Sphere Entertainment Co

NYSE:SPHR

Earnings Call Analysis

Sphere Entertainment's Q4: Strong Growth, Future Optimism

Sphere Entertainment generated $273 million in Q4 2024 with an adjusted operating income of $25.7 million. The Sphere Experience, featuring 'Postcard from Earth,' drove $74 million in revenue from 208 shows, showcasing strong performance in original content. Noteworthy events included concert residencies and corporate events, contributing to a vibrant quarter. The company holds $560 million in unrestricted cash and plans international expansions. Despite challenges in the MSG Networks segment, there is optimism with upcoming attractions and discussions for new Sphere locations globally.

Introduction to Sphere's Vision

Sphere is positioned as a revolutionary medium in the entertainment landscape, with a commitment to creating unique experiences for artists, guests, and partners. The company has made tangible strides since its opening last September, garnering significant media attention and hosting millions of guests. This commitment to innovation is illustrated by their original content, 'The Sphere Experience,' which continues to attract substantial visitor interest.

Financial Performance Highlights

In the fiscal 2024 fourth quarter, Sphere achieved total revenues of approximately $273 million with an adjusted operating income (AOI) of $25.7 million. The Sphere segment alone contributed around $151 million in revenue, welcoming over 900,000 guests to 230 events. The original content, particularly 'Postcard from Earth,' was a major driver, generating approximately $74 million across 208 shows. This underscores the economic potential of Sphere's original content strategy.

Key Events Driving Revenue

The quarter's performance was bolstered by notable events, including Phish's four-night concert series and Dead & Company's residency. Corporate events also contributed, such as Hewlett-Packard's keynote, while advertising campaigns on Exosphere added incremental revenue. The ability to maximize venue utilization by hosting multiple events concurrently remains a focus for growth.

Concerns Over MSG Networks

On the MSG Networks front, revenues decreased 5% year-over-year to $122 million, attributed largely to a 13% drop in subscribers. However, the affiliate revenue increase and higher advertising rates provided some offsets. Amid these challenges, MSG Networks is actively seeking to restructure its credit facilities due to insufficient lender support for a previous refinancing attempt. This has led to a workout strategy to re-negotiate its debt obligations.

Strategic Growth and Future Initiatives

Sphere aims to expand its content library with new immersive experiences and attract high-profile acts for residencies, including the Eagles and Anyma. Looking ahead, they plan to launch additional attractions and target international markets for expansion. Sphere's commitment to innovation remains strong, with recent enhancements such as a 24/7 live stream feature and custom audio synced to its experiences, which indicates sustained interest from advertisers like Verizon.

Financial Position and Debt Management

As of June 30, Sphere reported approximately $560 million in unrestricted cash against a total debt of around $1.4 billion, split primarily between MSG Networks and the Sphere in Las Vegas. The current debt profile includes $259 million in convertible debt. The company is navigating a challenging environment but emphasizes its liquidity as it moves forward with strategic plans.

Outlook: Continued Momentum and Financial Guidance

Management remains optimistic about the growth trajectory, particularly through its original content offerings and elite partnerships. The average daily ticket sales for 'Postcard from Earth' exceeded $1 million in the recent quarter. Looking ahead, the company anticipates that expanding their event offerings and potentially announcing new venues will drive growth. The focus on partnerships and market diversification aligns with long-term financial goals and enhancing shareholder value.

Earnings Call Transcript 2024-Q4

[Operator]

Good morning. Thank you for standing by, and welcome to the Sphere Entertainment Fiscal 2024 Fourth Quarter and Year-End Earnings Conference Call. [Operator Instructions]

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 fourth quarter and year-end earnings conference call.

Today's call will begin with our Executive Chairman and CEO, Jim Dolan, who will provide an update on Sphere. Dave Byrnes, our Executive Vice President, Chief Financial Officer and Treasurer, will then review 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've said from the start, we believe Sphere is a new medium that has the potential to change the entertainment landscape for artists, guests and partners. Fully realizing that vision will take time, but we are learning every day how to optimize Sphere's operating model. And with the close of fiscal 2024, we are pleased to look back and see real progress across multiple fronts. Since Sphere opened last September, we have welcomed millions of guests, hosted artists at blue-chip companies, and featured numerous brands on the Exosphere. Sphere has also become part of the global conversation with worldwide recognition and extensive press and social media coverage. Our plan for Sphere is to create widespread demand for our offerings and drive utilization far in excess of traditional venues.

