Sphere Entertainment Co

NYSE:SPHR

Earnings Call Analysis

Moderate Revenue and Loss, Strong Las Vegas Sphere Prospects

The company opened the fiscal year '24 with revenues of $118 million and an adjusted operating loss of $57.9 million. The Sphere segment, mainly encompassing the new Las Vegas venue, generated $7.8 million in revenue with a substantial adjusted operating loss of $83.1 million due to initial costs and SG&A expenses. This impact is expected to reverse in the fiscal second quarter with significant events like U2's concert series. MSG Networks raised its revenues by 10% to $110.2 million and AOI by 24% to $25.2 million. The company holds $434 million in cash and equivalents, alongside a debt of $1.2 billion. Sphere's successful launch entices global expansion, and it's designed to be profitable with just the Las Vegas project, hinting at moderate operational optimism.

Earnings Overview and Business Operations

Sphere Entertainment began its fiscal 2024 with a notable first quarter, marked by significant operational developments and a comprehensive update on its strategic trajectory. During this period, Sphere Entertainment reported total revenues of $118 million against an adjusted operating loss of $57.9 million.

Exciting Developments at Sphere

In the entertainment segment, the buzz centers on the sold-out shows for U2, a feat that has led to the addition of 11 more performances due to high demand. This impressive feat is expected to contribute to the entertainment giant's revenue growth in the future.

Strategic Partnerships and Product Launches

Sphere Entertainment is not just limited to in-person experiences but also boasts significant expansions into media coverage through MSG Networks. They've secured a multiyear rights renewal with the New Jersey Devils and have launched new direct-to-consumer streaming options, reaching an audience beyond traditional linear TV. Fans now have flexible options to subscribe monthly, annually, or even purchase single games, creating a more inclusive and accessible viewing experience.

Generating Revenue from Sphere Assets

The Sphere segment alone brought in revenues of $7.8 million despite an adjusted operating loss of $83.1 million for the quarter, which was mainly attributed to event-related revenues from concerts and advertising campaigns. With Sphere's facility now operational, its financial impact will start becoming more apparent in the company's second fiscal quarter.

Anticipated Highlights and Long-term Projections

Investors can look forward to several key events poised to enhance Sphere's revenue streams: the hosting of multiple new residencies, a significant presence during the Formula 1 event, as well as a record-setting revenue week forecasted around the Super Bowl scheduled in Las Vegas this coming February.

Corporate Restructuring Impact

A notable change during the quarter was the completion of Sphere Entertainment's spin-off from MSG Entertainment and the sale of its majority interest in TAO Group Hospitality. These corporate moves altered the financial landscape and made the comparison with previous year's financial results less straightforward due to changes in overhead costs and discontinued operations.

Earnings Call Transcript 2024-Q1

[Operator]

Thank you for holding, and welcome everyone to the Sphere Entertainment Company Fiscal 2024 First Quarter Earnings Conference Call. [Operator Instructions]. I will now turn the call over to Ari Danes, Investor Relations. Mr. Danes, please go ahead.

[Ari Danes, executive]

Thank you. Good morning, and welcome to Sphere Entertainment's Fiscal 2024 First Quarter Earnings Conference Call. Today's 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. I will then 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 Investors 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 4 and 5 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.

[James Dolan, executive]

Thank you, Ari, and good morning, everyone. Our company's next chapter officially got underway with the opening of Sphere in Las Vegas at the end of September. Many years in the making, bears debut drew the world's attention, generating significant present social leading coverage. In fact, our estimated total reach in the days immediately after opening was approximately $7 billion per day. Guest artists, advertisers and potential sponsors are now able to experience firsthand this new product, and we are very happy with the response. .

