Sphere Entertainment Q4 2023 Earnings Call Transcript

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Provided by Quartr
August 22, 2023

There are 9 speakers on the call.

Operator

Good morning. Thank you for standing by, and welcome to the Sphere Entertainment Company Fiscal 2023 4th Quarter and Year End Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' remarks, there will be a question and answer session. I would now like to turn the call over to Ari Danes, Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you. Good morning, and welcome to Sphere Entertainment's fiscal 2023 4th quarter earnings conference call. Today's earnings call will begin with our Executive Chairman and CEO, Jim Dolan, who will provide an update on Sphere. This will be followed by an update from Andrea Greenberg, President and CEO of MSG Networks and then Gautam Ranji, Our Executive Vice President, Chief Financial Officer and Treasurer will conclude with a review of our financial results for the period. After our prepared remarks, we will open up the call for questions.

Speaker 1

If you do not have a copy of today's earnings release, it is available in the Investors section of our corporate website. Please take note of the following. Today's discussion may contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any such forward looking statements are not guarantees of future performance or results and involve risks and uncertainties that could cause actual results to differ materially from those in the forward looking statements. Please refer to the company's filings with the SEC for a The company disclaims any obligation to update any forward looking statements that may be discussed during this call.

Speaker 1

On Pages 56 of today's earnings release, we provide consolidated statements of operations and a reconciliation of operating income to adjusted operating income or AOI, a non GAAP financial measure. And with that, I'll now turn the call over to Jim.

Speaker 2

Thank you, Ari, and good morning, everyone. I am pleased to be here today as we embark on our next chapter as a leading live entertainment, media and technology company. We recently completed a number of important transactions, Starting with the 2 thirds spin off of MSG Entertainment, which was finalized in April. This was followed in May by the sale of our majority interest Tintao Group Hospitality. And in June, we sold approximately 40% of our retained equity interest in MSG Entertainment.

Speaker 2

These transactions have supported our growth plans for Sphere, a next generation entertainment medium that we believe We'll disrupt the traditional venue model. We remain on track to open our 1st Sphere in Las Vegas at the end of September, And I'd like to share our progress towards that highly anticipated opening. In June, we finished primary construction of the venue and are currently putting the finishing touches on the interior spaces as well as the exterior grounds. And this month, We completed installation and testing of the majority of the technological systems inside the venue. That includes Our next generation immersive technologies such as our interior display plane, Sphere immersive sound and advanced concert grade audio system And 4 d Multisensory Technologies that enable effects such as vibration, wind, scent and changing temperatures.

Speaker 2

Taken together, these technologies will engage the senses and enable a fully immersive experience. This is essentially a new medium, which we call experiential. While it takes some time to reach its full potential, we have designed Sphere to be busy 365 days a year with multiple events per day. On October 6, we will debut the Sphere experience. The Sphere experience will come in 2 parts.

Speaker 2

The first part consists of a series of exhibits that chronicle technology's impact on the development of human potential. It will begin with a replica of Gutenberg's printing press and take you through the creation of a metaverse and the development of AI. The visitor will be guided through this experience by animatronic robots that will utilize holographs, beamforming sound and a 50 foot Translucent video all. It will then continue in the main venue bowl, where guests will be fully immersed in a multi sensory Cinematic journey from Academy Award nominated Director, Darren Aronofsky. And with more than 40,000,000 visitors annually And over 2,000,000 local residents, Las Vegas is the ideal market to debut this unique content.

Speaker 2

In addition to the Sphere experience, we plan to host a wide variety of event types, including concert residencies. As you likely are aware, global rock band U2 will open the venue on September 29 with the first of their 25 shows. We expect to announce additional residencies shortly, which are slated to take place later this fiscal year. Sphere will also host marquee sporting events as well as corporate events with our first taking place in November With Formula 1's inaugural Las Vegas Grand Prix, F1 will have a multi day takeover of Sphere's exterior and interior as well as feature Sphere prominently as part of the track. This will be a high profile opportunity to showcase the venue To the millions of race fans watching around the world.

