Q4 2023 Sphere Entertainment CoEarnings Call

Speaker 1: 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.

Speaker 1: I would now like to turn the call over to Ari Daines, Investor Relations. Please go ahead.

Speaker 1: Thank you. Good morning and welcome to SPHERE Entertainment's fiscal 2023 fourth quarter earnings conference call.

Speaker 1: Today's earnings call will begin with our Executive Chairman and CEO Jim Dolan, who will provide an update on Sphere.

Speaker 1: This will be followed by an update from Andrea Greenberg, President and CEO of MSG Networks.

Speaker 1: 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.

Speaker 1: 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.

Speaker 1: 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.

Speaker 1: Please refer to the company's filings with the SEC for a discussion of risks and uncertainties.

Speaker 1: The 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.

Speaker 2: And with that, I'll now turn the call over to Jim. Thank you Ari, and good morning everyone. I am pleased to be here today as we embark on our next chapter as the leading live entertainment media and technology company.

Speaker 2: We've recently completed a number of important transactions.

Speaker 2: starting with the two-thirds spinoff of MSG Entertainment, which was finalized in April .

Speaker 2: 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.

Speaker 2: These transactions have supported our growth plans for SPHERE, a next generation entertainment medium that we believe will disrupt the traditional venue model.

Speaker 2: 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.

Speaker 2: 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.

Speaker 2: That includes our next generation immersive technologies such as our interior display plane, sphere immersive sound, an advanced concert grade audio system, and 4D multi-sensory technologies that enable effects such as vibration, wind, set, and changing temperatures.

Speaker 2: Taken together, these technologies will engage the senses and enable a fully immersive experience.

Speaker 2: This is essentially a new medium which we call experiential.

Speaker 2: Well, take some time to reach its full potential. We have designed Sphere to be busy 365 days a year with multiple events per day. We have designed Sphere to be busy 365 days a year with multiple events per day.

Speaker 2: On October 6th, we will debut the Sphere experience.

Speaker 2: The SPEAR Experience will come in two parts. 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 the metaverse and the development of AI.

Speaker 2: The visitor will be guided through this experience by animatronic robots. It will utilize holographs, beamforming sound, and a 50-foot translucent video wall.

Speaker 2: 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

Speaker 2: And with more than 40 million visitors annually and over 2 million local residents.

Speaker 2: Las Vegas is the ideal market to debut this unique content.

Speaker 2: In addition to this fear experience, we plan to host a wide variety of event types including concert residencies.

Speaker 2: 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.

Speaker 2: SPEAR will also host marquee sporting events as well as corporate events with our first taking place in November with Formula One's inaugural Las Vegas Grand Prix. F1 will have a multi-day takeover of SPEAR's exterior and interior.

Speaker 2: 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 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.

Speaker 2: Another significant opportunity is advertising and sponsorship.

Speaker 2: led by Sphear's exterior, the Exosphere. Last month, the Exosphere's capabilities were unveiled in the July 4th 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.

Speaker 2: 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.

Speaker 2: 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, 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.

Speaker 2: 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

Speaker 2: 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 SPEAR 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 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.

Speaker 3: extensive postseason coverage for the Knicks, Rangers, Devils, and Islanders, including 20 first round games.

Speaker 3: A diverse slate of new and expanded content, from Gotham FC soccer broadcasts, to new sports betting programming on our digital platforms, and bet caps across Nixon Rangers games.

Speaker 3: The launch of our free ad supported streaming TV channel MSG sports zone

Speaker 3: And most recently, the debut of our direct-to-consumer and authenticated streaming offering, MSG+.

Speaker 3: We were also pleased to have completed renewal with several distributors this past year, including with one of our largest affiliates.

Speaker 3: Turning to our financial performance for fiscal 23.

Speaker 3: While affiliate revenue reflected the impact of ongoing subscriber decline, we delivered strong growth in advertising.

Speaker 3: That included the impact of the playoff.

Speaker 3: Record aggregate advertising revenue for our NBA and NHL teams during the regular season.

Speaker 3: 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 23, as well as a strong core of returning organizers, and increased demand from categories such as auto and financial services.

