Sphere Entertainment Co. annual report, FY2023

Business Context and Reporting Period

Sphere Entertainment Co.’s Form 10-K covers the fiscal year ended June 30, 2023. The source does not represent a 2022 fourth-quarter filing; it includes audited Fiscal Year 2023 results and unaudited quarterly data for the quarter ended June 30, 2023. The Company operates two continuing reportable segments: Sphere and MSG Networks.

Sphere: Development of an immersive entertainment venue and content platform. The Las Vegas venue was expected to open in September 2023, with capacity of approximately 17,600 seats and up to 20,000 guests.
MSG Networks: Regional sports and entertainment networks, plus the MSG+ authenticated and direct-to-consumer streaming product.
On April 20, 2023, the Company distributed approximately 67% of Madison Square Garden Entertainment Corp. to stockholders and retained an interest that was reduced to approximately 17% after subsequent sales and debt repayment.
On May 3, 2023, the Company sold its 66.9% interest in Tao Group Hospitality. Both transactions were presented as discontinued operations for all periods.

Financial Results and Key Metrics

Metric	Fiscal 2023	Fiscal 2022	Change
Revenue	$573.8 million	$610.1 million	Down 6%
Operating loss	$273.0 million	$165.7 million	Loss increased $107.3 million
Adjusted operating loss	$122.5 million	$24.5 million	Loss increased $98.1 million
Income from continuing operations	$172.0 million	Loss of $137.9 million	Improved $309.9 million
Net income attributable to stockholders	$502.8 million	Loss of $194.4 million	Improved $697.2 million
Operating cash flow	$153.6 million	$141.3 million	Up $12.3 million
Capital expenditures	$1.1 billion	$756.7 million	Primarily Sphere construction

Fiscal 2023 reported net income was heavily affected by non-operating and discontinued-operation items, including approximately $545.7 million of realized and unrealized gains on the MSG Entertainment retained interest and $212.9 million of after-tax gain on the Tao Group Hospitality disposition. These items do not reflect recurring operating performance.

MSG Networks: Revenue declined 6% to $571.2 million. Operating income declined 36% to $96.5 million, and adjusted operating income declined 18% to $169.9 million.
MSG Networks affiliation revenue decreased $49.3 million, primarily from an approximately 10.5% subscriber decline, excluding the Comcast impact, and the continued effect of Comcast’s non-renewal. Advertising revenue increased $11.5 million.
Sphere: Revenue was only $2.6 million during the pre-opening period. Operating loss was $369.6 million and adjusted operating loss was $292.4 million.
Sphere-related property and equipment totaled $3.3 billion, including $3.1 billion of construction in progress at June 30, 2023. The Company estimated final Las Vegas construction costs at approximately $2.3 billion, net of the Venetian’s $75 million commitment.
Fiscal 2023 restructuring charges were $27.9 million, including $23.1 million attributable to Sphere and $4.8 million to MSG Networks.
For the quarter ended June 30, 2023, revenue was $129.1 million, operating loss was $70.3 million, continuing-operations income was $359.6 million, and net income attributable to stockholders was $536.8 million. The quarterly profit was materially affected by retained-interest gains and other unusual items.

Cash Flow, Debt, Liquidity and Margins

Cash, cash equivalents and restricted cash totaled $429.1 million at June 30, 2023, including unrestricted cash of $132.0 million and restricted cash of approximately $297.1 million.
Cash used in investing activities was $653.9 million, including $1.1 billion of capital expenditures and $116.0 million of capitalized interest, partly offset by asset-disposition and investment-sale proceeds.
Total debt principal was $1.207 billion at June 30, 2023: $932.3 million of MSG Networks debt and $275.0 million under the LV Sphere Term Loan Facility.
The MSG Networks term loan had $82.5 million scheduled for Fiscal 2024 and a final maturity date of October 11, 2024. Management expected to refinance the facility and pay down a portion of the term loan.
The LV Sphere facility matures December 22, 2027, bears floating-rate interest, and had an interest rate of 9.56% at June 30, 2023.
A hypothetical 200-basis-point increase in floating interest rates was estimated to increase annual interest expense by approximately $24.1 million.
Contractual debt repayments totaled $1.207 billion, while operating lease commitments totaled $184.7 million. Additional off-balance-sheet commitments totaled approximately $3.1 billion, including $3.1 billion of MSG Networks broadcast-rights commitments.
No cash dividends were paid, and no shares had been repurchased under the $350 million share-repurchase authorization.

