5 Takeaways From Madison Square Garden Entertainment's Quarterly Earnings

Madison Square Garden
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Madison Square Garden in New York City.

The newly-spun off company's fiscal third quarter earnings show a 20% drop in revenue following the coronavirus-induced shutdown of live events in mid-March.

Madison Square Garden Entertainment experienced a predictable hit to earnings in the quarter ending March 31, posting a 20% drop in revenue and writing down its investment in the dining and nightlife business. After suspending concerts on March 12 in reaction to the spread of the coronavirus, MSGE’s revenue sank from $250 million to $199.9 million.

Any company that relies on people gathering in a confined space for multiple hours could not avoid poor quarterly earnings. Promoter Live Nation’s Q1 concert revenue fell 24%. German promoter CTS Eventim’s live entertainment business saw its Q1 revenue sink 40%. Agencies WME, CAA and UTA have thinned their staffs through layoffs, furloughs or both. Small venue owners around the country without cash reserves or access to capital are teetering on financial collapse.

With venues closed, tours postponed and social distancing rules in effect for the foreseeable future, promoters are preparing for a dismal second quarter. MSGE disclosed that “virtually all” events at its venues are postponed or canceled through June and its three-day Boston Calling festival planned for Memorial Day weekend has been canceled. Some promoters are filling voids on their calendars by testing reduced capacity concerts, drive-in concerts and live-streamed performances -- Live Nation revealed its interest in them -- but MSGE did not mention its interest in any such events. MSGE operators Madison Square Garden, Hulu Theater at Madison Square Garden, Radio City Music Hall, the Beacon Theatre and The Chicago Theatre.

Because MSGE was just recently spun off from the sports division, it opted not to have an earnings call to complement the earnings release. (It does intend to have a call for its fiscal 2020 earnings.) Fortunately, the 10-Q filing provided some insight into the quarter’s results and ongoing operations.

MSGE has few -- if any -- expectations for events to return in 2020. Sporting events could return this year without fans -- presumably for a lower fee charged to the teams and zero concession sales each event. It faces “a potentially lengthy period of time” without hosting or booking events because “virtually all” events (including MSGE venues scheduled to host the Boston Calling festival over Memorial Day weekend) are cancelled through June, the 10-Q reads.

Revenue will be “minimal” until events resume. MSGE “is currently recognizing minimal revenue,” according to the 10-Q filing. Although the company did not define minimal, not much creativity is required to imagine how little money is being made during a venue-wide shutdown. The 10-Q suggests that some sponsorship bookings will be recognized as revenue but will require credits or make-goods in the future. But, again, the company was not specific.

MSGE may not host reduced-capacity concerts or live-stream concerts. Neither the 10-Q nor the press release showed that MSGE will hold the type of experimental events Live Nation discussed in its latest earnings call. MSGE could hold reduced-capacity concerts that allow for safe distances between fans, but, again, the company did not indicate an intention to do so. Given the venues and MSGE venues’ urban locations, it seems unlikely MSGE will host drive-in concerts.

MSGE has enough liquidity to last through 2020. Liquidity as of March 31 was $1.34 billion in total and $1.11 billion after adjusting for advance cash proceeds from tickets, suites and sponsorships that “would be addressed, to the extent necessary, through refunds, credits, make-goods and/or rescheduled dates,” the 10-Q filing explains. MSGE’s liquidity could decrease as much as $200 million if MSG Sports fully draws from the DDTL facilities it has with MSGE. But MSGE believes it has “sufficient liquidity” for operations, including continued development of the Sphere and making committed funds available to MSG Sports.

The suspensions of professional sports leagues’ seasons are hurting MSGE. MSGE has license agreements with the two sports teams owned by MSG Sports, the Knicks basketball team and the Rangers hockey team. As a part of the post-spinoff agreement, MSG Sports pays MSGE fees of $22.5 million for Knicks home games and $16.7 million for the Rangers games. But MSGE does not receive money when the Garden is unavailable due to a force majeure event such as the COVID-19 pandemic. The Knicks played 33 of 41 home games, leaving MSGE with $4.4 million remaining on the $22.5 million fee.

The 10-Q mentions a couple of interesting twists in the licensing agreement that would allow MSGE to collect money, if the seasons go bust. If the Garden’s capacity is limited to 1,000 or fewer attendees, the teams’ fees can be reduced as much as 80%. So, if the teams resume the season to empty arenas, MSGE would get at least 80% of its normal prorated fee. Also, once the Garden becomes available after being cleared by New York authorities, the teams must pay MSGE whether or not their seasons resume. Although the remainder of the NBA season is in doubt, Houston Rockets owner Tilman Fetita was optimistic on Monday, saying at a White House roundtable discussion that the league’s owners will attempt to start the season if the spread of the coronavirus continues on its current downward path.

MSGE’s investment in dining and nightlife took a big hit. MSGE adjusted the book value of its 62.5% stake in TAO Group Hospitality, creating a $102.2 million impairment expense on its fiscal Q3 income statement. The non-cash impairment expense was equal to the difference between the current fair value and its value on MSGE’s books. The pre-spinoff MSG Company paid $181 million for 62.5% of TAO in 2017. TAO operates dining and nightlife venues in New York City, Las Vegas, Los Angeles, Chicago, Singapore and Sydney.

MSGE concluded that COVID-19 was a “triggering event” and conducted a quantitative impairment assessment using a discounted cash flows valuation method -- an approach that estimates the present value of TAO’s future cash flows that’s discounted using a weighted cost of capital. The impairment charge adjusted the value of TAO on MSGE’s books to an amount that reflects current market conditions. As for its entertainment division, MSGE concluded the effects of COVID-19 “would not more likely than not reduce [its] fair value” below its book value.

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