Speaker 3: With respect to adjusted operating income, our annual results also reflect the impact of the cost reduction program we implemented at the beginning of the calendar year, which has resulted in meaningful cost savings.

Speaker 3: But this was just one of the ways in which we believe our business is now better positioned going forward.

Speaker 3: As I mentioned earlier, in June , we launched our direct 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 Plus is also available free of charge.

Speaker 3: Go as our authenticated streaming product.

Speaker 3: 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 this past season.

Speaker 3: Similar to MSG Go, MSG Plus features our two linear networks, including all our live local NBA and NHL team telecasts.

Speaker 3: as well as other live sports events and programming.

Speaker 3: The consumer research we've conducted shows that, among the fans who do not receive our network, there is significant interest in subscribing to a D2C offering that includes games of their local team.

Speaker 3: These fans have the option to subscribe to MSG Plus directly by purchasing a monthly subscription for approximately $30.

Speaker 3: or an annual subscription for approximately $310.

Speaker 3: 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.

Speaker 3: such as staffing, technology, and marketing, and is provided for wider availability on devices, which will add value for viewers and advertisers alike.

Speaker 3: As we approach the start of the 23-24 NBA and NHL seasons, we will begin our targeted marketing efforts for MSG Plus and look forward to sharing more on our progress in the coming season.

Speaker 3: So while we remain mindful of the evolving media landscape, we are proud of our achievements this past fiscal year and will 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 Gautam.

Speaker 4: Thank you Andrea. Now let's review our financial results.

Speaker 4: Since we completed the spin-off of MSG Entertainment and the sale of our majority interest in TOW Group hospitality during the fiscal fourth quarter, both businesses are reflected as discontinued operations for all periods presented.

Speaker 4: In addition, results through the April 20 spinoff 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.

Speaker 4: discontinued operations. On a total company basis, we generated revenues of $129 million.

Speaker 4: an adjusted operating loss of 60 million for the fiscal 23 fourth quarter.

Speaker 4: 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. Guardian

Speaker 4: We expect sphere operating costs to increase in the fiscal 24 first quarter as we ramp up operations in Las Vegas.

Speaker 4: 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 One's multi-day takeover in November .

Speaker 4: Turning to MSG Networks, this segment generated $128 million in revenues and $31 million in AOI in the quarter.

Speaker 4: decreases of 8% and 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.

Speaker 4: As we look ahead to fiscal 24,

Speaker 4: We expect MSG Network segment results to reflect

Speaker 4: continued declines across the traditional subscriber base.

Speaker 4: partially offset by affiliate rate increases and our expectation for strong ongoing advertising demand.

Speaker 4: the impact of our direct-to-consumer launch, and the run rate impact of cost savings initiatives.

Speaker 4: Turning to our balance sheet.

Speaker 4: As of August 18th, we had approximately $341 million of unrestricted cash and cash equivalents and our debt balance was approximately $1.2 billion.

Speaker 4: Our cash balance includes the benefit of approximately $205 million in proceeds from our sale of 6.9 million MSG entertainment shares in June .

Speaker 4: 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.

Speaker 4: Since then, we have repaid the balance using approximately 1.9 million retained MSGE shares.

Speaker 4: 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.

Speaker 4: 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 dollars.

Speaker 4: Through August 18th, project to date construction costs paid were approximately $2.25 billion, which is net of the $65 million received from the Venetian.

Speaker 4: 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?

Speaker 4: Certainly, at this time I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad. And your first question comes from a line up, Brandon Ross from Light Shed Partners. Your line is open.

Speaker 4: Good morning. Thanks for taking the questions. Jim, we haven't had you on an earnings call since you announced this 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.

Speaker 5: Can you explain why you believe this investment makes sense and will generate an appropriate return given that level of investment you put in?

Speaker 5: 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 fears you mentioned in the prepared remarks, and will those fears be capex light for the company?

Speaker 2: Okay, let's see. That's a very complicated question.

Speaker 2: I do believe that the, you know.

Speaker 2: that the investment has been warranted. I will confess to you that we did not anticipate spending $2.3 billion. We also didn't anticipate COVID.

Speaker 2: 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. Thank you for that.

Speaker 2: 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.

Speaker 2: And the rest of the time, you're renting out. And you have a limited revenue stream from it. The app comes in, they may make prices in the garden as much as.

