Sphere Entertainment Co. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended September 30, 2023, compared with the three months ended September 30, 2022. The filing is unaudited. The company operates through Sphere and MSG Networks; MSG Entertainment and Tao Group Hospitality are presented as discontinued operations following their respective separations and dispositions.
Business Context and Reporting Period
- Sphere in Las Vegas opened in September 2023, with the first concerts beginning September 29 and The Sphere Experience featuring Postcard From Earth debuting October 6, 2023.
- MSG Networks provides regional sports and entertainment programming and the MSG+ streaming product.
- As of September 30, 2023, the company had no remaining MSG Entertainment common stock after selling portions of its retained interest and using shares to repay the delayed draw term loan.
Financial Performance and Key Metrics
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Revenue | $118.0 million | $123.1 million | Down $5.1 million, or 4% |
| Operating loss | $69.8 million | $51.1 million | Loss increased $18.7 million |
| Adjusted operating loss | $57.9 million | $30.8 million | Loss increased $27.1 million, or 88% |
| Loss before income taxes | $23.2 million | $48.1 million | Loss decreased $24.9 million |
| Net income attributable to Sphere stockholders | $66.4 million | $(44.8) million | Improved by $111.2 million |
| Diluted EPS attributable to Sphere stockholders | $1.89 | $(1.30) | Improved by $3.19 |
| Net cash used in operating activities | $(94.6) million | $(81.2) million | Use increased $13.5 million |
| Capital expenditures, net | $165.0 million | $270.1 million | Down $105.1 million |
Margins: Revenue declined despite Sphere generating $7.8 million of revenue, primarily because MSG Networks revenue fell 10%. Consolidated operating margin was approximately negative 59.1%, compared with negative 41.5% in the prior-year period. Adjusted operating margin was approximately negative 49.0%, compared with negative 25.0%. Net margin was approximately 56.3%, compared with negative 36.4%, but the current-period net result was heavily affected by unusual items and tax benefits.
- Sphere: Revenue was $7.8 million versus $0.7 million. Operating loss increased to $98.4 million from $79.1 million, and adjusted operating loss increased to $83.1 million from $64.1 million. Higher expenses reflected venue operations, event costs, Sphere Experience development, corporate costs, depreciation and restructuring.
- MSG Networks: Revenue declined to $110.2 million from $122.5 million, primarily because subscribers decreased approximately 11.5%, partially offset by higher affiliation rates. Operating income increased slightly to $28.7 million from $28.0 million, while adjusted operating income decreased 24% to $25.2 million.
- Unusual income items: Other income included a $62.6 million gain from a Networks Merger litigation settlement, partly offset by a $19.0 million realized loss on sales of MSG Entertainment shares.
- Taxes: The company recorded a $90.3 million income tax benefit and a 389% effective tax rate. The benefit included a $64.4 million state tax rate-change benefit and a $15.7 million benefit related to the tax treatment of repayment of the delayed draw term loan.
Cash Flow, Liquidity, Debt and Balance Sheet
- Cash, cash equivalents and restricted cash increased to $451.7 million at September 30, 2023 from $429.1 million at June 30, 2023. Unrestricted cash and cash equivalents were $433.5 million, including approximately $123.1 million of advance ticket proceeds.
- Cash flow benefited from $256.5 million of proceeds from selling MSG Entertainment shares. Investing cash flow was positive $66.5 million, compared with negative $285.2 million in the prior-year period.
- Capital expenditures were $165.0 million, including $122.4 million incurred but not yet paid. Sphere construction assets of approximately $3.13 billion were placed into service during the quarter, increasing depreciation.
- Total debt principal was $1.207 billion, consisting of $932.3 million of MSG Networks debt and $275.0 million under the LV Sphere Term Loan Facility. The reported net carrying value of long-term debt was $1.098 billion.
- The MSG Networks Term Loan bears interest at 7.42%, matures October 11, 2024, and requires $102.1 million of amortization payments over the following 12 months. The balance scheduled to mature within one year beyond the issuance date was $829.1 million.
- The LV Sphere Term Loan bears interest at 9.80%, matures December 22, 2027, and has no scheduled principal amortization before maturity. The liquidity covenant was reduced on August 8, 2023 to $50 million, including $25 million required in cash or cash equivalents.
- MSG Networks was in compliance with its debt covenants at quarter-end, including a 5.27:1 total leverage ratio versus a maximum generally of 5.50:1 and a 2.50:1 interest coverage ratio versus a minimum of 2.00:1.
- Operating cash flow remained negative, and management stated that sufficient liquidity depends materially on Sphere generating significant positive cash flow and MSG Networks refinancing its debt before maturity.
Material Changes Versus the Prior Comparable Period
- Sphere commenced operations and generated initial event, sponsorship, advertising and suite-related revenue, but its launch costs and newly placed-in-service assets materially increased operating expenses and depreciation.
- MSG Networks revenue decreased $12.3 million, driven mainly by the subscriber decline, while rights-fee expense increased $1.5 million.
- Consolidated adjusted operating loss nearly doubled, reflecting the Sphere investment phase and weaker MSG Networks revenue.
- Net income improved substantially because of the litigation settlement gain and significant discrete tax benefits; this improvement did not reflect a comparable improvement in recurring operating performance.
- Cash flow improved versus the prior-year period primarily because of MSG Entertainment share-sale proceeds and lower Sphere capital spending, although operating cash use increased.
- The company recorded $3.4 million of restructuring charges for executive and employee termination benefits; no comparable charge was recorded in the prior-year period.
Guidance, Outlook, Commentary and Risks
- Management expects Sphere in Las Vegas to generate substantial revenue and adjusted operating income over time through The Sphere Experience, original immersive productions, advertising, marketing partnerships, concerts, residencies, sporting events and corporate events.
- No specific quantitative revenue or earnings guidance was provided in the filing.
- Management expects substantial cash uses over the next 12 months for operations, Sphere content and capital spending, debt service, refinancing costs, investments and potentially share repurchases.
- The company concluded that it expects to remain a going concern for at least one year beyond the issuance date, but disclosed that the MSG Networks refinancing requirement raises substantial doubt absent successful refinancing or alternative funding.
- Key risks include the ability of Sphere to attract audiences, artists, advertisers and partners; the commercial success of original immersive productions; construction costs and delays for future venues; MSG Networks subscriber and affiliation trends; sports media-rights costs; interest-rate exposure; refinancing terms; seasonality; litigation, cybersecurity and economic conditions.
- The company estimates that a 200-basis-point increase in floating interest rates sustained for one year would increase annual interest payments by approximately $24.1 million.
- Management stated that disclosure controls and procedures were effective as of September 30, 2023, with no material changes in internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Sphere’s attendance, ticket pricing, event schedule, sponsorship revenue, operating costs and cash generation following its launch.
- MSG Networks’ subscriber trajectory, affiliation renewals, advertising trends and ability to refinance approximately $829.1 million due within one year beyond the filing issuance date.
- Whether the large tax benefit and litigation settlement gain are nonrecurring and how reported earnings reconcile to recurring operating cash flow.
- Actual capital spending and remaining commitments for Sphere content, technology and potential future venues.
- Compliance with the LV Sphere Term Loan liquidity and debt-service covenants as Sphere operations mature.
- Interest-rate sensitivity, debt-service requirements and the availability of cash held at MSG Networks, which was not freely distributable to the parent.