Speaker 2

Our event scheduled through the remainder of the calendar year is now in place, and we look forward to sharing more on calendar 2024 in the coming months. Another significant opportunity is advertising and sponsorship, led by Spheres exterior, the Exosphere. Last month, the Exosphere's capabilities were unveiled In the July 4 show that lit up the skyline, it featured a range of dynamic content that generated media coverage across the world and was shared widely on social media. To date, our estimated total reach is over $5,000,000,000 a number that will continue to grow as we Increase our engagement with audiences through new announcements and creative content. Following our demonstration of the Exosphere's capabilities, We've seen a significant increase in inbound interest from potential advertisers and marketing partners.

Speaker 2

In terms of premium hospitality offerings, SPEAR in Las Vegas will have 23 VIP suites as well as other unique hospitality spaces. We In summary, Sphere is brand new, never before seen medium, and we believe it will take the world by storm. We are excited for next month's opening in Las Vegas of what we hope is the first of many spheres. You should not expect the venue to reach its full economic We are confident that we will get there over time as guests, artists, advertisers and sponsors Experience, Sphere and all of its unique capabilities. And with that, I will now turn the call over to Andrea.

Speaker 3

Thank you, Jim, and good morning. As we look back at fiscal 2023, we are proud to have delivered another year of Exceptional sports and entertainment programming highlighted by hundreds of live regular season telecasts Across our 5 NBA and NHL teams, extensive postseason coverage for the Knicks, Rangers, Devils and Islanders, including 20 1st round games, a diverse slate of new and expanded content from Gotham FC Soccer Broadcast To new sports betting programming on our digital platforms and BetCast across Knicks and Rangers games, The launch of our free ad supported streaming TV channel, MSG SportsZone and most recently, the debut of our direct to consumer and authenticated streaming offering MSG Plus. We were also pleased to have completed renewals with several distributors this past year, including with one of our largest affiliates. Turning to our financial performance For fiscal 2023, while affiliate revenue reflected the impact of ongoing subscriber declines, we delivered strong growth in advertising. That included the impact of the playoffs, record aggregate advertising revenue for our NBA and NHL teams during the regular season, driven by higher per game advertising revenues as well as growth in our non ratings based initiatives, particularly branded content.

Speaker 3

We further benefited from the run rate impact of sports gaming, which once again was our single largest advertising category in fiscal 2023, as well as a strong core of returning advertisers and increased demand from categories such as auto and financial services. With respect to adjusted operating income, our annual results also reflect the impact of the cost reduction program we implemented at in which we believe our business is now better positioned going forward. As I mentioned earlier, in June, We launched our direct to consumer streaming product MSG Plus, which now allows us to reach the millions of home in our region Who do not receive our networks through a traditional linear TV package. MSG plus is also available free of charge To authenticated subscribers of participating TV operators, replacing MSG Go as our authenticated streaming product. For most of these subscribers, MSG Plus was installed as a seamless app update, establishing a strong foundation of engaged users for our new product following all time high viewership and ad revenue levels on MSG GO!

Speaker 3

This past season. Similar to MSG Go! MSG Plus features our 2 linear networks, including all Our live local NBA and NHL team telecasts as well as other live sports events and programming. The consumer research we've conducted shows that among fans who do not receive our network, there is significant interest And subscribing to a D2C offering that includes games of their local team. These fans have the option to subscribe to MSG plus for approximately $3.10 They will also have the option to purchase Single games for $9.99 each, a first of its kind offering for any regional sports network.

Speaker 3

We believe that this individual per game option will drive entry point transactions, wider reach and up sell opportunities. And I'd add that all of our direct to consumer price points are designed to help reinforce the value of the traditional bundle. Also creating one unified app for both T2C and authenticated subscribers has allowed us to leverage existing efficiencies in place such as staffing, technology and marketing and has provided for wider availability on devices, which will add value for viewers and advertisers alike. As we approach the start of the As we approach the start of the 'twenty three, 'twenty four NBA and NHL season, We will begin our targeted marketing efforts for MSG Plus and look forward to sharing more on our progress in the coming months. So while we remain mindful of the evolving media landscape, we are proud of our achievements this past fiscal year And we'll look to build on our strong track record of innovation in sports programming in the year ahead.

