Madison Square Garden Sports Corp’s Q3 Results: Revenue Declines Amid Media Rights Woes, But Franchise Strength Persists

Madison Square Garden Sports Corp (MSG) reported its fiscal 2025 third-quarter results, revealing a challenging quarter marked by a 1% revenue decline to $424.2 million, driven largely by contractual headwinds in local media rights. While the company faced significant financial pressures, its core franchises—the Knicks and Rangers—showed enduring appeal, with strong season ticket renewal trends and playoff momentum. The results underscore a broader narrative of short-term pain versus long-term strategic bets.

Revenue: Mixed Signals in a Transition Quarter

MSG’s top line fell due to a $18.6 million drop in local media rights fees, stemming from proposed amendments to the Knicks’ and Rangers’ media agreements with MSG Networks. The revised contracts, part of a debt restructuring deal, slashed annual rights fees by 28% for the Knicks and 18% for the Rangers, while eliminating escalators and extending expiration dates to 2028-29. This move aims to stabilize MSG’s balance sheet but comes at an immediate revenue cost.

Offsetting this were pockets of growth:
- Sponsorship and signage revenue rose by $8.9 million, driven by stronger sales of existing inventory.
- Suite revenues increased $3.4 million, reflecting robust demand for premium hospitality.
- League distributions grew $2.4 million, benefiting from higher national media rights fees.

However, operational challenges dampened progress. Fewer games at Madison Square Garden (two fewer than the prior year) and weaker merchandise sales—particularly due to the absence of a new Rangers’ jersey launch—cost $2.5 million in food, beverage, and merchandise revenue.

Costs Surge, Operating Income Plummets

While revenue dipped modestly, operational expenses surged 16% to $316.3 million, primarily due to:
- A $33.8 million increase in NBA luxury tax and league revenue sharing, reflecting the Knicks’ competitive payroll.
- A $14.7 million rise in team compensation, signaling higher player costs.

Even as selling, general, and administrative expenses fell 2% (due to reduced executive transition costs), direct operating expenses overwhelmed gains. Operating income collapsed by 59% to $32.3 million, with adjusted operating income dropping 58% to $36.9 million.

The stock’s reaction will hinge on whether investors view these results as a temporary setback or a sign of deeper structural issues.

Balance Sheet Pressures and Strategic Moves

MSG’s balance sheet reflects the strain of its debt-heavy model. As of March 31, total liabilities reached $1.788 billion, including $267 million in long-term debt and $848.5 million in operating lease liabilities. The debt restructuring deal, which includes penny warrants for 19.9% of MSG Networks’ equity, aims to reduce near-term pressure but carries long-term equity dilution risks.

One bright spot: cash flow from operations improved, with a $41.9 million net inflow for the first nine months of fiscal 2025, versus a $16.2 million outflow in the prior year. This suggests better liquidity management, though it remains fragile against rising expenses.

The Long Game: Franchise Strength and Renewal Momentum

Management pointed to strong early season ticket renewals for the 2025-26 campaigns, with renewals launched in March surpassing expectations. The Knicks’ NBA playoff run post-quarter-end also adds momentum, though the Rangers missed the playoffs.

Crucially, the media rights amendments, while painful in the near term, may provide longer-term stability. By capping costs and extending agreements, MSG aims to avoid the volatility of renegotiating deals under financial stress.

This metric will be key to watch: reducing debt dependency could be critical to sustaining franchise value.

Conclusion: A Franchise Bet with Risks, but Underlying Strength

MSG’s Q3 results are a stark reminder of the trade-offs in its business model. The 59% drop in operating income is alarming, but the $41.9 million operating cash flow improvement and strong renewal demand suggest core assets remain healthy.

Investors must weigh two factors:
1. Short-term pain: Media rights declines and NBA luxury tax burdens will continue to pressure margins. The stock’s valuation may remain under pressure until these headwinds ease.
2. Long-term upside: The Knicks and Rangers are among the NBA and NHL’s most valuable franchises, with Madison Square Garden itself a global sports icon. If MSG can stabilize its debt and capitalize on future media rights cycles (post-2028), its franchises could rebound strongly.

The company’s adjusted operating income drop to $36.9 million highlights the urgency of cost discipline, but the $8.9 million sponsorship growth and $3.4 million suite revenue gains show that demand for its assets persists. For investors, this is a call to assess whether the current valuation accounts for near-term pain or underestimates the long-term value of its crown jewels.

In short, MSG’s Q3 results are a mixed bag—financially challenging but not yet dire. The next few quarters will test whether its strategic moves can bridge the gap between today’s struggles and tomorrow’s potential.