Our journey with Sphere is just beginning. And while it will take some time for Sphere to realize its full potential, we're off to a great start. As you know, U2 opened the venue and are now in the midst of their multishow run. Every U2 show so far has been sold out. And in light of the demand, we recently announced that we are adding 11 more shows. This [ call tank ] to bands run its sphere into February with a total of 36 performances. The incredible response to U2s at Sphere has only increased interest from the artist community to play the venue. And we're having conversations with artists across a wide variety of genres, including discussing runs of varying links. We expect to host 2 additional residence fees in the second half of this fiscal year and look forward to sharing more detail.

As you're aware, we have designed Sphere to be busy 365 days a year with multiple events per day on many days. A core component of that strategy is the Sphere experience which debuted on October 6, with featuring postcard from Earth from Academy of Nominated Director, [ Darren Aronovsky ]. We've been very pleased with the reception of the Sphere experience from our guests as well as the critical claim postcard from Earth has received for its captivating visuals and use of the venue's immersive technologies to engage the sensors and [ incent ] our audience systems.

This has translated into strong ticket sales to date. Through the end of October, we have grossed over $1 million in average daily ticket sales each day. As we learn more about our audiences and the venue, we're already planning ways to continue enhancing the signature content category. This is the first of what will be different iterations of the Sphere experience. That includes populating the atrium with additional technology exhibits and at time introducing new cinematic content as we keep Sphere at the forefront of innovative experiences. U2 and the Sphere experience will both take a brief pause next week when we welcome Formula 1 and its inaugural loss-based grand free to our grounds. We're excited to showcase Sphere to the millions of Formula 1 fans that we'll be watching around the world.

As part of our agreement, F1 will have a multi-day takeover of sphere, including the use of the Exosphere display rate-related content and compelling brand activations. As I'm sure you've seen, our momentum as the building with respect to advertising on the Exosphere. In early September, we welcomed our first official brand campaign with U2 in support of NFL Sunday Ticket. U2's 2-week campaign creatively transformed the Exosphere and the helmets of all 32 teams ahead of the start of the NFL season. This was quickly followed by campaigns from other prominent brands, including PlayStation, Meta, Xbox and Coca-Cola as well as artistic content from renowned artist [indiscernible].

As anticipating advertising campaigns on the ExoSphere are being shared widely on social media, this amplifies the platform's overall reach well beyond the millions of tourists and local residents in Las Vegas significantly enhancing the value proposition for our partners. We have a healthy pipeline of advertising commitments for the Exosphere and over the coming months, you will see a constant rotation of impactful campaigns from many prominent global brands. In fact, we are expecting a record-setting revenue week for the Exosphere around Super Bowl in Las Vegas this February.

We are also in active discussions with a number of blue-chip brands about potential marketing partnerships and look forward to sharing more on our progress.

In summary, we are already seeing Sphere's ability to inspire all and wonder, and the venue has become a landmark destination in Las Vegas, but we've only just begun to scratch the surface and are excited by how much further we can take this new entertainment media miniature, including to new markets. So while you should not expect the venue to reach its full economic potential right away, our momentum is building with artists motors, sponsors and guests from across the globe, and we remain confident in the long-term outlook for Sphere.

Before I turn the call over to Andrea, we announced last Friday that Gautam Ranji resigned from his position as EVP, Chief Financial Officer and Treasurer effective November 3. We thank him for all of his contributions during his time at the company and wish him well in his future endeavors. And with that, I'll turn the call over to Andrea.

[Andrea Greenberg, executive]

Thank you, Jim, and good morning. With the 2023, '24 NBA and NHL regular season is underway, we are excited to be back with extensive coverage of our 5 professional sports team, the New York Nick, Rangers and Islanders, New Jersey Devils and Buffalo Sabres. We are also pleased to announce that we recently reached the multiyear rights renewal with the New Jersey Devils. This extension, which begins next season, enables MSG Networks to continue to offer a full slate of devil's games as well as compelling pre- and post-game coverage and other devils related programming across all of our platforms.