Speaker 3

With that, I will now turn the call over to Gavin.

Speaker 4

Thank you, Andrea. Now let's review our financial results. Since we completed the spin off of MSG Entertainment and the sale of our majority interest in TAO Group Hospitality during the fiscal Q4, Both businesses are reflected as discontinued operations for all periods presented. In addition, Results through the April 20 spin off date include certain corporate overhead costs that Sphere Entertainment did not incur after the date of the spin and does not expect to incur in future periods, but did not meet the criteria for inclusion and discontinued operations. On a total company basis, we generated revenues of $129,000,000 and an adjusted operating loss of $60,000,000 for the fiscal 2023 4th quarter.

Speaker 4

This included $90,000,000 of adjusted operating loss in the Sphere segment, which primarily reflects corporate overhead, Expenses related to Sphere Studios and associated content and technology development as well as costs related to the Las Vegas venue as we for the opening next month. We expect Sphere operating costs to increase in the fiscal 'twenty four first quarter as we ramp up operations in Las Vegas. With the venue opening on September 29, Sphere's impact on Financial results will really begin to show in our fiscal second quarter, including U2's multi month run, The debut of the Sphere experience featuring Postcard from Earth and Formula 1's multi day takeover in November. Turning to MSG Networks. The segment generated $128,000,000 in revenues $31,000,000 in AOI In the quarter, decreases of 8% 22%, respectively, as compared to the prior year period.

Speaker 4

The decrease in AOI primarily reflected lower affiliate revenue and higher rights fees expenses, partially offset by lower advertising and marketing costs. As we look ahead to fiscal 2024, We expect MSG Networks segment results to reflect continued declines across the traditional subscriber base, partially offset by affiliate rate increases and our expectation for strong ongoing advertising demand. The impact of our direct to consumer launch and the run rate impact of cost savings initiatives. Turning to our balance sheet. As of August 18, we had approximately $341,000,000 of unrestricted cash and cash equivalents and our debt balance was approximately 1,200,000,000 Our cash balance includes the benefit of approximately $205,000,000 in proceeds from our sale of 6 point 9,000,000 MSG Entertainment shares in June.

Speaker 4

It also benefits from $65,000,000 of proceeds from the delayed draw term loan from MSG Entertainment, which we drew on subsequent to the end of the quarter. Since then, we have repaid the balance using approximately $1,900,000 retained MSGE shares. Our remaining interest in the MSGE is now 8,200,000 shares, which as of August 18 was worth approximately $270,000,000 based on the closing price on that date. Finally, with the majority of work for Sphere in Las Vegas now behind us, we expect final project construction cost To be approximately $2,300,000,000 Through August 18, project to date construction costs paid were approximately $2,250,000,000 which is net of the $65,000,000 received from The Venetian. With that, I will now turn the call back over to Ari.

Speaker 1

Thank you, Gautam. Operator, can we open up the call for questions, please?

Operator

And your first question comes from the line of Brandon Ross from LightShed Partners. Your line is open.

Speaker 5

Good morning. Thanks for taking the questions. Jim, we haven't had you on an earnings call since you To keep it moving forward, can you explain why you believe this investment makes sense and will generate Inappropriate return given that level of investment you put in. And then I guess going forward from here, today's results So a significant amount of overhead in the business. Is that overhead to support the additional spheres you mentioned in the prepared remarks?

Speaker 5

And Will those fears be CapEx light for the company?

Speaker 6

Okay. Let's see. That's a very complicated question. But I do believe that the investment is warranted. I will confess to you that we did not Anticipate spending $2,300,000,000 We also didn't anticipate COVID.

Speaker 6

Well, I think we're still in good shape. And look, the business is really Built on the notion of changing the model that is currently used to operate entertainment venues. And that model right now is what I call basically it's a landlord model. You're building. If you have a team, they are the first tenants in, But that generally only occupies 40 to 50 nights a year.

