Madison Square Garden Entertainment Corp. (now Sphere Entertainment Co.) — Form 10-Q Summary
Business context and reporting period
This unaudited Form 10-Q covers the three and six months ended December 31, 2022, the second quarter and first six months of fiscal 2023. The company operated through Entertainment, MSG Networks and Tao Group Hospitality. Results are seasonal, with a disproportionate share of revenue and operating income generally generated in the second and third fiscal quarters. The filing predates the company’s subsequent name change to Sphere Entertainment Co.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2022 | Three months ended Dec. 31, 2021 | Six months ended Dec. 31, 2022 | Six months ended Dec. 31, 2021 |
|---|---|---|---|---|
| Revenue | $642.2 million | $516.4 million | $1,043.4 million | $810.9 million |
| Operating income (loss) | $74.0 million | $35.4 million | $29.1 million | $(48.0) million |
| Net income (loss) | $70.6 million | $5.0 million | $26.5 million | $(71.6) million |
| Net income (loss) attributable to stockholders | $67.6 million | $2.3 million | $22.8 million | $(77.0) million |
| EPS | $1.95 | $0.07 | $0.66 | $(2.25) |
| Adjusted operating income | $124.1 million | $76.1 million | $126.9 million | $86.4 million |
Revenue increased 24% year over year in the quarter and 29% for the six-month period. Approximate GAAP operating margins were 11.5% for the quarter and 2.8% for the six months; net margins were 11.0% and 2.5%, respectively. Adjusted operating margins were approximately 19.3% and 12.2%.
- Entertainment revenue increased 44% in the quarter and 79% for the six months, driven by the return of live events and a significantly stronger Christmas Spectacular. The company held 181 performances and sold more than 930,000 tickets, with per-show attendance more than 25% above the prior year.
- MSG Networks revenue decreased 1% in the quarter and 7% for the six months. The decline primarily reflected lower affiliation revenue, including the continuing non-carriage of the networks by Comcast and subscriber losses.
- Tao Group Hospitality revenue increased 16% in the quarter and 14% for the six months, but higher labor, food and beverage, entertainment, rent and other costs reduced six-month adjusted operating income by 24%.
- Operating cash flow was $55.0 million for the six months, down from $132.8 million in the prior-year period.
- Investing cash outflow was $575.9 million, including $558.8 million of capital expenditures. The majority of spending related to construction of MSG Sphere in Las Vegas.
- Financing cash inflow was $229.2 million, primarily reflecting the $275.0 million MSG Sphere term loan issued in December 2022.
- Cash, cash equivalents and restricted cash declined to $553.7 million at December 31, 2022 from $846.0 million at June 30, 2022. Unrestricted cash and cash equivalents were $432.2 million, including approximately $218.0 million of advance customer proceeds; $121.6 million was restricted cash, including $75.0 million pledged under the Sphere term loan.
- Total debt principal was $2.011 billion at December 31, 2022, compared with $1.757 billion at September 30, 2022. Reported long-term debt, net of deferred financing costs, was $1.885 billion, with $102.5 million classified as current.
Material changes versus the prior comparable period
- Results benefited materially from the normalization of live entertainment activity after COVID-19-related event cancellations, restrictions and venue closures affected the prior-year period.
- The Entertainment segment moved from an operating loss of $10.3 million to operating income of $39.7 million in the quarter and narrowed its six-month operating loss from $125.0 million to $35.6 million.
- MSG Networks experienced ongoing subscriber and affiliation pressure. Comcast’s non-carriage reduced subscribers and revenue by approximately 10% on a comparable basis.
- The company recorded $13.7 million of restructuring charges related to workforce reductions in Entertainment and MSG Networks, including $2.3 million of share-based compensation.
- The company sold its controlling interest in Boston Calling Events on December 2, 2022, recognizing an $8.7 million gain, and sold its corporate aircraft on December 30, 2022, recognizing a $4.3 million loss.
- Other expense improved year over year because unrealized losses on equity investments, particularly DraftKings, were substantially lower than in the prior-year period.
- Construction in progress increased to $2.559 billion from $2.032 billion at June 30, 2022, primarily due to MSG Sphere development.
Guidance, outlook, risks and unusual items
- Management expected MSG Sphere at The Venetian in Las Vegas to open in September 2023. The estimated project cost, including core technology and soft costs, was approximately $2.175 billion, excluding significant content, internal labor, capitalized interest, furniture and equipment costs. Approximately $2.015 billion had been incurred through December 31, 2022, including approximately $236 million accrued but unpaid.
- Management stated that available cash, operating cash flow, borrowing capacity and cost-reduction savings were expected to fund operations, debt service and Sphere construction for the foreseeable future. It also expected to refinance MSG Networks’ term loan before its October 2024 maturity.
- The company was exploring a sale of its interest in Tao Group Hospitality. There was no assurance that a transaction would occur; absent a sale, management indicated that additional cost reductions or capital raising could be necessary.
- On January 13, 2023, the company announced plans to spin off its traditional live entertainment business from MSG Sphere, MSG Networks and Tao Group Hospitality. The transaction remained subject to regulatory filings and other conditions.
- On February 6, 2023, the company announced that it was exploring a potential sale of its majority interest in Tao Group Hospitality.
- Key risks include Sphere construction delays, cost overruns and financing needs; substantial leverage and floating interest rates; MSG Networks subscriber and carriage losses; economic weakness affecting attendance, advertising and hospitality demand; renewed pandemic restrictions; seasonality; litigation; and execution risk related to the proposed spin-off or potential Tao sale.
- A hypothetical 200-basis-point increase in floating rates was estimated to increase annual interest expense by approximately $40.2 million.
- Two merger-related stockholder litigations remained pending. The company could not estimate potential liability and recorded no accrual. Trial dates were set for April 2023, with mediation scheduled for February 2023.
- All disclosed debt-related financial covenants were reported as satisfied at December 31, 2022. The MSG Sphere term loan requires minimum liquidity of $100 million, including $75 million in cash or cash equivalents before specified project-completion conditions are met.
Important facts for investors to verify
- Verify the actual opening date, final cost and financing plan for MSG Sphere, including excluded content and technology costs.
- Monitor unrestricted cash, restricted cash, advance ticket and sponsorship proceeds, capital expenditure accruals and operating cash burn.
- Review debt maturities, refinancing plans, floating-rate exposure and compliance with the MSG Networks, National Properties, Sphere and Tao covenants.
- Assess whether MSG Networks can stabilize subscribers and replace or renew distribution agreements, particularly following Comcast’s non-carriage.
- Track the proposed traditional live entertainment spin-off and any resulting retained interest, collateral pledges or liquidity effects.
- Determine whether the potential Tao Group Hospitality sale occurs and how proceeds would affect leverage and Sphere funding.
- Evaluate the outcome and potential cost of the pending merger-related litigation, for which no liability was accrued.