Sphere Entertainment Co. (NYSE:SPHR) Q4 2023 Earnings Call Transcript

Sphere Entertainment Co. (NYSE:SPHR) Q4 2023 Earnings Call Transcript August 22, 2023

Operator: Good morning. Thank you for standing by and welcome to the Sphere Entertainment Company Fiscal 2023 Fourth 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. Please go ahead.

Ari Danes: Thank you. Good morning, and welcome to Sphere Entertainment’s fiscal 2023 fourth 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. 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 discussion of risks and uncertainties. And company disclaims any obligation to update any forward-looking statements that may be discussed during this call. On pages 5 and 6 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 will now turn the call over to Jim.

James Dolan: 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’ve recently completed a number of important transactions, starting with the two-thirds spinoff of MSG Entertainment, which was finalized in April. This was followed in May by the sale of our majority interest in Tao Group Hospitality. And in June, we sold approximately 40% of our retained equity interest in MSG Entertainment. These transactions have supported our growth plans for Sphere, a next generation entertainment medium that we believe will disrupt the traditional venue model. We remain on track to open our first 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, an advanced concert-grade audio system, and 4D multisensory technologies that enable effects such as vibration, wind, scent, and changing temperatures. 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 two parts. The first part consists of a series of exhibits that chronicle technology’s impact on the development of view and 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, beam forming sound and a 50-foot translucent video wall. It will then continue in the main venue bowl where guests will be fully immersed in a multisensory cinematic journey from Academy Award nominated director Darren Aronofsky. And with more than 40 million visitors annually and over 2 million local residents, Las Vegas is the ideal market to debut this unique content.

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 29th 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.

Our event schedule through the remainder of the calendar year is now in place and we look forward to sharing more on calendar ’24 in the coming months. Another significant opportunity is advertising and sponsorship led by Sphere’s exterior, the Exosphere. Last month, the Exosphere’s capabilities were unveiled in the July 4 shows 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 billion, 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.

In terms of premium hospitality offerings, Sphere in Las Vegas will have 23 VIP suites, as well as other unique hospitality spaces. We expect to license a number of these suites in multi-year agreements and are making progress towards this goal. 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 potential right from the start, but we’re 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.

Andrea Greenberg: Thank you, Jim, and good morning. As we look back at fiscal ’23, we are proud to have delivered another year of exceptional sports and entertainment programming, highlighted by hundreds of live regular season telecasts across our five NBA and NHL teams, extensive postseason coverage for the Knicks, Rangers, Devils and Islanders, including 20 first-round games, a diverse slate of new and expanded content from Gotham FC soccer broadcasts to new sports betting programming on our digital platforms and bet casts 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+.

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 ’23. 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. We further benefited from the run rate impact of sports gaming, which once again was our single largest advertising category in fiscal ’23, as well as the 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 beginning of the calendar year, which has resulted in meaningful cost savings. But this was just one of the ways 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+, 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+ 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+ 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 this past season.

Similar to MSG GO, MSG+ features our two 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 conducted shows that among fans who do not receive our network, there is significant interest in subscribing to a D2C offering that includes games of their local teams. These fans have the option to subscribe to MSG+ directly by purchasing a monthly subscription for approximately $30 or an annual subscription for approximately $310. 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. We believe that this individual per game option will drive entry point transactions, wider reach and upsell 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 D2C 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 ’23, ’24 NBA and NHL seasons, we will begin our targeted marketing efforts for MSG+ 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.

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

Gautam Ranji : Thank you, Andrea. Now let’s review our financial results. Since we completed the spinoff of MSG Entertainment and the sale of our majority interest in Tao Group Hospitality during the fiscal fourth quarter, both businesses are reflected as discontinued operations for all periods presented. In addition, results through the April 20th spinoff date includes 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 in discontinued operations. On a total company basis, we generated revenues of $129 million and an adjusted operating loss of $60 million for the fiscal ’23 fourth quarter.

This included $90 million 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 prepare for the opening next month. We expect Sphere operating costs to increase in the fiscal ’24 first quarter as we ramp up operations in Las Vegas. With the venue opening on September 29th, Sphere’s impact on our 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 million in revenues and $31 million in AOI in the quarter, decreases of 8% and 22% respectively as compared to the prior year period.

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 ’24, 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 18th, we had approximately $341 million of unrestricted cash and cash equivalents and our debt balance was approximately $1.2 billion. Our cash balance includes the benefit of approximately $205 million in proceeds from our sale of 6.9 million MSG Entertainment shares in June.

It also benefits from $65 million 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 1.9 million retained MSGE shares. Our remaining interest in MSGE is now 8.2 million shares, which as of August 18th was worth approximately $270 million 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 costs to be approximately $2.3 billion. Through August 18th, project to date construction costs paid for approximately $2.25 billion, which is net of the $65 million received from The Venetian. With that, I will now turn the call back over to Ari.

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

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Q&A Session

Operator: Certainly. [Operator Instructions] And your first question comes from the line of Brandon Ross from LightShed Partners.

Brandon Ross : Jim, we haven’t had you on an earnings call since you announced the Sphere. The project came in above the initial budget range and you’ve had to engage in a number of strategic transactions to keep it moving forward. Can you explain why you believe this investment makes sense and will generate an appropriate return, given that level of investment you put in? And then I guess going forward from here, today’s results show a significant amount of overhead in the business. Is that overhead to support the additional Spheres you mentioned in the prepared remarks? And will those Spheres be CapEx-light for the company?

James Dolan: 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 $2.3 billion. We also didn’t anticipate COVID. But 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 build your building, if you have a team, they’re the first tenants in, but that generally only occupies 40 to 50 nights a year, 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, regardless much as much as $5 million or $6 million 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 want to play Sunday or Monday. So therefore you’re dark and your capital is also languishing. 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 U2, et cetera, 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. But all-in-all, although it is — I agree with you that it’s capital intensive, right, that 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? Oh, the overhead, right?

Brandon Ross: Yes. Overhead and CapEx for additional…

James Dolan: Right. So, first off, we built this one all ourselves. Don’t plan on doing that really again. We want partners that the — 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 the Sphere product for other marketplaces that goes as low as 2,500 seats and has a construction period of less than two years, we’ve done a lot of innovation in the construction area and we have architectural plans that allow us to go into multiple, multiple marketplaces. Really I have to say that this — it’s a great time to be having this conversation because we’re just about to launch this product, right? And we’re really going to — the next call we ought to be able to really dig into some actual numbers, et cetera.

But we’re sitting on the precipice here. And we believe in the product. We believe in the formula and the business, et cetera. But the proof is in the pudding and the pudding is about to show up. So yes, so going forward, right, construction of additional Spheres will be for this company capital-light, because we’ll be doing the franchise, plus the overall cost of building these venues is going to go significantly down. The first one is the most expensive. We learned a ton out of building the first one. And we plan on taking that experience and knowledge and putting it forth coming. As far as the overhead in terms of creating content, et cetera. Sort of the same thing, I mean that we learned a lot. Darren, we learned a lot, right, from when he started.