Our core component of that strategy is our content category, The Sphere Experience, which currently features Postcard from Earth. This category again generated more than $1 million in average daily ticket sales in our fourth quarter. Since premiering in October, The Sphere Experience has generated over $300 million in high-margin revenue.

These results reinforce our confidence in original content as a key economic engine for Sphere. We are actively developing new cinematic experiences and expect to launch our next attraction in the coming weeks. We believe this expanding content library will benefit our Las Vegas business and strengthen our value proposition to new markets. On the concept front, artists continue to benefit from the drawing power of Sphere. Dead & Co. just completed their 30-show run on Saturday night. The Eagles kick off their residency next month with a 20-show run through January. And we recently announced that Anyma will be our first EDM act with a multi-night run around New Year's. Both the Eagles and Anyma have been extended multiple times due to demand.

And next month in another first, Sphere will host the UFC, which will be the first live sports event in the venue. We are also making progress towards our goal of hosting multiple event types on the same day. The Sphere Experience ran on the same day as select Dead & Co. concerts in July and August, and we believe that this had a positive impact on attendance for Postcard from Earth on those days. We also expect a similar schedule during the Eagles run and our upcoming EDM shows. In addition, we are not standing still in terms of innovation. On July 4, we marked the 1-year anniversary of Exosphere by launching 2 new features, an official live stream called XO Stream, which is available 24/7 on our website and XO Audio, custom audio synced to Exosphere content that is available both onsite and online via the live stream.

We also welcomed Verizon as the presenting partner of the live stream. And we're pleased that the partners and advertisers continue to recognize the Exosphere as a high-impact platform for their brands. Finally, we remain focused on executing on our global vision for Sphere. Expansion discussions with international markets continue to progress, and we look forward to sharing more. So while we know it's still early days, we're positive about what we have achieved with Sphere and we remain optimistic about what the future holds for this next-generation medium.

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

[David Byrnes, executive]

Thank you, Jim, and good morning, everyone. For the fiscal '24 fourth quarter, we generated total company revenues of approximately $273 million and adjusted operating income of $25.7 million. Our Sphere segment generated fourth quarter revenues of approximately $151 million as we welcomed over 900,000 guests to more than 230 events along with an AOI loss of $5.5 million. These results were driven by our original content category, The Sphere Experience featuring Postcard from Earth, which generated approximately $74 million in revenue across 208 shows in the fourth quarter.

They also reflected Phish's 4-night run in April and the start of Dead & Co.'s residency in May with 18 performances during the quarter. Fourth quarter results also benefited from Hewlett-Packard's corporate keynote event and the NHL Draft as well as advertising campaigns on the Exosphere. SG&A expenses for the fourth quarter were $102 million. This primarily reflects corporate overhead as well as expenses related to Sphere Studios, associated content and technology development.

Turning to MSG Networks. The segment generated $122 million in revenues and $31.1 million in AOI, which represent a decrease of 5% and an increase of 2%, respectively, as compared to the prior year period. The revenue decrease reflects lower distribution revenue primarily due to a 13% decrease in subscribers, inclusive of the impact of MSG+. This was partially offset by higher affiliate rates and an increase in advertising revenue year-over-year primarily due to higher per game advertising sales on the linear networks and advertising revenue related to MSG+. The increase in AOI reflects lower SG&A expenses, partially offset by the decrease in revenues.

Turning to our balance sheet. As of June 30, we had approximately $560 million of unrestricted cash and cash equivalents. Our debt balance was approximately $1.4 billion at quarter end. This reflected $259 million in convertible debt and a $275 million credit facility related to Sphere in Las Vegas. It also reflected approximately $850 million outstanding on the MSG Networks' term loan, which, as a reminder, is debt that is recoursed only to MSG Networks. As you know, we had been in discussions with our lenders regarding a potential refinancing of the MSG Networks' credit facilities.