Speaker 6

And the rest of the time, you're renting out. And you have a limited revenue stream from it. The act comes in, they may make, for instance, in the Garden as much as $5,000,000 or $6,000,000 in ticket revenue, right, but you only get your rental fee. And so therefore, you're limited, on top of which The acts that come in generally want to play Wednesday, Thursday, Friday, Saturday, not many Sunday or Monday. And so therefore, you're dark and your capital is also languishing.

Speaker 6

The Sphere completely changes that model. The Sphere is a venue that will be busy Theoretically, 365 days a year because when we're not bringing in someone like a YouTube, etcetera, we're running our own content. And that business is a high margin business. As you've seen from the numbers already, there's already a great deal of investment Into that product, and so now it's time to harvest. And that's what we'll be doing.

Speaker 6

But all in all, although it is I agree with you that it's capital intensive, Right. The opportunity to return on the capital is significantly better than it is With your traditional venue model. Let's see. And what was the second question? The second question was Overhead, right, and Sphere.

Speaker 6

Yes,

Speaker 4

overhead and CapEx for additional.

Speaker 6

Right. So, First off, we built this one all ourselves. Don't plan on doing that really again. We want partners And we're looking at more of a franchise type model, right, in terms of constructing the Spheres. Although I will tell you that We've designed a Sphere product for other marketplaces that goes as low as 2,500 seats And has a construction period of less than 2 years.

Speaker 6

We've done a lot of innovation in Construction area and we have architectural plans that allow us to go into multiple, multiple marketplaces. Really, I have to say that the it's a great time to be having this conversation because Yes, we're just about to launch this product, right.

Speaker 2

And we're really going to the next call, we ought to

Speaker 6

be able to really Dig into some actual numbers, etcetera. But we're sitting on the precipice here. And we believe in the product. We believe in the formula and business, etcetera. But the proof is in the pudding and the pudding is about to show up.

Speaker 6

So yes, so going forward, right, construction Additional spheres will be for this company capital light because we'll be doing franchise plus the overall cost Of building these venues is going to go significantly down. The first one is the most expensive. We've learned a ton out of building the first one. And we plan on taking that experience and knowledge and putting it forth. As far as the overhead in terms of Creating content, etcetera,

Speaker 2

the sort of the same thing.

Speaker 6

I mean that we learned a lot. Darren learned a lot, Right. From when he started, we have he's a very talented director and but We have new cameras that are used for capture. We had to learn how to use those cameras. We had to learn how to use those cameras.

Speaker 6

We went all over the world with those cameras capturing content from all parts of the globe. I believe it's going to be a spectacular show. But yes, it was Again, capital intensive because it was first time that the we're now shifting with the opening of the Sphere So starting to make some money on that capital investment. And I'm feeling Pretty positive about it. I've seen the product already or at least a lot of parts, but I have that advantage over you.

Speaker 6

And I am very positive about it, but you'll see it soon too.

Speaker 5

As you're on That precipice and about to make money, I know you said there's been a lot of inbound interest, but you haven't Announced any additional residencies or sponsorships yet. Can you just give us a little more color On why and when do you think we'll hear and then I'll shut up.

Speaker 6

Okay.

Speaker 2

Brett, from the artist community, I have to say that the we've had a

Speaker 6

real robust Interest from the artist community that the and we will be making some announcements pretty soon about additional residences. However, I mean, YouTube has 25 shows in play. They're sold out. But we expect Maybe not as high profile as YouTube, but quotes, right, because those are the kinds of artists that have been coming to talk to us. It's about residencies And that notion appeals to artists, the ability instead of having to travel all around the world With 16 trucks, etcetera, to plant yourself, in this case, in the Las Vegas and for them, the LA market just come in and do their shows that has a lot of appeal to art.

