Madison Square Garden Sports Corp. Form 10-Q Summary
Business context and reporting period
Madison Square Garden Sports Corp. owns and operates the New York Knicks, New York Rangers, Hartford Wolf Pack and Westchester Knicks, and operates the Madison Square Garden Training Center. The company reports one operating segment.
This unaudited Form 10-Q covers the three months ended September 30, 2023, the first quarter of fiscal 2024, compared with the three months ended September 30, 2022. Results are seasonal, with a disproportionate share of revenue generally earned in the second and third fiscal quarters when most games are played.
In April 2023, the company sold its controlling interest in Counter Logic Gaming and received an approximately 25% noncontrolling equity interest in NRG/CLG. The transaction affects year-over-year comparability.
Financial performance and liquidity
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Revenue | $43.0 million | $24.1 million | Up 79% |
| Operating loss | $14.8 million | $35.9 million | Improved $21.1 million |
| Adjusted operating loss | $10.0 million | $27.8 million | Improved $17.8 million |
| Net loss | $18.8 million | $18.5 million | Worsened $0.3 million |
| Net loss attributable to common stockholders | $18.8 million | $17.8 million | Worsened $1.0 million |
| Loss per share | $0.79 | $0.73 | Worsened $0.06 |
| Net cash from operating activities | $(54.1) million | $1.3 million | Declined $55.4 million |
Revenue growth was primarily driven by a $17.0 million increase in league distributions, including the timing and amount of distributions unrelated to national media rights fees. Revenue consisted of event-related revenue of $5.8 million, media rights of $7.2 million, sponsorship, signage and suite licenses of $5.3 million, and league distributions and other revenue of $24.7 million.
Operating margin improved to approximately negative 34.4% from negative 149.0% in the prior-year quarter, while net margin was approximately negative 43.7% versus negative 76.9%. These calculated margins should be interpreted in light of the company’s seasonal business model.
Direct operating expenses declined 4% to $3.5 million, and selling, general and administrative expenses declined 3% to $53.6 million. Depreciation and amortization declined 23% to $0.8 million. The operating improvement was substantially offset below the operating line by higher interest expense and investment-related losses.
Net interest expense increased to $6.5 million from $3.0 million, primarily because of higher average borrowings and interest rates. Miscellaneous expense increased to $12.7 million, principally because of unrealized losses on Xtract One common stock and warrants.
Cash, cash equivalents and restricted cash totaled $52.4 million at September 30, 2023, including $51.2 million of cash and cash equivalents. The company reported approximately $155 million of additional borrowing capacity and stated that it believes available liquidity is sufficient to fund operations and obligations for the foreseeable future.
Debt, cash flow and balance sheet
- Total borrowings were $400 million, consisting of $370 million under the Knicks and Rangers revolving credit facilities and a $30 million Rangers NHL advance. The credit facilities mature in December 2026.
- During the quarter, the company borrowed $75 million: $40 million under the Knicks facility and $35 million under the Rangers facility.
- At September 30, 2023, the Knicks facility was fully drawn at $275 million with an interest rate of 6.67%; the Rangers facility had $95 million outstanding at 7.17%.
- Both the Knicks and Rangers subsidiaries were in compliance with their required 1.5:1.0 debt service ratio covenant.
- Operating cash flow was negative $54.1 million, driven principally by working-capital uses, including payments of accrued league-related and employee liabilities.
- Financing activities provided $67.8 million, primarily from the $75 million of additional borrowings. Investing activities used $1.7 million.
- Total operating lease liabilities were $784.8 million, including $696.6 million payable to MSG Entertainment on a noncurrent basis.
- Deferred revenue, including the noncurrent portion, increased to $302.0 million from $169.7 million at June 30, 2023, largely reflecting advance billings and receipts for tickets, suites and media rights.
Material changes, outlook and risks
- Revenue increased substantially year over year, but the company remained loss-making and generated negative operating cash flow.
- Lower employee compensation and the absence of CLG-related expenses reduced operating expenses. Prior-year results also included executive management transition costs.
- The company recorded $12.1 million of unrealized losses on equity investments and warrants, including $6.6 million on Xtract One common stock and $5.4 million on Xtract One warrants.
- Annual impairment testing in the first quarter of fiscal 2024 identified no impairment of goodwill or indefinite-lived intangible assets.
- No material changes to contractual obligations were reported other than ordinary-course activity. The company is party to various lawsuits, but management does not expect their resolution to have a material adverse effect.
- Management provided no specific revenue or earnings guidance in the filing. Its stated outlook is that liquidity is sufficient for the foreseeable future, based on cash and available borrowing capacity.
- Interest-rate exposure is material: a hypothetical 100-basis-point increase in floating rates for a full year would increase annual interest expense by approximately $3.7 million.
- Key risks include team performance and popularity, player compensation and injuries, NBA and NHL rules and work stoppages, economic conditions, sponsorship and media demand, affiliate performance, litigation, security incidents, regulatory changes, seasonality, and potential defaults under credit facilities.
Important facts for investors to verify
- Whether the large increase in league distributions and deferred revenue represents timing-related benefits or a sustained improvement in recurring revenue.
- The company’s ability to convert advance billings and seasonal revenue into positive operating cash flow during the remainder of fiscal 2024.
- Future borrowing needs, floating-rate exposure and compliance with the Knicks and Rangers credit-facility covenants.
- The valuation volatility and strategic significance of the company’s Xtract One investments and its approximately 25% NRG/CLG interest.
- The effect of the 35-year Arena License Agreements, related-party arrangements and substantial operating lease obligations on long-term margins and liquidity.
- The company’s seasonal revenue concentration and the absence of specific fiscal-year financial guidance.
- Whether future team performance, player transactions, luxury taxes, revenue sharing and media-rights developments materially change results.