Sphere Entertainment Co

NYSE:SPHR

Earnings Call Analysis

Sphere Segment Shines in Earnings Debut

In its inaugural financial quarter since launching Sphere in Las Vegas, the company reported $168 million in revenues with an operating income of $14 million. Factors such as original content, like 'Postcard from Earth', and performances by U2 drove positive results, with expectations for continued demand with upcoming acts like Phish and Dead & Company. However, the company bore a $117 million noncash impairment charge due to scrapping plans for a Sphere in London. On the financial side, the company ended the year with $615 million in cash and equivalents and a debt balance of $1.4 billion, after raising $236 million through a convertible debt offering. These funds will support corporate objectives, including growth initiatives for Sphere.

Sphere's Debut Quarter Reveals High Volume and Global Expansion Intentions

The Sphere venue in Las Vegas has completed its inaugural full quarter, having hosted over 200 events and selling more than 1 million tickets, signaling strong demand and operational success. The Sphere Experience, its original content category, is emerging as a high-margin revenue driver, achieving high ticket sales daily. Alongside residencies such as U2's, Sphere is attracting significant advertising interest, particularly on its Exosphere. With the Sphere sector turning profitable, plans to refine business models and expand to international markets are on the horizon, aiming to capitalize on the global response and transform Sphere into a major entertainment and technology entity. New executive appointments are expected to bolster this vision.

Fiscal '24 Second Quarter Results Highlight Sphere's Impact and MSG Networks' Challenges

The company recorded revenues of approximately $314 million and an adjusted operating income of $51 million for the fiscal '24 second quarter. The Sphere segment substantially contributed with $168 million in revenue and $14 million in adjusted operating income. Although impacted by a noncash impairment charge related to a halted London project, Sphere's performance stems from robust event schedules and advertising campaigns. Meanwhile, MSG Networks faced an 8% decrease in revenue and a 22% drop in adjusted operating income due to subscriber decline, underscoring the ongoing need for strategic alignment and efficiency improvements.

Financial Stability and a Commitment to Efficient Expansion

The company's balance sheet remains robust with approximately $615 million in unrestricted cash and equivalents, hinting at a solid financial foundation. With no significant gating factors in pursuing international markets, the company is validating its business model through its primary Las Vegas venue. The franchise model for Sphere's expansion is designed to be revenue-generating from the start, focusing on construction services and content provision required for new venues. The company is keen on delivering profitable growth without incurring losses through these expansion activities.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, and thank you for standing by, and welcome to the Sphere Entertainment Co. Fiscal 2024 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. I would now like to turn the call over to Ari Danes, Investor Relations. Please go ahead.

[Ari Danes, executive]

Thank you. Good morning, and welcome to Sphere Entertainment's Fiscal 2024 Second 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. And then Dave Byrnes, our Executive Vice President, Chief Financial Officer, and Treasurer, will 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 5 and 6 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. As we said from the very start, the vision for Sphere was to create a next-generation medium that would disrupt the traditional venue model. Now, with our first full quarter of operations in Las Vegas behind us, we can see from our results that our thesis is starting to play out. With Sphere, we wanted to design a venue that would be busy 365 days a year with multiple events per day.

During the second quarter, we sold more than 1 million tickets to over 200 events. This volume is 2x to 3x greater than what you would typically see from the busiest arena size venues in the world. Our original content category, The Sphere Experience, drove this volume, grossing more than $1 million in average daily ticket sales at a high margin.

While The Sphere Experience is our key economic engine, residencies will continue to have an important place on our event calendar. High-profile residencies are not only profitable, they generate awareness for Sphere and other events at the venue. U2's sold-out extended run is a great example.

We've also had strong demand from advertisers who have been quick to recognize the unique value of the Exosphere. And in November, we demonstrated what Sphere can do for corporate partners through our collaboration with Formula 1. With strong results from both events and advertising, our Sphere business segment generated positive adjusted operating income for our second quarter. This is an important financial milestone, demonstrating that the Sphere business model can be both profitable and self-sustaining. We know that this is just the first of many milestones to come as we continue to build our Sphere into a global entertainment and technology company.

As we continue to learn more about our audience, we will refine our business model to maximize revenue opportunities. We will keep investing in technology, intellectual property and content as we look to stay on the cutting edge of immersive experiences. Our plan is to monetize these investments not only at our Las Vegas venue, but over time across multiple platforms. This includes a network of Sphere venues around the globe.