And this season, local fans now have the opportunity to watch our award-winning programming not only through their traditional linear TV package, but also through our new direct-to-consumer and authenticated streaming service [ MSPs ], which launched in June. This product allows us to reach the millions of home in our regions who do not currently receive our network through linear TV. In addition to authenticated subscribers of participating TV operators, fans have the option to subscribe to MSG+ directly by purchasing a monthly subscription for approximately $30 or an annual subscription for approximately $310.

They also have the option to purchase single games for $999 each, a first-of-its-kind offering for any regional sports network. Leading up to the start of the season, we began marketing our offerings through targeted linear, social and digital channels. And while it's still early, we are pleased with the initial interest we have seen so far including for our per game offering, which offers a unique avenue for entry point transactions, wider reach and upsell opportunities. As we add subscribers and learn more about their streaming behavior, we will further enhance our marketing strategies to even more effectively grow and sustain our subscriber base.

On the advertising front, we plan to build on last year's success which included record advertising revenue for our teams during the regular season and growth across our non-ratings-based initiatives. We've started the season with a strong base of returning advertisers under multiyear commitments and have already made strides in new sales with the introduction of our D2C offerings, including NSC Plus' new presenting partnership with [ ELEAD ]. So while the media landscape continues to evolve, we believe with our premium content and commitment to innovation, we are uniquely positioned to continue driving value for partners, advertisers and viewers alike.

With that, I will now turn the call back over to Ari.

[Ari Danes, executive]

Thank you, Andrea. As you're aware, Sphere Entertainment completed the spin-off of MSG Entertainment in April and completed the sale of its majority interest in TAO Group Hospitality in May. Our fiscal '24 first quarter financials, therefore, represent the first quarter results on a fully stand-alone basis. I'd also note that these results are not fully comparable on a year-over-year basis while results for the prior year first quarter reflect MSG Entertainment and Tao Group Hospitality as discontinued operations. The prior year period does include certain corporate overhead costs that sphere entertainment did not incur after the date of the spin and does not expect to occur in future periods, but did not meet the criteria for inclusion in discontinued operations.

Turning to our results. On a total company basis, we generated revenues of $118 million and an adjusted operating loss of $57.9 million for the fiscal '24 first quarter. The Sphere segment generated revenues of $7.8 million and an adjusted operating loss of $83.1 million. Revenues primarily reflected event-related revenues from concerts at the end of the quarter as well as the launch of [ Exiter ] advertising campaigns in early September. The adjusted operating loss of $83.1 million primarily reflected SG&A expenses, including corporate overhead, expenses related to Sphere Studios and associated content and technology development as well as costs related to operating Las Vegas venue. With the venue now open, Sphere's impact on our financial results will really begin to show in our fiscal second quarter, including U2's multimonth run, the debut of the experience featuring [indiscernible], the impact of additional [ Exosphere ] advertising campaigns and Formula 1's multiday takeover in November.

Turning to [ MSG ] Networks. The segment generated $110.2 million in revenues and $25.2 million in AOI, which represent increases of 10% and 24%, respectively, as compared to the prior year quarter. The decrease in AOI primarily reflected lower affiliate revenue and higher rights fees expenses, partially offset by lower SG&A expenses.

Turning to our balance sheet. As of September 30, we had approximately $434 million of unrestricted cash and cash equivalents, and our debt balance was approximately $1.2 billion, During the quarter, we received $65 million of proceeds from the delayed draw term loan with MSG Entertainment, which we then repaid using approximately 1.9 million retained MSGE shares. We also received approximately $257 million in proceeds from the sale of our remaining approximately 8.2 million share position in MSGE.

With that, operator, can we now open up the call for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Brandon Ross with Lightshed Partners.

[Brandon Ross, analyst]

Jim, with the Sphere in completely uncharted territory now. And I'm sure things have been a little bit different than what you expected since the opening. Can you tell us what's exceeded your expectations? And what disappointed you or may need some fine-tuning?