However, we have been unable to reach an agreement with our lenders on a refinancing on a voluntary basis. As a result, MSG Networks has decided to pursue a refinancing through a workout with its existing lenders and have hired advisers to assist it with the process. We will keep you updated as appropriate.

And with that, we'd be happy to take your questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Brandon Ross from LightShed Partners.

[Brandon Ross, analyst]

I guess MSG Networks has stolen the day today with the workout. So Jim, I wanted to ask you how the new NBA deal and the recent Comcast tiering of RSNs have changed your views on MSG Networks and the broader RSN industry? And I guess related, are those influencing the approach that you're taking to this workout?

[James Dolan, executive]

Well, I wouldn't say that the NBA deal helped the regionals or MSG Networks, probably just the opposite. But the -- in terms of the workout, I'm going to let Mr. Byrnes answer the workout questions today. The -- but yes, no, I don't think that the -- speaking strictly from Networks point of view, losing content is never good and that was some very high profile premier content. So did not help our business at all.

[David Byrnes, executive]

And then, Brandon, on the workout part of that, we can't speculate today how the process is going to go going forward. We mentioned Networks has hired advisers. The advisers are in touch with our lenders. And we're just going to have to see how that plays out and keep you posted as we move forward.

[Brandon Ross, analyst]

Okay. Great. And then on the Exosphere advertising, it was a little lower than the buildings first couple of quarters. I realized you had Super Bowl last quarter. But what are you seeing overall in terms of the advertiser demand? And how is your approach to selling evolved? How can it improve?

[James Dolan, executive]

Well, it could definitely improve. The -- but we're just -- we're really getting used to the marketplace. The -- it's the first year of this product. And so we're learning more about it. The -- I think our approach right now is going in the direction where we're putting together conventions, other things going on in the marketplace, right? The -- our pitches are much more branded, that the -- and we're still -- we're looking at the medium as being something that advertisers use to really introduce products, right, further brands, et cetera, and the pitches have changed that way.

[Operator]

Your next question comes from the line of Peter Henderson from Bank of America.

[Peter Henderson, analyst]

Yes. A question for Jim. So we've seen the market rumors around your content plans. And just sort of wondering if your plan or preferred model is to partner with other studios or to go it alone on content for The Sphere Experience? And then can you just discuss the puts and takes for each of those?

[James Dolan, executive]

Okay. I guess the answer to that is yes. But that the -- but branded content certainly has its appeal, right? That the -- but the thing that probably is most important when we take a look at the content is that we use the medium well, that we continue to explore the medium. And if you can do that via branded content or via original content, that the -- the most important thing is to me, that the -- is that it's experiential. That's what we want our customers to have when they come in the building. It's an experience. So the -- it's a branded content does do that, then we're going to shy away from it. The business that the -- business equation on a branded content is more expensive and you have to make room for the IP owners in that. When you do your own, you don't have that as much and you reap more of the benefits. But of course, branded content also has a pretty instilled appeal to the marketplace. So you weigh one against the other.

[Peter Henderson, analyst]

Okay. Great. And just a quick follow-up. Is there another path where you put out immersive concert content based on the residencies you have, just as a way to sort of extend those residencies and even provide additional sort of [ reason for that ]?

[James Dolan, executive]

We think there is. But it kind of goes back to my first answer, right? It's all about experience. So if you look at the concerts that we've had and the events that we've had in the Sphere so far, and you think of them as an experience, right? That the -- then recording them actually in the Sphere itself is probably the most perfect place to make an experiential recording. So that suggests that there's a product there. Now we haven't launched anything with that yet, and we're not prepared to announce anything today. But I expect you'll hear from us soon about that kind of content.

[Operator]

Your next question comes from the line of Daniel Duran from Morgan Stanley.

[Carlos Daniel Duran, analyst]

Jim, I believe that on the last 2 earnings calls, you suggested we might hear soon about plans for an additional or multiple additional Spheres. Do you have any update for us today? Or when do you think we might now expect to hear on the expansion of the Sphere portfolio to new markets?

