Sphere Entertainment Co. Form 10-Q Summary
Reporting period: Quarterly and nine months ended March 31, 2023. The supplied metadata references “2022 Q3,” but the filing is the fiscal third-quarter 2023 Form 10-Q. Amounts are in thousands unless otherwise stated.
Business context
At March 31, 2023, the Company reported two continuing segments: Entertainment, including Sphere development and traditional live-entertainment venues, and MSG Networks. Tao Group Hospitality was classified as held for sale and discontinued operations. On April 20, 2023, after quarter-end, the Company distributed approximately 67% of MSG Entertainment to stockholders and retained approximately 33%; traditional live entertainment excluding Sphere was transferred to MSG Entertainment.
Financial performance and liquidity
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue | $363.3 million, up 3% | $1.139 billion, up 23% |
| Operating income (loss) | $(70.3) million | $(56.4) million |
| Net loss | $(58.6) million | $(32.0) million |
| Net loss attributable to Sphere stockholders | $(56.8) million; $(1.64) per share | $(34.0) million; $(0.98) per share |
| Adjusted operating income | $19.4 million, down 49% | $111.2 million, up 42% |
| Cash flow from operations | Not separately provided | $137.8 million |
| Capital expenditures | $200.7 million | $751.1 million |
Quarterly revenue was approximately 3% higher year over year, but the operating margin declined to approximately negative 19% from near breakeven, primarily because of higher selling, general and administrative expenses, restructuring charges and Sphere-related costs. Nine-month revenue increased 23%, while the operating loss narrowed from $69.4 million to $56.4 million.
- Entertainment: Quarterly revenue increased 4% to $201.9 million, but operating loss widened to $81.1 million. Nine-month revenue increased 48% to $705.5 million, and operating loss improved to $119.9 million from $172.8 million. Adjusted operating loss was $39.3 million for the quarter and $20.7 million for the nine months.
- MSG Networks: Quarterly revenue declined 4% to $161.4 million and operating income declined 77% to $10.4 million. Nine-month revenue declined 6% to $442.8 million and operating income declined 40% to $62.9 million. Adjusted operating income was $58.3 million for the quarter and $130.5 million for the nine months.
- At March 31, cash, cash equivalents and restricted cash totaled $327.2 million, including $217.6 million of unrestricted cash and $109.7 million of restricted cash, compared with $822.9 million at June 30, 2022.
- Principal debt outstanding was approximately $1.901 billion at March 31, 2023, with $98.8 million classified as current. The balance included a $275 million LV Sphere term loan facility bearing interest at 9.23% at quarter-end.
- Nine-month investing cash use was $825.5 million, driven primarily by Sphere construction. Financing cash inflow was $200.5 million, including $275.2 million of debt proceeds.
Material changes versus the prior comparable period
- Entertainment benefited from the recovery of live events, a full Christmas Spectacular season and higher venue-related revenue. The Company reported 181 Christmas Spectacular performances and approximately 930,000 tickets sold, with per-show attendance up more than 25% year over year.
- MSG Networks affiliation revenue declined because subscribers decreased approximately 10%, including the continuing effect of Comcast’s non-renewal. Higher advertising revenue partially offset the decline.
- Quarterly selling, general and administrative expense increased 51% company-wide, and restructuring charges increased to $20.5 million from $14.7 million. Nine-month restructuring charges were $34.2 million versus $14.7 million.
- Interest expense fell to zero in the income statement because more interest was capitalized into Sphere construction; $88.5 million of interest was capitalized during the nine months versus $32.2 million in the prior-year period.
- Other income benefited from investment gains, including DraftKings-related gains, compared with significant investment losses in the prior-year period.
- The Company completed the sale of its controlling interest in Boston Calling Events in December 2022, recognizing an $8.7 million gain, and sold its corporate aircraft for a $4.4 million loss.
Guidance, outlook, risks and unusual items
- Management expected Sphere Las Vegas to open in September 2023. As of May 9, 2023, the estimated cost of Sphere, including core technology and soft costs, was approximately $2.3 billion; approximately $2.08 billion had been paid.
- Management expects Sphere to generate substantial annual revenue and adjusted operating income, but the filing provides no quantified revenue or earnings guidance.
- As of May 9, 2023, after the spin-off and Tao sale, unrestricted cash was approximately $232.7 million, restricted cash was approximately $110 million, total debt principal was approximately $1.228 billion, and the retained MSG Entertainment interest had an estimated fair value of approximately $575 million.
- The Company entered into an undrawn $65 million delayed draw term loan facility that may be used for Sphere costs and refinancing MSG Networks debt. MSG Networks debt matures in October 2024, creating a refinancing requirement.
- The LV Sphere facility requires minimum liquidity of $100 million, including $75 million of pledged cash before specified completion milestones, and debt-service coverage testing begins in fiscal 2024 and after the first public Sphere event.
- Key risks include Sphere construction delays or cost overruns, demand and attendance uncertainty, operating cash burn, high leverage and floating-rate exposure, MSG Networks subscriber losses and affiliation renewals, economic conditions, COVID-19-related disruptions, litigation, and the ability to refinance debt.
- The Company recorded a $48.5 million liability for a proposed MSG Networks litigation settlement, subject to court approval; insurers agreed to advance $20.5 million while coverage remains disputed. A separate proposed $85 million MSG Entertainment litigation settlement is expected to be funded by insurers and was not recorded as a gain at March 31, 2023.
Most important facts to verify
- Actual opening date, final construction cost and early operating performance of Sphere Las Vegas.
- Availability and terms of refinancing for the MSG Networks term loan maturing in October 2024.
- Post-spin-off cash needs, restricted cash requirements and use or sale of the retained MSG Entertainment interest.
- MSG Networks subscriber trends, affiliation renewals and advertising performance.
- Final court approval, insurance recoveries and cash obligations related to the two proposed litigation settlements.
- Whether the cost-reduction program delivers the expected savings without impairing Sphere development or operating capacity.