Sphere Entertainment Co.

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 speaker's remarks, there will be a question and answer session. I would now like to turn the call over to Ari Daines, Investor Relations. Please go ahead.

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 investor 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. 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. 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 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 6th, 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 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, 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 residency 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 One'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 a 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. 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 Spheres and all of its unique capabilities. And with that, I will now turn the call over to Andrea.

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 betcasts 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 decline, 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 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 the 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 consumer streaming product, MSG Plus, which now allows us to reach the millions of homes 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 this past season. Similar to MSG Go, MSG Plus 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'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 teams. These fans have the option to subscribe to MSG Plus 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 THC 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 will 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.

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 Tau 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 One'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 Network's 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 were 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.

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

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 the line of Brandon Ross from LightShed Partners. Your line is open.

Good morning. Thanks for taking the questions. 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 Lite for the company?

Okay. Let's see. That's a very complicated question. 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 know, you have a limited revenue stream from it. You know, the act comes in, they may make, for instance, in the garden as much as $5 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 William Pettit- Wednesday, Thursday, Friday, Saturday, not many want to play Sunday or Monday and so therefore your dark and your capital is also you know language. William Pettit- The sphere completely changes that that model that the speed, 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, that the opportunity to return on a 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?

And spheres, right? The overhead and capex for additional, yeah.

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 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 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 it's a great time to be having this conversation because you know, 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, you know, 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 business, et cetera. But, you know, the proof is in the pudding, and the pudding is about to show up. So, yeah. So, yeah, so going forward, right, construction of additional spheres will be, for this company, capital-like, 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 out of building the first one. And, you know, 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. Darren learned a lot from when he started. He's a very talented director, but 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. you know, content from all parts of the globe. I believe it's going to be a spectacular show. But yes, it was, you know, again, capital intensive because it was first time. We're now shifting with the opening of the sphere to, you know, starting to make some money on that capital investment. And, you know, 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.

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, and then I'll shut up.

Okay. From the artist community, I have to say that we've had a real robust interest from the artist community. And we will be making some announcements pretty soon about additional residency. However, U2 has 25 shows to play. They're sold out. But we expect maybe not as high profile as U2, but close. Those are the kinds of artists that have been coming to talk to us. It's about residencies. That notion appeals to artists, the ability instead of having to travel all around the world with 16 trucks etc plant yourself the in this case in the in the Las Vegas and for them to la marketplace and just come in and do their shows. That they that has a lot of appeal to art so i'm not i'm not concerned at all about about getting talent in that the as far as sponsorship goes it's pretty difficult for sponsors. right to uh you know to come in and make an investment in sponsorship in 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 4th that sort of ignited their interest and we've been pursuing that and we have we are starting now to sign up uh advertisers sponsors that are and you know and also honestly a lot of interest from partners people who want to join in the project with us but they see the potential understand that it's an experiential medium that the and that really is the new entertainment form of future and they want to be a part of it thank you very much

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

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? And the second question... Sure. Hang on.

Repeat the first one.

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 postcard from Earth?

OK. 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 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. It runs, you know, roughly 200 shows in eight weeks. So it has the same amount of volume that we, that we were planning for skier. Um, they, uh, and, um, but with, with like that, you generally don't see the ticket demand until you get pretty close to the, to the actual opening and the event itself that the, so for instance, with the Christmas spectacular. We know that better than 50% of the tickets get sold in the last three weeks prior to. I expect that the sphere will follow the same kind of model in Las Vegas. So no, we don't have a lot of results yet. We haven't started marketing yet, et cetera. But we got a great product. Now, what was the other part of your question?

Yeah.

Second question is how to be thinking about initial profitability in terms of and then your term and how quickly. That can ramp over time.

Well, let's see, are we giving guidance on this? No guidance. Look, without giving you any guidance, because we didn't intend to do that today, but we need you to understand with that is that it's a new product. It's a new medium, et cetera. It's not going to behave like other products, et cetera, that you see in this kind of space. And 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 is to see if you have a product that you think is going to appeal to the public. We really, really believe we do. So once you start off with that, with a great product, you introduce it, right, you get people interested in it, you explain it to them, et cetera, and then you reap the benefits. But we're at that point today. I told you this is an interesting time for this call, right, because, you know, we're at the precipice. We're about to unveil the product to the public, and the next call that we have will have, you know, a lot more for you to sink your teeth into. Okay.

And your next question. Thank you, Ted.

Operator, we'll take the next caller. Go ahead.

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

Hi, good morning. Thank you for taking my question. So given court 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?

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's been no lack of interest in sports. 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, 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 addresses that. But underlying all of this 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. Yeah, you wanted to go ahead, Sandy.

Yeah, 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 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.

Thanks, Sandra. 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.

Great, thank you. And just my second question, now that SPHERES retained interest in MSGE has been roughly cut in half, and the SPHERES 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.

Well, let's see. Look, the operational performance affects everything. So before we get to, you know, what we do with the retained interest, right, that's obviously going to be our focus. And we will, you know, 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 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 want to take the second part? Sure. 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 spinoff. And to the extent we sell some or all of the retained stake, we're going to be deliberate in our approach around that.

Great, thank you.

Operator, we have time for one last caller.

And our final question comes from the 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, be it the proprietary content versus residencies versus corporate band and banding 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 MSGN is facing as they look to bring the refinance? Thank you.

All right, let me take the first part of that one that the so let's start with our own original concept, which really is that the the sort of the backbone of business that the, you know, that is basically a high margin business, because you've already invested your capital, you've made your show, you've built your, you know, you've built your attraction, And now your running costs are basically things like 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 access. It's the same kind of thing. They come in. You rent the building to them, right? And it has less risk on the sale of tickets, but less upside, too. And residency really should be looked at as, you know, Also, it's not a loss leader, but it does improve the profile of the product and of the building. It gets a lot of people in, and those turn into customers for your own content. The final piece is basically what we call 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, and then everything, all the other expenses that are incurred with the operating of the building or building content become the responsibility of the renter. So there's a guaranteed outline to it for the business. And those are basically the three streams of usage, other than, of course, then there's sponsorship and advertising sales, which is not insignificant.

And then with regard to your second question, there are a number of important factors related to the refinancing. Obviously, Sphere's performance and ramp up in year one 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 mentioned, and all options are on the table as we move forward.

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.