Speaker 2: five or six million dollars in ticket revenue, right? But you only get your rental fee.

Speaker 2: 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. And so therefore you're dark and your capital is also languishing.

Speaker 2: The SPHERE completely changes that model. The SPHERE is a venue that will be busy.

Speaker 2: theoretically 365 days a year because when we're not bringing in someone like a YouTube etc 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.

Speaker 2: into that into that product and So now it's time to harvest the and that's what we'll be doing the but all all in all that the although it is I agree with you that it's capital intensive, right that the opportunity to return on the capital

Speaker 2: is significantly better than it is with your traditional venue model.

Speaker 2: Let's see, and what was the second question? Oh, yes.

Speaker 5: Overhead, right? And spheres, right? Overhead and Cat-X for additional.

Speaker 2: Right. So first off, we built this one all ourselves.

Speaker 2: Don't plan on doing that really again. We want partners and we're looking at more of a franchise type model in terms of constructing the SPEARs. I will tell you that we've designed the SPEAR product for other marketplaces.

Speaker 2: 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.

Speaker 2: that allow us to go into multiple, multiple marketplaces. Really, I have to say that it's a great time to be having this conversation because we're just about to launch this product, right? And we're really gonna, the next call, we ought to be able to really dig into some actual numbers.

Speaker 2: But we're sitting on the precipice here. And we believe in the product. We believe in the formula and business, etc. But you know, the proof is in the pudding and the pudding is about to show up. The

Speaker 2: So, yeah, so going forward, right, construction of 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 learned a ton. Sometimesitching encouraging.

Speaker 2: 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, et cetera, sort of the same thing. I mean, we learned a lot.

Speaker 2: Darren learned a lot right from when he started. We have, you know, he's a very talented director and, but, you know, we have new cameras that are used for capture. He had to learn how to use those cameras. We had to learn how to use those cameras. We went all over the world with those cameras capturing.

Speaker 2: content from all parts of the globe. I believe it's gonna be a spectacular show. But yes, it was, again, capital intensive because it was first time. We're now shifting with the opening of the sphere.

Speaker 2: to 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. 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 you think we'll hear in the next couple of minutes?

Speaker 2: We've had a real robust.

Speaker 2: interest from the artist community. That the and we will be making some announcements pretty soon about additional residents.

Speaker 2: However, I mean, U2 has 25 shows to play. They're sold out. But we expect, you know, maybe not as high profile as U2, but close, right? Because those are the kinds of artists that have been coming to talk to us. It's about residency.

Speaker 2: And that notion appeals to artists, the ability, instead of having to travel all around the world with 16 trucks, etc., to plant yourself, in this case in Las Vegas, and for them, the LA marketplace, and just come in and do their shows.

Speaker 2: that has a lot of appeal to artists. So I'm not concerned at all about getting talent in. As far as sponsorship goes, it's pretty difficult for sponsors, right, to come in and make an investment in sponsorship in a product that they haven't really been able to see.

Speaker 2: and that they don't know what the public's reaction is to it. Now, but when we lit up the Exosphere on July 4th, that sort of ignited their interest and we've been pursuing that, and we are starting now to sign up advertisers and sponsors, and also honestly a lot of interest from partners.

Speaker 2: And that really is the new entertainment form of the future, and they want to be a part of it.

Speaker 5: Thank you very much.

Speaker 4: And your next question comes from a line of David Karnofsky from JP Morgan. Your line is open.

Speaker 5: Hi, this is Ted on for David. We had two questions. The 1st is on original content. What have early demand indicators been like for. Postcard for Mary.

Speaker 5: And how should we be thinking about other types of original content over time beyond postcard from Earth? And the second question... I'm going to ask you... Hang on, repeat the first one.

Speaker 5: Yeah, 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 5: 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 postcard from Earth?

Speaker 2: Okay, well, I mean, it's early for demand. We haven't even started actually doing any of our paid marketing. We will start towards the end of this month.

Speaker 2: You know, we feel we're kind of uniquely qualified to look at this part of the business because maybe one of the most similar kind of businesses that's out there is the Christmas Spectacular.