Material Changes Versus the Prior Comparable Period

Consolidated revenue decreased 6%, primarily because of lower MSG Networks affiliation revenue.
MSG Networks profitability weakened as subscriber losses and lower affiliation fees combined with higher sports-rights costs.
Sphere’s adjusted operating loss widened by $61.2 million as construction, technology, content, marketing and pre-opening expenses increased.
Sphere construction spending accelerated, with property and equipment increasing from $2.2 billion to $3.3 billion and construction in progress increasing to $3.1 billion.
Cash and restricted cash decreased from $760.3 million to $429.1 million, despite positive operating cash flow, largely because of Sphere capital spending, dispositions, the MSG Entertainment distribution and other investing activity.
The Company’s balance sheet benefited from the MSG Entertainment retained-interest gains and the Tao Group Hospitality sale, but these gains were not recurring operating earnings.
The Company introduced MSG+ in June 2023, offering authenticated access and direct-to-consumer subscriptions, including single-game purchases.

Guidance, Outlook, Risks and Unusual Items

Management expected Sphere Las Vegas to generate substantial annual revenue and adjusted operating income after opening, but provided no quantified revenue or earnings guidance.
Sphere’s initial programming included U2’s planned 25-show opening run, the Formula 1 Las Vegas Grand Prix takeover, and the original production Postcard from Earth, scheduled to debut October 6, 2023.
Management’s liquidity plan depended materially on Sphere generating significant positive cash flow in Fiscal 2024 and on potential proceeds from selling the remaining MSG Entertainment interest.
If Sphere underperformed, management indicated it could reduce labor and non-labor expenses and reduce or defer capital spending.
Key risks include the unproven demand for Sphere’s immersive content, construction delays or cost overruns, reliance initially on a limited number of productions, competition in Las Vegas, and the ability to attract artists, guests, advertisers and corporate events.
MSG Networks faces continuing traditional pay-TV subscriber declines, distributor concentration, affiliation-agreement renewals, sports-rights costs, team performance risk and competition from streaming platforms.
The Company recorded a $48.5 million liability for the MSG Networks merger litigation settlement. A separate $85 million settlement related to MSG Entertainment litigation was approved after year-end and was expected to be funded by other defendants’ insurers; no gain had been recorded as of June 30, 2023.
The Company’s material weakness in internal control identified in Fiscal 2022 was reported as remediated. Management and Deloitte concluded that internal control over financial reporting was effective as of June 30, 2023.
The MSG Entertainment distribution could create significant tax liabilities or indemnification obligations if the transaction does not receive intended tax treatment.
The Dolan Family Group controlled approximately 72.3% of total voting power, creating significant controlled-company and related-party governance considerations.

Important Facts for Investors to Verify

Whether Sphere opened on schedule and achieved expected attendance, utilization, pricing, advertising and sponsorship levels.
Sphere’s actual final construction cost, remaining capital requirements, content-investment needs and cash burn.
The outcome and terms of refinancing the MSG Networks debt before its October 2024 maturity, including any required paydown.
MSG Networks subscriber trends, distributor renewals, affiliation rates, advertising performance and sports-rights obligations.
The amount and timing of proceeds from any further sale or other monetization of the MSG Entertainment retained interest.
Whether reported Fiscal 2024 profitability and cash generation exclude or are distorted by retained-interest gains, dispositions, settlements and other unusual items.
Potential tax and indemnification exposure associated with the MSG Entertainment and prior MSG Sports distributions.
Related-party transactions, shared services, media-rights payments and the effect of Dolan Family voting control.