With positive worldwide reaction to Sphere, we continue to have substantive discussions about expanding to international markets. So, we're pleased with our early results for Sphere in Las Vegas. However, we also believe we're only scratching the surface in terms of the global opportunity for this next-generation medium.

Before I turn the call over to Andrea, I'd like to welcome Jennifer Koester, who was recently named President of Sphere Business Operations. Jennifer has an extensive background of driving growth of premier technology and entertainment brands, including most recently at Google. At Sphere, she will lead the development and execution of all business operations. I look forward to working with her on growing our business.

I would also like to welcome Dave Byrnes. Dave previously served as MSG Entertainment's EVP and Chief Financial Officer and has now joined Sphere Entertainment as EVP, Chief Financial Officer, and Treasurer. You will hear from him a little later on.

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

[Andrea Greenberg, executive]

Thank you, Jim, and good morning. For the second quarter, we continued to execute on our plans for MSG Networks. This includes expanding how we deliver our networks to fans, strengthening our partnerships with distributors and advertisers, and building on our history of innovation. As we focus on these goals, we also remain mindful of our continued subscriber decline and its impact on our business.

With regard to programming, we're in the midst of delivering another year of hundreds of live professional sports broadcasts and other award-winning original content, all with an eye on cost and operating efficiencies. We are halfway through the 2023-'24 NBA and NHL seasons, which also marked the first time we're making our games available through our direct-to-consumer authenticated streaming service, MSG+, and we're pleased with how the launch has gone to date. Since the start of the season, we've learned from subscriber behavior and have begun to utilize key takeaways to market our D2C offering more effectively.

On the advertising front, we welcomed several new partners, including the pharmaceutical category. Aleve was named the presenting sponsor of MSG+ while Moderna signed on as a presenting sponsor of our New York Islanders broadcast. These new partners join a significant number of returning advertisers, which puts us on track for another year of solid advertising results. We also recently completed renewals with several distributors, including a multiyear agreement with one of our major affiliates. And lastly, we just announced a partnership with the YES Network to form Gotham Advanced Media and Entertainment, a new technology, sports and entertainment streaming joint venture. Both MSG Networks and the YES Network have developed expertise and technology with their direct-to-consumer launches. With this 50-50 partnership, we'll combine these valuable insights to explore new products that further elevate the streaming experience for New York area sports fans. The joint venture will also offer a scalable turnkey and customizable solution to third-party content owners that want to deliver a state-of-the-art streaming experience to their own customers. We look forward to sharing our progress as we work with the YES Network on building this new opportunity.

And with that, I'll turn the call over to Dave.

[David Byrnes, executive]

Thank you, Andrea. I'm pleased to join you all here today in my new role at Sphere Entertainment. I'd like to start by reminding you that Sphere Entertainment completed the spin-off of MSG Entertainment last April and the sale of its majority interest in Tao Group Hospitality last May. Results for the prior year second quarter reflect MSG Entertainment and Tao Group Hospitality as discontinued operations. However, 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 incur in future periods but did not meet the criteria for inclusion in discontinued operations. Due to these factors, our results are not fully comparable on a year-over-year basis.

Turning to our fiscal '24 second quarter results, on a total company basis, we generated revenues of approximately $314 million and adjusted operating income of $51 million. The Sphere segment generated revenues of $168 million and adjusted operating income of $14 million in its first full quarter of operations since opening Sphere in Las Vegas. These results reflect a number of items led by our original content category, The Sphere Experience, which debuted on October 6. The Sphere Experience currently features Postcard from Earth, which ran 191 times during the quarter.

Our results were also positively impacted by U2's multi-month run. And while the band shows are drawing to a close, we look forward to hosting Phish and Dead & Co. later this fiscal year. We also benefited from Formula 1's multiday takeover of Sphere for the inaugural Las Vegas Grand Prix as well as from a full quarter of advertising campaigns on the venue's Exosphere.

As Jim noted, we've been pleased with early demand from advertisers. This includes around tentpole events like the Super Bowl this coming weekend. We are running a number of advertising campaigns from premier brands ahead of the event and are looking at a record-setting advertising revenue week for the Exosphere.

