Business Context and Reporting Period
The Madison Square Garden Company reported unaudited results for the three months ended September 30, 2017, the first quarter of fiscal 2018. The company operated through MSG Entertainment and MSG Sports, including venues, live events, the Knicks, Rangers and other sports franchises, TAO Group, Boston Calling Events and, beginning July 28, 2017, esports organization Counter Logic Gaming (CLG).
Results are seasonal: MSG Sports generally generates a disproportionate share of revenue in the second and third fiscal quarters, while MSG Entertainment benefits significantly from the Christmas Spectacular in the second quarter. TAO Group results are reported on a three-month lag and therefore reflect March 27 through June 25, 2017 activity in this quarter.
Key Financial Metrics
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Revenue | $245.0 million | $181.7 million | 35% |
| Operating loss | $15.7 million | $32.8 million | Improved $17.2 million |
| Operating margin | (6.4%) | (18.1%) | Improved |
| Net loss | $10.9 million | $28.9 million | Improved $18.0 million |
| Net loss attributable to company stockholders | $11.1 million | $28.6 million | Improved $17.5 million |
| Basic and diluted loss per share | $0.47 | $1.19 | Improved |
| Adjusted operating income | $29.0 million | $1.6 million | Improved $27.4 million |
| Net cash used in operating activities | $32.4 million | $21.7 million | Use increased $10.7 million |
| Capital expenditures | $19.5 million | $8.3 million | Increased $11.2 million |
Revenue growth included $60.5 million from TAO Group and was partly offset by the absence of the New York Spectacular, which reduced revenue by $11.0 million. Adjusted operating income is a non-GAAP measure that excludes depreciation and amortization, share-based compensation and other purchase accounting adjustments.
Segment Performance
| Segment | Revenue | Year-over-year change | Operating income | Adjusted operating income |
|---|---|---|---|---|
| MSG Entertainment | $164.1 million | Up 48% | $9.7 million | $17.8 million |
| MSG Sports | $80.9 million | Up 14% | $19.7 million | $25.8 million |
| Corporate and Other | Not applicable | Higher costs | $(39.7) million | $(14.6) million |
MSG Entertainment benefited from TAO Group, higher activity at Radio City Music Hall and The Chicago Theatre, and other event-related increases. MSG Sports benefited from league distributions, ticket-related revenue and higher local media rights fees. Sports direct operating expenses declined primarily because prior-year team personnel transaction costs were significantly higher.
Liquidity, Debt and Capital Resources
- Cash and cash equivalents were $1.164 billion at September 30, 2017, down from $1.238 billion at June 30, 2017. Restricted cash was $34.3 million.
- Total debt was $110.0 million, consisting primarily of the TAO Group senior secured term loan; net debt after deferred financing costs was approximately $105.7 million. The TAO revolving facility was undrawn.
- The company had $377.0 million of revolving credit capacity across the Knicks, Rangers and TAO facilities, all undrawn at quarter-end. The Knicks and Rangers facilities were each in compliance with their financial covenants.
- The TAO facilities require minimum liquidity, leverage and fixed-charge coverage compliance. TAO was in compliance as of June 25, 2017, the latest assessment date disclosed.
- The company provided credit facilities to nonconsolidated affiliates. At September 30, 2017, $97.5 million was drawn under the AMSGE facility and approximately $15.8 million was outstanding under the Tribeca facility, excluding $1.1 million of PIK interest.
- The company repurchased 18,000 Class A shares for $3.8 million during the quarter and had $267.6 million remaining under its authorization.
Material Changes Versus the Prior Comparable Period
- Revenue increased 35%, primarily from the acquisition and consolidation of TAO Group and higher MSG Sports revenue.
- Operating loss narrowed substantially despite higher selling, general and administrative expense, depreciation and amortization, and purchase accounting charges.
- MSG Entertainment shifted from a $7.1 million operating loss to $9.7 million of operating income.
- MSG Sports operating income increased 111% to $19.7 million.
- Adjusted operating income increased to $29.0 million from $1.6 million, reflecting improved segment performance and the inclusion of acquired businesses.
- Operating cash use increased because of working-capital timing, higher compensation-related payments and other liability changes, despite the lower net loss.
- Investing cash use declined to $26.5 million from $48.5 million, while financing cash use declined to $15.3 million from $80.0 million, largely because prior-year share repurchases were much higher.
Guidance, Outlook, Risks and Unusual Items
- Management stated that the company may experience lower regular-season ticket-related revenue for fiscal 2018 compared with the prior fiscal year.
- The company expects seasonality to make the first quarter less representative of full-year results.
- Management believed available liquidity, operating cash flows and borrowing capacity were sufficient for the next 12 months to fund operations, venue development, acquisitions or investments and share repurchases. It also noted that additional capital may be required for planned large-scale venues, including a proposed 17,500-seat, 400,000-square-foot Las Vegas venue.
- Material risks include team performance and popularity, player compensation and injuries, league rules and work stoppages, competition, economic conditions, venue development and acquisition integration, TAO Group and CLG performance, litigation, cybersecurity, tax matters and subsidiary credit-facility defaults.
- GMR, an investee of the company’s 50%-owned Azoff MSG Entertainment, remained involved in antitrust litigation with the Radio Music Licensing Committee. An interim licensing arrangement was extended through March 31, 2018.
- The company acquired a 65% controlling interest in CLG in July 2017. CLG’s contribution to quarterly revenue and net income was not material, but the company recorded $6.6 million of preliminary deferred and contingent consideration, with potential future payments of up to $9.2 million.
- Annual impairment testing identified no impairment of goodwill or indefinite-lived intangible assets.
- The company adopted share-based compensation guidance that resulted in a $2.4 million cumulative reduction to beginning accumulated deficit and increased first-quarter share-based compensation expense to $12.9 million from $8.4 million.
- Revenue recognition, lease, financial instruments and credit-loss accounting standards had not yet been fully adopted; management was evaluating their effects, with potential impacts on performance obligations, timing of revenue recognition and balance-sheet presentation.
Most Important Facts for Investors to Verify
- Assess the sustainability of revenue and adjusted operating income growth after separating TAO Group’s acquisition impact and the effects of seasonal event timing.
- Monitor regular-season ticket demand and the company’s warning that fiscal 2018 ticket-related revenue could be lower.
- Review TAO Group’s lagged reporting, debt amortization beginning March 31, 2018, high floating-rate borrowing costs and covenant compliance.
- Evaluate cash conversion, since operating cash flow remained negative despite a substantially improved reported loss.
- Track planned Las Vegas and other venue investments, potential external funding needs and the company’s remaining share-repurchase authorization.
- Follow the GMR/RMLC litigation and any effects on the company’s equity-method investment.
- Consider comparability limitations arising from the acquisitions of TAO Group and CLG and from the absence of the 2017 New York Spectacular.