Speaker 6

So I'm not concerned at all About getting talent in that the as far as sponsorship goes, it's pretty difficult for sponsors, right, To come in and make an investment in sponsorship and a product that they haven't really been able to see and that they don't know what the public's reaction is to it. Now, but when we lit up the exosphere on July 4, that sort of ignited their interest and we've been Pursuing that and we have we are starting now to sign up advertisers and sponsors. And also honestly a lot of interest from partners, people who want to join in the project with us, They see the potential, understand that it's an experiential medium and that really is The new entertainment form of future, and they want to be a part of it.

Speaker 5

Thank you very much.

Operator

And your next question comes from the line of David Karnovsky from JPMorgan. Your line is open.

Speaker 7

Hi. This is Ted on for David. We had two questions. The first is on original content. What have early demand indicators been like For Postcard from Earth and how should we be thinking about other types of original content over time beyond Postcard from Earth?

Speaker 7

I'm going to ask you

Speaker 6

Repeat the first one. Yes.

Speaker 7

So what have early demand indicators been like for postcard from Earth? And how should we be thinking about other types of original content over time beyond

Speaker 2

Okay.

Speaker 6

Well, I mean, it's early For demand, we haven't even started actually doing any of our paid marketing, and we will start towards the end of this month. We feel we're kind of uniquely

Speaker 1

qualified

Speaker 6

To look at this part of the business because maybe one of the most similar kind of businesses that's out there It's the Christmas Spectacular. It runs roughly 200 shows in 8 weeks. So it has the same amount of volume that we are planning for Sphere. But With products like that, you generally don't see the ticket demand until you get pretty close to the actual Opening in the event itself. So for instance with the Christmas Spectacular, we know that better than 50% of the tickets get sold in the last 3 weeks The prior to it.

Speaker 6

I expect that the Sphere will follow the same kind of model in Las Vegas. So no, we don't have we don't have a lot of results yet. We haven't started marketing yet, etcetera. But we got a great product. Now what was the other part of your question?

Speaker 7

Yes. And the Second question is, how to be thinking about initial profitability in terms of AOI in the near term and How quickly that can ramp over time?

Speaker 6

Well, let's see. Are we giving guidance on this, Gavin? Well, no guidance. Without giving you any guidance, because we didn't intend to do that today, We need you to understand with that is that it's a new product. It's a new meeting that they Etcetera.

Speaker 6

It's not going to behave like other products, etcetera, that you see in this kind of space When we're learning at the same time, so It's early to project that, but when you do something like this, the first thing that you look to, Right. It's to see if you have a product that you think is going to appeal to the public, right. We really, really believe we do. And so once you start off with that with a great product, Right. Then you introduced it, right, you get people interested in it, you explain it to them, Etcetera and then you reap the benefits.

Speaker 6

But we're at that point today, I told you this is an interesting time for this call, right, because Yes. We're at the precipice. We're about to unveil the product to the public. And the next call that we have, we'll have a lot more for you to

Operator

And your next question Operator,

Speaker 1

We'll take the next caller. Go ahead.

Operator

Certainly. Your next question comes from the line of Daniel Durant from Morgan Stanley. Your line is open.

Speaker 8

Hi, good morning. Thank you for taking my question. So given cord cutting creating revenue pressures at MSG Networks, How do you weigh whether to refinance the Networks term loan coming due next year versus separating Networks from Sphere And leaving Sphere as a live entertainment equity pure play.

Speaker 6

I'm going to let Gautam answer that question. But before he does, I want to point something out to all of you who are watching this sector. There has been no lack of interest in sports. Sports continues to grow and it has Great, great appeal, right, to the consumer in the marketplace, particularly in New York. What's going on with this business when you take a look at things like diamond sports, etcetera, Is that the monetization mechanisms that harvest that interest are basically broken.

Speaker 6

I think I've said this before in other calls, etcetera. And it remains true, right? I think we have a plan That addresses that. But underlying all of this, right, is the public's thirst and interest For live sports and that has not diminished at all. The mechanism of monetizing Might not be in such great shape, but the public's interest is that they and so we can regain, I think, the business.