Speaker 2: It runs roughly 200 shows in eight weeks, so it has the same amount of volume that we're planning for Sphere. But with a product like that, you generally don't see the ticket demand until you get pretty close to the actual price.

Speaker 2: 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 three weeks.

Speaker 2: prior to. I expect that the sphere will follow the same kind of model in Las Vegas.

Speaker 2: So no, we don't have a lot of results yet. We haven't started marketing yet, etc. But we got a great product. Now what was the other part of your question?

Speaker 5: Yeah, and the second question is how to be thinking about initial profitability in terms of ALI in the near term and how quickly that can ramp over time.

Speaker 2: Well, let's see, are we giving guidance on this, Gavin? Nope. No guidance. No. Well, let's see, you know, without giving you any guidance, because we didn't intend

Speaker 2: But we need you to understand with that is that it's a new product. It's a new medium that they etc. It's not going to behave like other products etc. that you see in this kind of space. But the, you know, when we're learning at the same time.

Speaker 2: So, it's early to project that, but when you do something like this, the first thing that you look to is to see if you have a product that you think is going to appeal to the public.

Speaker 2: we really, really believe we do. So once you start off with that, with a great product, then you introduce it, you get people interested in it, explain it to them, etc, and then you reap the benefits.

Speaker 2: But we're at that point today, I told you this is an interesting time for this call, because we're at the precipice, we're about to unveil the product to the public, and the next call that we have will have a lot more for you to sink your teeth into.

Speaker 6: And your next question.

Speaker 4: We'll take the next caller. Go ahead.

Speaker 7: Certainly your next question comes from line of Daniel Duran from Morgan Stanley . Your line is open.

Speaker 8: Hi, good morning. Thank you for taking my question.

Speaker 8: So, given court cutting creating revenue pressures at MSG Network,

Speaker 8: How do you weigh whether to refinance the network's term loan coming due next year versus separating networks from Sphere and leaving Sphere as a live entertainment equity pure play?

Speaker 2: 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.

Speaker 2: There's been no lack of interest in sports.

Speaker 2: Sports continues to grow and has great, great appeal 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 The

Speaker 2: et cetera, is that the monetization mechanisms that harvest that interest are basically broken. I think I've said this before in other calls, et cetera, and it remains true. I think we have a plan that …

Speaker 2: 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 monetization might...

Speaker 3: going to our direct consumer market for the 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. Thanks, Andrea. And just in terms of the refinancing.

Speaker 4: 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 SPHERES retain interest, MSGE has been roughly cut in half, and the SPHERES set to open next month, how, if at all, does the operational performance of SPHERES impact what you do?

Speaker 8: with SPHERES remaining MSG shares. Thank you.

Speaker 8: MSGE shares. Thank you.

Speaker 2: 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.

Speaker 2: and we will adjust the business depending upon how that operational performance turns out. We won't be making our decisions on the first show that we sell, but I think that over a fairly short period of time, we'll get a good sense.

Speaker 2: of where the right balances are for the business. We will adjust to make sure that we have a profitable business and that it builds value for our shareholders. You wanna 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 three 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 deliberating our approach around that.

Speaker 4: Great, thank you. Operator, we have time for one last caller. And our final question comes from a line of David Joyce from Seaport Research Partners. Your line is open. 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, particularly if the proprietary content versus residencies versus corporate banning events versus other things you might do? And then secondly, kind of further on that MSG Network's debt question, could you kind of explain how the ramp up in sphere cash flows can offset the challenges that Candida? Kinda.

Speaker 2: 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 show, you've built your attraction, and now your running costs are basically things like...

Speaker 2: ushers, security, merch, those kinds of things. So the return on that is pretty strong. Residencies are basically the traditional model, right? That you follow with the app. The same kind of thing. They come in and you...

Speaker 2: of product and of the building that gets a lot of people in, 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? And there's really not a lot of, you know, I don't even know if a margin discussion is appropriate for that. Basically you have a rental fee that the...

Speaker 7: All right, thank you very much. And this concludes our question and answer session. Mr. Ari Daines, I turn the call back over to you for some final closing remarks. Thank you all for joining us. We look forward to speaking with you on our next earnings call. Have a good day. This concludes today's conference call. Thank you for your participation. You may now disconnect.