[James Dolan, executive]

It's -- well, mostly it's been good. The product they came out and was very well received. And that's probably the most important thing that you look at it at least from my point of view. The social media things sort of really surprised us that the -- we thought we would do well. But it really went globally. And so that aspect of the business has exceeded it. On the opposite side, I'd say it's mostly operational right, things like ingress, egress, turnover time between the concert and the Sphere attraction, all our -- had its challenges in the opening, but seems to be getting better.

We're really -- the whole marketing model is -- we're still learning so much right now. But as I said in my comments and what we're doing on an annual -- on a daily basis on ticket sales is pretty good, not as good as I'd like it to be, but it's still early, and there's a lot more we're finding to do when -- what the capacities are when the shows are running, those kinds of things. So I expect those numbers to improve. And -- but all in all, I have to say it was a pretty good -- there's success. They were pretty happy with the [ opening ].

[Brandon Ross, analyst]

Okay. Great. And you've been clear that Las Vegas is going to be the first of many Spheres. Since you opened, has there been any movement in negotiations for additional locations? And maybe what regions of the world should we expect the next set of venues?

[James Dolan, executive]

Well, there is certainly a great deal of interest and the -- and substantive discussions with several markets. None of which I can discuss here the reveal today, but I will say that it does look like Sphere will be a global brand. And so we should expect expansion globally rather than just in the U.S. market.

[Brandon Ross, analyst]

Right. And then if I could just sneak one more in. I have to ask, is there anything more you could share on why your CFO resigned?

[James Dolan, executive]

Yes. Look, the -- I think it's -- as you started off your -- your question with, I mean, it's a new business. It's pretty challenging the -- and I think we both came to the conclusion that it probably wasn't a great fit. And thus we -- there's a change coming. But I don't -- there's no issues with reporting or any of that stuff. That's all. That's all in good shape. It's much more about just the fit. There's a lot. I will say the CFO's job at 3 years has a heavy operational component that probably we didn't foresee. The [indiscernible] them. So we're moving on. And there, I don't expect much to change.

[Operator]

Ben Swinburne with Morgan Stanley.

[Benjamin Swinburne, analyst]

Couple of questions, sticking with the unchartered territory theme from Brandon. As we track the business this year in the early quarters, how should we think about the amount of revenue you need to generate a profit against the kind of cost base that we're seeing at Sphere? And do you think we'll see that revenue during the fiscal '24 year? Or do we need to think about maybe a longer duration? .

[James Dolan, executive]

Yes, sure. Look, Ben, the Sphere is already profitable. It kind of depends on how you calculate.

[Benjamin Swinburne, analyst]

I'm looking at the segment, I guess.

[James Dolan, executive]

Yes. The question is, is it going to be profitable enough to be to justify the capital expense that we put in. And we do think it will be, but it's got to develop the watch -- if I'm watching the company, I'm looking at how is the Sphere experience doing, right? Our sales continuing to hold up, right? The artists -- I mean the U2 thing is just sort of off the charts, right? And I think it's challenged a lot of artists, right, to match that. So you're liable to see more great residencies coming. And those are the components that will make the project successful.

I will say that -- now the way we designed this business was for the Sphere itself to support the expense structure underneath so that there doesn't have to be expansion in order to justify the expenses that go along with the business, particularly the production expenses, et cetera. The -- so -- but it's fine-tuning an economic equation. And we're bullish that we are going to have more Spheres and that, of course, will expand our revenue base were to justify the expense based on, and we'll probably get more aggressive as we roll out more Spheres, we'll get more aggressive with content and keep trying to make the product bigger, greater, more appealing, they think there's a lot of room for that project.

[Benjamin Swinburne, analyst]

That's helpful. So just to make sure I understand, your expectation is that the Sphere segment can be profitable with just the Las Vegas Sphere. It's not built needing more Spheres. Am I hearing you right?

[James Dolan, executive]

That's correct. But I mean, look, if you spend like a drunken sailor on the content you're going to -- it's going to be a little -- it's going to be a little difficult. You've got to be a little disciplined and moderate, but you still want to have great product. We still want to explore the medium and push it, et cetera. So there's that balance. And we're paying a lot of attention to it. And I think that balance will have a lot to do with how successful the company is.

