and Cash Flow
- Cash, cash equivalents and restricted cash increased by $378.0 million from June 30, 2020 to $1.302 billion, primarily because of $630.5 million of net term-loan proceeds and $14.5 million drawn under the Tao revolving facility.
- Cash and cash equivalents were $1.278 billion at March 31, 2021, including approximately $194 million of advance customer proceeds that may require credits, refunds, make-goods or rescheduled events.
- The Company used $293.8 million in operating activities and invested $321.6 million in capital expenditures during the nine months. Financing activities provided $617.9 million.
- Debt consisted principally of $648.4 million outstanding under the National Properties Term Loan Facility, $39.5 million under Tao senior facilities, and approximately $0.6 million related to a BCE note, before applicable presentation adjustments.
- The National Properties Term Loan Facility matures in November 2025, bears interest at 7.00% as of March 31, 2021, and requires substantial principal repayment at maturity. The Company was in compliance with its covenants.
- Tao’s facilities included $14.5 million drawn on its revolving facility, with $9.75 million of remaining borrowing availability after letters of credit. Tao’s senior credit agreement was amended to suspend certain financial covenants through December 31, 2021 and requires the Company to maintain minimum liquidity of at least $75 million under a guarantee arrangement.
- Management estimated average monthly operational cash burn of approximately $25 million for the remainder of Fiscal Year 2021, excluding capital expenditures, severance, Sphere content and technology spending, and working-capital changes.
Material Changes Versus the Prior Comparable Period
- COVID-19-related venue closures, capacity restrictions and cancellations drove the substantial revenue decline. The 2020 Christmas Spectacular and the 2020 and 2021 Boston Calling festivals were canceled, while most ticketed events were postponed or canceled.
- Entertainment adjusted operating results deteriorated from $46.0 million of adjusted operating income to a $175.3 million adjusted operating loss for the nine months.
- Tao adjusted operating results declined from $14.5 million of adjusted operating income to a $24.9 million adjusted operating loss for the nine months, despite the absence of the prior-year $90.2 million impairment charge.
- The Company recorded $21.3 million of restructuring charges for workforce reductions involving approximately 360 employees.
- Depreciation and amortization increased to $88.2 million for the nine months, including accelerated amortization of certain Tao venue management contracts.
- Capital expenditures remained substantial, with $321.6 million spent during the nine months, primarily related to MSG Sphere construction.
- Construction in progress increased to $988.1 million at March 31, 2021 from $685.4 million at June 30, 2020.
Guidance, Outlook, Risks and Unusual Items
- Management expected MSG Sphere in Las Vegas to open in calendar year 2023. The Company estimated that the project’s cost, including core technology and soft costs, had increased approximately 10% from the previously disclosed $1.66 billion estimate. Construction costs incurred through March 31, 2021 were approximately $712 million, including approximately $62 million accrued but unpaid.
- The Company expects to fund the remaining Las Vegas Sphere construction costs with cash on hand and operating cash flows, but stated that additional financing may be required if operating cash flows are insufficient.
- New York venues began reopening at limited capacity after the reporting date. The Garden was limited to 10% capacity during the quarter, with capacity permitted to increase to 30% beginning May 19, 2021. Management stated that restrictions made most events economically unfeasible.
- As of March 31, 2021, 18 Tao venues were operating at limited capacity or through delivery and takeout, while 11 remained closed. Government requirements, curfews, social distancing and customer demand remained uncertain.
- On March 25, 2021, the Company agreed to merge with MSG Networks using a fixed 0.172 exchange ratio. Closing was expected in the third calendar quarter of 2021, subject to regulatory and other conditions. Certain termination circumstances could require a $21.2 million termination fee.
- After the quarter, on April 27, 2021, Tao acquired the Hakkasan Business in exchange for an 18.5% interest in a Tao subsidiary. The initial purchase-price allocation was incomplete at the filing date.
- The Company identified no goodwill or indefinite-lived intangible impairment in its Fiscal Year 2021 annual testing, but warned that continued pandemic effects could result in future impairment charges.
- Key risks include prolonged pandemic disruption, venue attendance and capacity limits, high cash burn and debt service, floating-rate exposure, Sphere construction delays or cost overruns, Tao covenant compliance, merger execution risk, related-party arrangements, and seasonality.
Investor Verification Checklist
- Verify the post-quarter reopening pace, actual attendance levels and the timing of the return of concerts, venue events, Christmas Spectacular and Boston Calling.
- Reconcile cash balances to customer advance proceeds and assess the portion potentially subject to refunds, credits or rescheduled events.
- Monitor operating cash burn, capital expenditures and remaining MSG Sphere construction costs against the revised estimate and calendar-year-2023 target.
- Review debt maturities, minimum-liquidity covenants, Tao waiver requirements and sensitivity to higher floating interest rates.
- Confirm the status, regulatory approvals, exchange ratio implications and transaction costs of the MSG Networks merger.
- Assess the accounting and economic impact of the Hakkasan acquisition, including Tao’s post-transaction ownership and noncontrolling interests.
- Consider the comparability limitations caused by the prior-year carve-out presentation and the impact of investment gains on reported earnings.