Business Context and Reporting Period
The filing is Madison Square Garden Entertainment Corp.’s unaudited Form 10-Q for the three months ended September 30, 2022, the first quarter of Fiscal Year 2023. The requested company name, Sphere Entertainment Co., does not match the registrant name in the filing. The business comprised Entertainment, MSG Networks, and Tao Group Hospitality.
Operations included live entertainment venues and productions, regional sports networks, and more than 70 Tao Group Hospitality locations. The company was constructing MSG Sphere at The Venetian in Las Vegas.
Key Financial Metrics
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Revenue | $401.2 million | $294.5 million | Up 36% |
| Operating loss | $44.8 million | $83.3 million | Improved $38.5 million |
| Net loss | $44.0 million | $76.7 million | Improved $32.6 million |
| Net loss attributable to shareholders | $44.8 million | $79.2 million | Improved $34.5 million |
| Loss per share | $1.30 | $2.32 | Improved |
| Adjusted operating income | $2.8 million | $10.3 million | Down $7.5 million |
| Cash flow from operations | $(81.2) million | $7.0 million | Declined $88.2 million |
| Capital expenditures | $272.1 million | $137.3 million | Up $134.8 million |
Reported operating margin was approximately negative 11.2%, net margin was approximately negative 11.0%, and adjusted operating margin was approximately 0.7%. The filing does not present a consolidated gross margin.
- Entertainment revenue was $147.1 million, up from $34.2 million; operating loss improved to $75.3 million from $114.7 million.
- MSG Networks revenue was $122.5 million, down 13%; operating income increased to $27.6 million, while adjusted operating income declined 41% to $32.9 million.
- Tao Group Hospitality revenue was $132.7 million, up 11%; operating income declined 41% to $5.9 million and adjusted operating income declined 44% to $14.6 million.
- Cash, cash equivalents, and restricted cash were $458.9 million at September 30, 2022, including $441.4 million of unrestricted cash and cash equivalents, versus $846.0 million and $828.5 million, respectively, at June 30, 2022.
- Total debt principal was $1.757 billion. Net debt, using unrestricted cash, was approximately $1.316 billion.
- Available revolving capacity included $63.0 million under the National Properties facility and $49.3 million under the Tao facility. The MSG Networks revolver had no borrowings or letters of credit outstanding.
Material Changes Versus the Prior Comparable Period
- Entertainment benefited from the return of live events after COVID-19-related restrictions and limited event bookings in the prior-year quarter. Concert revenue increased by approximately $80.2 million.
- MSG Networks revenue decreased primarily because Comcast stopped carrying the networks effective October 1, 2021. The company reported approximately 10% fewer subscribers from the Comcast non-carriage and an additional approximately 9% subscriber decline excluding Comcast.
- MSG Networks direct operating expenses increased because prior-year reductions in media rights fees related to the shortened 2020-21 NHL season did not recur.
- Tao revenue increased because of new venue openings and the reopening of locations that had been closed during the prior-year period, but labor, food and beverage, rent, and other operating costs rose faster than revenue.
- Adjusted operating income declined despite the reported operating-loss improvement, primarily because of lower MSG Networks and Tao adjusted results. Prior-year results included substantially higher merger and acquisition-related costs.
- Operating cash flow turned negative, and investing cash outflows nearly doubled, primarily because of increased MSG Sphere construction spending and related capitalized interest.
- The company reported a $2.0 million net gain from insurance proceeds in the current quarter, compared with a $7.8 million prior-year impairment related to certain Hakkasan venues.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected MSG Sphere at The Venetian to open in the second half of calendar year 2023. The estimated cost, including core technology and soft costs, was approximately $2.175 billion, net of a $75 million Venetian contribution. Approximately $1.780 billion had been incurred through September 30, 2022, including $226 million of accrued but unpaid construction costs.
- Management stated that it expected available cash, operating cash flow, and borrowing capacity to fund operations, debt service, and completion of MSG Sphere, while planning cost reductions and deferral of certain discretionary capital projects. It also expected to use cash to repay part of the MSG Networks term loan when refinancing before its October 2024 maturity.
- The company was pursuing financing for original MSG Sphere content, but stated there was no assurance that additional capital would be obtained. Additional financing could be required if cash, revolver capacity, and operating cash flow are insufficient for construction.
- COVID-19 did not materially affect the current quarter compared with the prior year, but new variants, government or league restrictions, staffing issues, attendance changes, and reduced tourism could adversely affect operations.
- Major risks included construction delays and cost overruns, inflation, substantial debt and floating interest rates, MSG Networks subscriber and carriage losses, media-rights costs, economic weakness, venue demand, sports-team performance, cybersecurity, litigation, and execution of new venues and Tao openings.
- A hypothetical 200-basis-point increase in floating interest rates for a full year would have increased interest expense by approximately $35.4 million.
- Two consolidated lawsuits related to the MSG Networks acquisition remained pending, with tentative trial dates in April 2023. The company could not estimate potential liability and recorded no accrual.
- The company confidentially submitted an initial Form 10 registration statement for a proposed spin-off of its traditional live entertainment and MSG Networks businesses. Completion remained subject to conditions, including final board approval.
- The company’s credit facilities were reported to be in compliance with applicable covenants as of September 30, 2022. No shares had been repurchased under the authorized $350 million repurchase program.
Most Important Facts for Investors to Verify
- Confirm the registrant and corporate structure, because the filing identifies Madison Square Garden Entertainment Corp., not Sphere Entertainment Co.
- Track MSG Sphere’s remaining construction cost, timing, unpaid accrued expenditures, financing needs, and exposure to delays or overruns.
- Assess whether the sharp decline in cash and negative operating cash flow can be reversed while large Sphere capital expenditures continue.
- Monitor MSG Networks’ Comcast non-carriage, subscriber trends, affiliation renewals, media-rights expense, and the October 2024 term-loan maturity.
- Reconcile GAAP losses with adjusted operating income and evaluate the recurring nature of excluded items, including acquisition costs, share-based compensation, and non-cash adjustments.
- Review floating-rate debt exposure, covenant headroom, available revolver capacity, and the company’s ability to refinance or raise additional capital.
- Follow the proposed spin-off, pending merger-related litigation, and any changes to related-party transactions or MSG Sphere construction arrangements.