In addition to the impact of strong demand across events and advertising, our second quarter results also reflect the impact of SG&A expenses, including corporate overhead and expenses related to Sphere Studios and associated content and technology development. I would also note that operating income results at the Sphere segment include a noncash impairment charge of $117 million related to our decision to no longer pursue a Sphere in London. As Jim mentioned, the company continues to have substantive discussions about bringing Sphere to other international markets.

Turning to MSG Networks, the segment generated $146 million in revenues and $37 million in AOI, which represent decreases of 8% and 22%, respectively, as compared to the prior year quarter. The decrease in AOI primarily reflected lower distribution revenue and higher direct operating costs, partially offset by lower SG&A expenses.

Turning to our balance sheet, as of December 31, we had approximately $615 million of unrestricted cash and cash equivalents, and our debt balance was approximately $1.4 billion. These balances reflect our recent convertible debt offering for net proceeds of approximately $236 million. The convertible notes carry an annual coupon of 3.5% and mature in December 2028. We intend to use the net proceeds from the offering for general corporate purposes, including Sphere-related growth initiatives.

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

[Ari Danes, executive]

Thank you, Dave. Operator, can we open up the call for questions?

[Operator]

Thank you. [Operator Instructions] We'll go first to Brandon Ross at LightShed Partners.

[Brandon Ross, analyst]

In your prepared remarks, you talked about substantive discussions for international locations. I was hoping you could give a detailed update on those international growth plans. There have been a few markets in the press, like South Korea. What are the gating factors to an announcement? And how do you foresee deal structuring? I know you said asset-light. What does that exactly mean?

[James Dolan, executive]

Okay. Well, gating factors, they're really -- you know, I don't really see gating factors, right, in exploring these markets. It's more like an evolution that the -- and we're -- I think we're pretty much on time.

But I think the one thing, Brandon, is that this is the first full quarter of operations that Sphere has gone through. And so we're proving out the business model, right? By doing that, you're making the product more attractive, right? There's more confidence in it, and it removes one of the gating factors, which would be our is this thing going to be profitable? And I think that we're -- that this quarter's results are showing that, yes, we are going to be profitable, and we are profitable. And now we just need to continue to negotiate with those markets that have the keenest interest, and we are doing so, and I expect that we'll soon conclude an arrangement.

[Brandon Ross, analyst]

Great. And then for MSG Networks, the debt is due in October. How do you think about the refinancing in terms of ensuring that that Sphere segment has sufficient flexibility to grow and isn't encumbered by a challenged asset like MSG Networks? And then related, I guess, would love your updated outlook on where the MSG Networks business is going and the RSN business in general.

[James Dolan, executive]

I'll let Dave answer the first part of the question, then I'll answer the second one.

[David Byrnes, executive]

With Sphere, we're obviously looking at a long-term growth opportunity here. That's why we did the convertible debt offering this December to ensure that we have appropriate financial flexibility to drive that growth. And we're not going to be looking to do anything to hinder our ability to drive growth for Sphere.

You mentioned the refi. Yes, it's due in October. Just to touch on that, we are currently in regular contact with our lenders. We're pursuing a number of potential options with regard to the ultimate refi, and we should have more on that in the coming months.

[James Dolan, executive]

As far as the business itself goes, we've been saying for quite some time, and I think everybody is very aware, that the monetization mechanisms for content are impaired -- that would be a kind way of putting it -- with the move from traditional cable linear business to streaming business. Right? I think that it's not only the MSG Networks, but sports and entertainment in general are all challenged by the model. Having said that, MSG Networks has some -- has great content. The consumers very much want it. And just the question about how are you going to monetize it is still up in the air. But I do think that the progress that Andrea is making, right, in terms of developing streaming platforms, et cetera, are certainly part of the answer. And we just have to continue along. But that is a very strong product, right? But how long a transition takes from linear to streaming and how the consumers consume it and what they pay for it, right, are key issues yet to be resolved.

[Operator]

We'll move next to Paul Golding at Macquarie Capital.

[Paul Golding, analyst]

This is for either Jim or Dave. Just after seeing this quarter that you grossed over $1 million in average daily ticket sales for The Sphere Experience, I'm wondering if you could speak to whether you have a clear indication of the life cycle of an original attraction now at Sphere and if this informs subsequent Sphere Experience content that you might generate to keep that momentum going?

[James Dolan, executive]

It's a good question. The -- around here, we talk about it like what we call the first pancake. It's never perfect, but the demand is robust. Las Vegas is a great market for this as it renews itself almost every week with fresh customers.

