Sphere Entertainment Co. Form 10-Q Summary
Reporting period: Fiscal quarter ended March 31, 2024, filed May 10, 2024. The requested “2023 Q3” appears to refer to the company’s fiscal third quarter; the filing covers fiscal 2024 Q3. Amounts are in thousands unless otherwise stated.
Business Context and Reporting Period
Sphere Entertainment operates two reportable segments: Sphere, including the Las Vegas venue and Sphere Studios, and MSG Networks, including MSG Network, MSG Sportsnet and the MSG+ streaming product. Sphere opened in September 2023, and its first original immersive production, Postcard From Earth, debuted in October 2023.
The traditional MSG Entertainment business and Tao Group Hospitality are presented as discontinued operations. Following sales of its MSG Entertainment retained interest and repayment of the delayed draw term loan, the company held no MSG Entertainment common stock as of March 31, 2024.
Key Financial Metrics
| Metric | Three months ended March 31, 2024 | Three months ended March 31, 2023 | Nine months ended March 31, 2024 | Nine months ended March 31, 2023 |
|---|---|---|---|---|
| Revenue | $321.3 million | $162.1 million | $753.5 million | $444.7 million |
| Operating loss | $(40.4) million | $(101.9) million | $(269.9) million | $(202.7) million |
| Net loss attributable to Sphere stockholders | $(47.2) million | $(56.8) million | $(154.1) million | $(34.0) million |
| Loss per share | $(1.33) | $(1.64) | $(4.38) | $(0.98) |
| Adjusted operating income | $61.5 million | $(18.7) million | $55.1 million | $(62.7) million |
| Cash flow from operations | Not separately disclosed | Not separately disclosed | $52.8 million | $137.8 million |
Reported operating margin was approximately (12.6%) for the quarter and (35.8%) for the nine-month period. Adjusted operating margin was approximately 19.2% and 7.3%, respectively; adjusted operating income is a non-GAAP measure.
Segment Performance and Material Changes
- Sphere: Quarterly revenue was $170.4 million, compared with $0.6 million in the prior-year quarter. Nine-month revenue was $345.9 million, compared with $1.9 million. The quarterly segment adjusted operating result improved to $12.9 million from a $77.0 million loss; the nine-month adjusted operating loss improved to $56.1 million from $202.0 million.
- Sphere revenue included $134.8 million of event-related revenue in the quarter and $287.0 million for the nine-month period. The Sphere Experience had 257 performances during the quarter and 449 performances during the nine-month period.
- Sphere’s reported results were burdened by $77.7 million of quarterly depreciation and amortization and $168.1 million for nine months as the Las Vegas venue’s assets entered service. The company also recorded a $116.5 million impairment charge in the nine-month period after abandoning plans for a London Sphere venue.
- MSG Networks: Quarterly revenue declined 6% to $151.0 million, while nine-month revenue declined 8% to $407.6 million. Subscriber declines reduced distribution revenue. Adjusted operating income declined to $48.6 million for the quarter and $111.1 million for nine months.
- Consolidated adjusted operating income improved primarily because of Sphere’s launch and lower merger-related costs, partially offset by weaker MSG Networks results and higher Sphere operating costs.
- Depreciation and amortization increased substantially following the opening of Sphere. Interest expense was $27.1 million in the quarter and $52.9 million for nine months, primarily reflecting the end of capitalized interest on placed-in-service Sphere assets and the December 2023 convertible notes.
- The nine-month period included a $62.6 million gain from a litigation settlement and a $19.0 million realized loss on the sale of part of the MSG Entertainment retained interest. The company also recognized a $113.6 million income tax benefit for nine months, including discrete tax benefits.
Cash Flow, Liquidity and Debt
- Cash, cash equivalents and restricted cash were $693.9 million at March 31, 2024, up from $429.1 million at June 30, 2023. Unrestricted cash and cash equivalents were $680.6 million.
- Nine-month cash flow from operations was $52.8 million, compared with $137.8 million in the prior-year period. Investing cash use was $20.2 million, including $249.9 million of capital expenditures, partly offset by $256.5 million of proceeds from selling the MSG Entertainment retained interest.
- Financing cash inflow was $233.0 million, including $251.6 million from the 3.50% convertible senior notes and $65.0 million borrowed under the delayed draw term loan facility. The delayed draw facility was subsequently repaid using MSG Entertainment shares.
- Principal debt outstanding was $1.404 billion, consisting primarily of $870.4 million of MSG Networks debt, $275.0 million under the LV Sphere Term Loan Facility and $258.8 million of convertible notes. The MSG Networks debt was classified as current.
- The MSG Networks Term Loan had a final maturity date of October 11, 2024. The company expected $41.3 million of additional amortization payments before maturity and stated that MSG Networks could not repay the remaining balance from operating cash flow without refinancing.
- Management was negotiating an amendment and refinancing intended to extend maturity to October 10, 2025, reduce outstanding debt and revolving commitments, increase interest and amortization rates, and impose more restrictive covenants. The filing states that this refinancing was not yet completed and that failure could result in default, acceleration or foreclosure on MSG Networks collateral.
- The filing states that these conditions raised substantial doubt about going-concern status, but management concluded the doubt was effectively alleviated for at least one year from issuance based on expected refinancing, liquidity and anticipated Sphere cash generation.
Guidance, Outlook, Risks and Unusual Items
- Management expects Sphere to generate substantial annual revenue and adjusted operating income over time, but provides no quantified revenue or earnings guidance in the filing.
- Key dependencies include continued demand for Postcard From Earth and future immersive productions, concert and event bookings, advertising and sponsorship demand, and tourism in Las Vegas.
- MSG Networks faces continued subscriber attrition, affiliation-renewal risk, competition from direct-to-consumer services and possible pressure on advertising revenue.
- Future Sphere venues may use joint ventures, equity partners, managed-venue structures and non-recourse financing. The company no longer plans to develop a United Kingdom venue after its London planning application was rejected.
- The company reported effective disclosure controls as of March 31, 2024 and no material changes in internal control over financial reporting during the quarter.
- After quarter-end, on April 25, 2024, the company acquired the remaining equity interest in Holoplot GmbH, making it a consolidated subsidiary. Purchase accounting was not complete as of the filing date.
Important Facts for Investors to Verify
- Whether MSG Networks completed the proposed refinancing before the October 2024 maturity and on what final terms.
- Sphere attendance, ticket pricing, revenue per visitor, event calendar, advertising bookings and cash flow generation as the venue moves beyond its launch period.
- The sustainability of Sphere’s adjusted operating income after recurring depreciation, content investment, operating expenses and interest costs.
- MSG Networks subscriber trends, affiliation renewals, MSG+ adoption and the effect of declining traditional pay-TV distribution.
- Future cash requirements for original immersive productions, potential new Sphere venues, debt service and any equity contribution to MSG Networks.
- The final purchase price allocation and financial impact of the Holoplot acquisition.