Speaker 6

Yes, you wanted to go ahead, Sandy.

Speaker 3

Yes, I was just going to add to what Jim is saying is that we are the first And only regional sports network going to our direct to consumer market with a per game offering. I think that particularly in this market and particularly with our premier teams opens up a funnel That brings people into our ecosystem, allows us to super serve them and market and speak directly to them, Upsell to them. So when Jim says that we believe we have a very, very strong and viable plan, That's a key piece of it.

Speaker 4

Thanks, Andrea. And just in terms of the refinancing, I think it's important to note it's still early in the process. The loan matures in October of 2024 And we have great relationships with our bank group. And as we move forward with this process, all of our options are on the table.

Speaker 8

Great. Thank you. And just my second question, now that Sphere's retained interest in MSG has been roughly cut in half and the Sphere is set to open next month. How, if at all, Does the operational performance of Sphere impact what you do with Sphere's remaining MSG shares? Thank you.

Speaker 6

Well, let's see. Look, the operational performance affects Everything. So before we get to what we do with the retained interest, right, That's obviously going to be our focus and we will adjust the business depending upon How that operational performance turns out, right? We won't be making our decisions on the 1st show that we sell, Right. But I think that over a fairly short period of time, we'll get a good sense Where the right balances are for the business.

Speaker 6

We will adjust to make sure that we have A profitable business and that it builds value for our shareholders.

Speaker 8

Do you want to take the second part? Sure.

Speaker 4

No final decisions have been made with regard to what we're going to do with the retained stake. We continue to have the 3 options for the retained stake, Monetization, exchange offer and a follow on spin off. And to the extent we sell some or all of the retained stake, we're going to be delivering our approach around

Speaker 8

Great. Thank you.

Speaker 1

Operator, we have time for one last caller.

Operator

And our final question comes from the line of David Joyce from Seaport Research Partners. Your line is open.

Speaker 4

Thank you. Two questions, kind of building on some other discussions here. But first, could you please walk us through the different event types And their respective or relative margin profiles, be it the proprietary content versus residencies versus Corporate banding events versus other things you might do. And then secondly, kind of further on that MSG Networks I had that question. Could you kind of explain how the ramp up in Sphere cash flows can offset the challenges that And MSGN is facing as they look to refinance.

Speaker 4

Thank you.

Speaker 6

All right. Let me take the first part of that one.

Speaker 4

So

Speaker 6

Let's start with our own original content, which really is the sort of the backbone of the business. That is basically a high margin business because you've already invested your capital, you've made your You've built your attraction and now your running costs are basically things like ushers, security, Well, merch, those kinds of things. So the return on that is pretty strong. Residences that the are basically the traditional model, right, that you follow with the act. The same kind of thing.

Speaker 6

They come in, you rent the building to them, right? And it As less risk on the sale of tickets, but less upside too. And residency really should be looked at as Also a bit of a it's not a loss leader, but it does improve the profile of products and of building that gets a lot of people in that they and those turn into Customers for your own content. The final piece is basically like what we call sort of corporate rentals And F1 is a good example of this. That is extremely low risk, right?

Speaker 6

And There's really not a lot of I don't even know if a margin discussion is appropriate for that. Basically, you have a rental fee And then everything, all the other expenses that are incurred with the operating of the building or building content The responsibility of the renter, so there's a guaranteed Top line to it for the business. And those are basically the 3 streams of Usage other than of course then there's sponsorship of the advertising sales, which It's not insignificant.

Speaker 4

And then with regard to your second question, look, there are a number of important factors related to the refinancing. Obviously, SKUER's performance and ramp up in year 1 is a large one and important to that. And as we think about it going forward, we're going to monitor the situation as Jim And all options are on the table as we move forward. All right. Thank you very much.

Operator

And this concludes our question and answer session. Mr. Ari Danes, I turn the call back over to you for some final closing remarks.

Speaker 1

Thank you all for joining us. We look forward to speaking with you on our next earnings call. Have a good day.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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Sphere Entertainment Q4 2023
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