But how long will The Sphere Experience last? I think that it will -- first off, you don't go a set amount of time and then cut it off. What happens is that -- what our plan is -- is that -- is to replace it, right, but still run it and keep building up a library of content, right, that, of course, when we open up new Spheres, they'll have a whole -- they won't be dealing with the first pancake syndrome.

So the other part of it, that's probably hard to quantify, but they -- are our consumers coming in for -- to see Postcard from Earth and the current Sphere Experience or are they just coming to see the Sphere? How much does the content draw versus just the pure medium or the technology? And I'd say it's a mix of both. Right? But over time, it will move closer to content, and we're preparing for that.

[Paul Golding, analyst]

Jim, that's a great point. And then I wanted to circle back on the venue itself. As you continue to engage in these substantive conversations with potential partners, is the construction cost estimate of potential subsequent venues becoming clearer relative to what the original venue cost as we think about what the ROI might be for a run rate model of franchising these venues?

[James Dolan, executive]

Well, I mean it is a franchising model, which means that we don't carry the heaviest-loads capital into it. However, we do think we can deliver new Spheres on a less costly basis than the first one, again, sort of that first pancake thing. We learned a lot. We're already in the midst of looking at the new designs and taking costs out of it, making the construction go faster, be more efficient. And hopefully, over time, we'll get really, really good at that. But it shouldn't go up. It should go down because of everything that we've learned.

[Operator]

We'll go next to Ben Swinburne at Morgan Stanley.

[Benjamin Swinburne, analyst]

Jim, you guys have a pretty full residency calendar this year. I'm just wondering if you think this is the right mix of residency versus experiences. I think you're kind of run-rating around almost 100 a year now in residents when we look at U2, Phish, and Dead & Co.

And then maybe just sticking with the pancake, how long do you think it will take to build the next pancake? Do you think it's going to -- the construction time line is shorter under the -- as you move forward with your partner or partners? And do you anticipate generating any revenue until that new venue opens for you guys?

[James Dolan, executive]

Yes. Well, let me -- how do I parse apart your question? What part would you like answered first?

[Benjamin Swinburne, analyst]

Residencies and then pancake costs -- or time line, sorry.

[James Dolan, executive]

So residencies, right, the -- we've already announced the next 2 acts to come. I can tell you without telling you who that pretty much our calendar is full for this calendar year, that we don't have room, beyond what we've already committed to, to do anything more significant. But the demand from artists is continuing to grow, and we expect to have 25 be another full year.

I will say that the -- what has surprised us with this is, like U2, which started off committing to around 20 shows and ended up with 40, right, we're seeing the same time of demand for tickets for Phish and Dead, et cetera. And so these residencies looks like they're going to go longer than we initially anticipated because of ticket demand. So, that's a good thing that the - so does that answer your residency question?

[Benjamin Swinburne, analyst]

Yes, absolutely.

[James Dolan, executive]

And then you want to know what specifically?

[Benjamin Swinburne, analyst]

How long - we're trying to think about when your company could start benefiting, from a cash flow point of view, from additional Spheres. Obviously, [indiscernible] time to build, so curious if you have an updated thought on time line.

[James Dolan, executive]

So I mean, it's a franchise model. So that the -- and we have a construction development division that services that franchise model. They don't work for free. And so, yes, they will be generating revenue right from the start to support the build and construction process. So we're -- there's different revenue streams that go along with the franchise model, but the construction model has revenue associated with it.

And essentially, our minimal goal here is to -- that there won't be any losses associated with Sphere with construction. Most likely, there will be profits.

But then beyond construction, there's the ongoing servicing and providing of content, which will provide a revenue stream like a franchise model that is ongoing.

[Operator]

We'll move to our next question from David Karnovsky at JPMorgan.

[David Karnovsky, analyst]

Jim, just following up on the residency question, interested in how you think about the venue in Vegas as a destination not just for residencies but maybe for music touring generally. Is it feasible for an artist to consider Sphere as a 1- or 2-night stop for a tour when they're in Vegas?

[James Dolan, executive]

Not at this time. The investment that the artist has to make in order to create the show and do the content, right, requires more than just 1 or 2 shows. I mean, when an artist is on tour, they're playing 40 markets. They build a show and they amortize their show investment over the 40 markets. With The Sphere, because of how unique it is, what they build for Sphere really doesn't move into a touring model, or at least most of it doesn't. So, they need to justify it based on the run that they have at The Sphere. So 1 or 2 shows doesn't do it.