[Operator]

David Karnovsky with JPMorgan.

[David Karnovsky, analyst]

Just a few on Sphere. Assuming there are more Sphere builds may be financed by your partners, how do you think construction costs might compare to the initial venue given how much impact the pandemic had, can you lower that expense that the capital return profile for partners potentially looks different?

[James Dolan, executive]

Yes. I mean the team always talks about what they call the first [ pancake ] effect, right? So the first pancakes, a little difficult. So we're moving on to our second pancake. And we do expect it to cost less. We also think we can make improvements in the product, too.

[David Karnovsky, analyst]

Okay. And then just following up on the original content. I'm interested, how long do you envision a show like Plus Card running? And at what point do you start to think about replacing that show? And I don't know if you can ballpark kind of a figure for what production expense should look like for some of your originals.

[James Dolan, executive]

Right now, we're thinking that the current show will run about a year but look, I want to point out that the just if we put in a new show, which we will do, it doesn't obsolete the old show the -- especially as you talk about new Spheres, et cetera, those marketplace obviously haven't seen post guards, et cetera. So I mean, it will still be very viable there. And the way the Las Vegas market is, I expect that will new versions of post guards for years to come, but probably a less and less number of exhibitions on an annual basis as we feather in the new content. So what was the other part of your question?

[David Karnovsky, analyst]

No, if you could ballpark the production expense and whether that would be incremental?

[James Dolan, executive]

So the -- again, the production like the one with Darren, again, that's another sort of first pancake kind of thing that -- I expect that we'll be able to do more exploration of the medium, but also I think we will definitely be able to reduce costs, what it takes to produce these shows.

[Operator]

David Joyce with Seaport Research Partners.

[David Joyce, analyst]

A few questions for you, please, Jim. First, what are your early learnings on the post card from the earth in terms of what are the variables that you might fine-tune in terms of number of events, pricing, the seating capacity? And then I have some follow-ups.

[James Dolan, executive]

Well, I think we started off, David, pretty conservative. But with all those factors, a number of shows, capacity, et cetera, we're starting to explore, expanding the -- look, the thing about the Sphere experience is that the margin on it is really, really high because you've already invested obviously, in the building, you've already invested in the content, the creation of the content, the actual cost of running the experience is very, very low.

So the -- so we're trying to obviously maximize out the number of customers that come in. What they were -- I think we priced low to start off with right? So I think there's probably some pricing flexibility in that. But the marketing is also -- we're just -- we're really still learning about that. The Las Vegas market is -- I mean it wasn't a perfect market for us to open it because it has an ever regenerating marketplace of customers, they're up to like 50 million people come through that market every year. And so our ability to reach those people right, the -- and sell the ticket and interest in our products, that we're still refining. So I think there's upside both in all those parameters, marketing, number of shows, price per show, price per ticket, et cetera. Those are the things that we're studying heavily now, and I expect to see improvement.

[David Joyce, analyst]

Okay. Great. And the second question is on naming rights. That's already referred to as the Sphere at the [ Venetian ], but are there other naming opportunities surrounding the asset?

[James Dolan, executive]

There are -- I think we're going to be pretty careful about that. The -- look, the Sphere has already has a sort of global profile right, that they -- and so we don't want to lose any of that -- so the -- so naming rights would have to be something that's consistent with that kind of strategy. So it's not purely financial in terms of its consideration.

[David Joyce, analyst]

Understood. And finally, curious about the Exosphere advertising opportunity and the logistics basically. How many ads could you run? Or how long are the ad campaigns typically going to be? Or also, I'd be interested in understanding what's the production time and the expense involved in producing an ad?