[David Karnovsky, analyst]

And then on networks, following up on the term loan expiration question, I'm just wondering how you're thinking about potential costs that you could still take out of the business as far as programming, SG&A, or even amended rights fees.

And then separately, with the game JV with YES, do you view this purely as a technology tie-up, or is there opportunity down the line to bundle content and go to market together in the New York area?

[Andrea Greenberg, executive]

I'll take that, David. Well, as you know, a significant percentage of our costs are fixed. That includes the right fees that we pay our teams. That said, we're always looking for ways to run our business more efficiently. And considering the pressures facing all similar companies, that is and will remain a big focus of ours.

We previously mentioned, I think, on our last call that we had renewed our Devils rights agreement. That renewal did reflect the realities of the current landscape. At the same time, we do expect to see operating efficiencies and screening coming from our new venture with the YES Network.

As to your second question about a potential larger deal with Yes, the deal that we announced related to the streaming venture and only to the streaming venture, but as always, we're open to exploring opportunities that make strategic and financial sense for us.

[Operator]

We'll move next to Logan Angress at Wolfe Research.

[Logan Angress, analyst]

Congrats on the results. First, I'm just curious. Acknowledging that Sphere is still very new, to what extent are you seeing opportunities to drive greater efficiencies at The Sphere in terms of either venue utilization or costs? Specifically, do you expect to be able to do both Sphere Experiences and concerts or residencies in the same day at some point during this fiscal year?

[James Dolan, executive]

Yes. And that's exactly what we're driving towards. Right? The Sphere is designed, strategized, to run multiple events on a day, right, not just the same event multiple times, but different events. And we are -- yes, we do want to have a concert and a Sphere Experience on the same day. And we think actually that will be quite lucrative. But there are other things, too, that we can -- that we're looking at, including we're looking at a late-night [ DDM ] show. How far we can stretch this thing, we've talked about it.

I don't know if we're going to get to 3 different kinds of events in a day, but we can definitely do 2. The -- and a big part of the old venue model was what they call the load-in and the load-out, right, and how much time that took. And another -- there basically is no load-in and load-out with The Sphere. So that enables us, like we do with U2 right now, to have a concert on Wednesday and then by Thursday at noon, we're running The Sphere Experience, which is why you're seeing some of that in the results now. But there's a great deal of refinement that is still to come on this, both on the expense and the revenue side.

[Logan Angress, analyst]

Great. And then on the Exosphere side, I'm curious. How much does social media reach factor into how you price Exosphere ads? And I guess, is the reach on social media as important for advertisers as the physical reach at the venue is?

[James Dolan, executive]

Yes. I'd say probably -- I wouldn't just limit it to social media, but the -- but look, what advertisers are seeing with the Sphere -- with the Exosphere is that by designing -- particularly by taking content and specifically designing it for the Exosphere, that the amount of attention that it grabs, a lot of it's through social media. Right? There's significant -- enough for them to look at using it to launch new brands, new products, like make statements to the space that marketers and advertisers want to do, right, well beyond reaching just the Las Vegas market. And that's how we're seeing them utilize it now. And you'll see, in the Super Bowl, right, that we have quite a robust group of advertisers using it in just that way.

[Ari Danes, executive]

Operator, we'll take one last caller.

[Operator]

We'll take that question from David Joyce at Seaport Research Partner (sic) [ Partners ].

[David Joyce, analyst]

For Jim, could you please update us on the status of the sponsorship business? You've had a few announcements lately post-quarter. So, I was just wondering, where do you see that going from here? How do you differentiate between sponsorship opportunities and excess to your advertising? Just some more color there would be helpful.

[James Dolan, executive]

Yes, so I mean, most of those opportunities are focused on the Exosphere at this point, right, which is the predominant sort of medium for advertisers. But sponsorship is something that we're going to continue to develop [indiscernible]. And I expect that, this year, we'll have some significant announcements that, yes, involve the Exosphere, but more involve the direct association between the client and the product, right, the -- and even the content that runs in the product.

[Operator]

And that does conclude the question-and-answer session. I would like to turn the conference over to Ari Danes for closing remarks.

[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.

[Andrea Greenberg, executive]

Goodbye.

[Operator]

And this concludes today's conference call. You may now disconnect.