[James Dolan, executive]

So in the production time, I don't think it's really that much different for advertisers than other mediums. But I mean you can do it really fast that you need to, right? The -- but most advertisers to clients are -- take their time they're thoughtful about it. I will say that it's a different medium. It's [ peril ], right? It's 3-dimensional. And so your content has to perform to that. You can't take a flat screen advertising content and just place on Sphere. It doesn't look good on it and it won't bring you the value that you're spending on that -- I mean, when an advertiser comes on the Sphere, and they do a great piece of content on it, right, it goes viral right away. And the advertiser gets all this real extra benefit and a lot of exposure, right? So -- but you have to do content that does that.

So the -- some advertisers are spending a lot of time and money on making sure that they have something that will be really the rest with the marketplace. The others are a little quicker. They need to get there their message out, but all of them seem to be wanting to get that global sort of push with it. And so they're paying attention and they're creating. We're seeing some really great creative from some of our advertisers sort of blowing us away. And it's interesting because I mean I don't want to talk too much about it, but some of it they've done through our Sphere studios, some of it they did on their own, right, that they -- and the results so far, pretty good.

[David Joyce, analyst]

And do you have any requirements for minimum ad campaign lengths or requirements on how many ads per day or per hour or [ are ]?

[James Dolan, executive]

Well, the -- this isn't exactly an answer to your question, but the -- we do have a kind of a standing rule that with our sales force that 50% inventory is dedicated to art and community and the other 50% is dedicated to sponsorship so that the -- so if you're visiting Las Vegas or you're looking at it on your social media, right, there's always something interesting out of tale. Again, even to trying to reach the global community. And so far, that's been pretty successful. But the -- but I think we're going to stick to that 50-50 formula, right? Because I think in the long run, that will make the product law more valuable.

[David Joyce, analyst]

I appreciate it. Congratulations.

[Ari Danes, executive]

Thanks, Dave. Operator, we'll take one more caller.

[Operator]

Our final question comes from the line of Paul Golding with Macquarie Capital.

[Paul Golding, analyst]

Maybe a different angle of attack here. On Networks, a few questions. I guess, could you give any color on the uptake of subs for the OTT product across the 3 pricing tranches? And then I have a couple of follow-ups.

[Andrea Greenberg, executive]

Well, while MSG+ initially launched back in June, we've really only begun our targeted marketing efforts at the beginning of the season. So it's still relatively early for meaningful numbers. But I can say we're very pleased with the initial response, including for the early demand we're seeing for our per game offering. We've -- as I mentioned, seeing robust advertiser interest. We have a new presenting partnership with [ leads ]. They're a new advertiser to our brand. So all in all, we continue to expect [indiscernible] to be while you are accretive to our business.

[Paul Golding, analyst]

And then in the prepared remarks, you noted the Devil's rights renewal, we've seen pressure in the RSN space to the downside, we've seen pressure in the national rights space for the upside. Any color you could give on how this deal shook out for you on rights fees?

[Andrea Greenberg, executive]

Sure. We've had a long and active relationship with the Devil. I can say we're pleased with the renewal terms. Those terms begin that season. We can't get into specific but certainly, in having these discussions, both we and the Devil are mindful of the changing pay-TV environment.

[Paul Golding, analyst]

Great. And if I could sneak one last one in here on Networks. Just conscious of the Networks' debt, the October '24 maturity. Any progress there on refinancing or anything that we should keep in mind as that date approaches?

[Unknown Executive]

So with respect to the refinancing of the Networks' term loan, it remains early in the process. As you noted, the loan matures in October. We are in constant contact with our lenders. There are a number of potential options with respect to the ultimate refi, and we'll know more in the coming months.

[Operator]

This ends the Q&A session. I will now turn the call back over to Ari Danes for closing comments.

[Ari Danes, executive]

Thank you all for joining us. We look forward to speaking with you on our next earnings call. Have a good day.

[Operator]

This concludes the Sphere Entertainment Company Fiscal 2024 First Quarter Earnings Conference Call. We thank you for your participation. You may now disconnect.