[James Dolan, executive]

The interesting thing about that question is that topic is sort of -- I can't really say exactly when, right, because then I'd be saying exactly when. Do I anticipate that we're going to have something to say very soon? Yes, I do, right? The -- and I think that's about all I can say, right, other than you're going to know when it happens.

[Carlos Daniel Duran, analyst]

Got it. And just one follow-up. I believe Postcards was about an $85 million investment. Can you give us a sense of how much the other 2 in process Sphere experiences comparing cost?

[James Dolan, executive]

Yes. I think, look, they probably won't be much more. They could be much less that the -- we're still figuring out some of those dynamics. We -- Postcards, we call Postcards the first pancake. It's like to make first pancake. The second pancake is always better, usually at least. And we won't spend -- we learned about -- a lot about where to spend our money from the first pancake. So I would say that the next couple of efforts will be better in terms of their appeal and how they use the medium, right? In terms of what we spend to make them, I think we're somewhat comfortable at the number that Postcards was made at. We won't -- I don't think that will make it from much less because what we'll end up doing is we find we have more resources to put into it, then we'll make it even better. So that the -- we're likely to stay in and around that range.

[Operator]

Your next question comes from the line of David Karnovsky from JPMorgan.

[David Karnovsky, analyst]

Maybe following up on the potential international locations. Jim, I wanted to see if you could talk more about what role Sphere the company would play for these venues? I assume Sphere Studios with licensed content, but what other kind of corporate booking, management functions do you think the central entity could or will provide?

[James Dolan, executive]

Sure. The -- actually -- this -- I tend to think about this at least once a week, because as we're going out to other marketplaces, right, and to other potential owners of Spheres, the question of -- we obviously bring the expertise of how to build the Sphere, right? But when you take a look at this last year, that the -- we've really gotten much better at operating a Sphere, right? And by the time we open up another Sphere, right, we'll have -- we'll really have gotten that operation down. And that the -- but when I look at everything that's happened in the last year, I keep thinking to myself, well, the next guy is going to really benefit from the fact that we learned this and we learned that, and we changed this policy and this procedure, right, we became efficient at this. I mean one of the things that we talked about in the script right was what we call side-by-side, right?

The -- that's where we have more than one event, right, in the Sphere on the same day. The next Sphere will automatically know how to do that because of what happened in the Sphere in Las Vegas, how to set up, how to change out, how to move from one piece of content to another piece of content, right, and effectively bring in an audience for one, right, and then bring in an audience for another one and have them exit and do the experience, et cetera. The utilization of the building, that's a big piece of what the economic formula was for Sphere was to build a building, right, that you could utilize 365 days a year and multiple times a day. So we've learned a lot this year. The next person to build one to use us will be us who builds it, obviously, will benefit from what we've learned in this year, particularly with things like side-by-side.

[David Karnovsky, analyst]

Got it. And then regarding some of the non-music events like NHL or the upcoming UFC fight, interested to know what type of interest you're seeing for this type of show at the Sphere? And then can you maybe also speak to corporate demand just following the Hewlett-Packard event you did?

[James Dolan, executive]

Okay. I'm going to answer that in a slightly different way than you asked it. The -- because the strategy, as I was just talking about was that the -- was Sphere is what are we programming on a day-to-day basis in the Sphere? Our anchor programming, right, is this -- is our content at the moment, Postcards from Earth. The -- we can run Postcards from Earth 365 days a year and run nothing else. We could do that. That the -- and that will generate x amount of revenue per day. If you're sitting there and you're booking the venue, you would probably not book anything in there that made less than what you can do with your base content, right?

Now your question is, is how many corporates do we have, how many residencies, et cetera, that's the formula, right? So corporates, we've actually had quite a bit of interest in corporates, right? But I will tell you that some of them have been a little shocked with the price tag because they're actually competing with Postcards from Earth for utilization of the building. And so we basically say to them, sure, we'd love to rent you the building and have you do this, but we got to make at least as much money as Postcards, right? And that can be somewhat expensive for our corporate clients. Still, the ones with a lot of imagination and foresight, et cetera, are not daunted by those numbers because they see what they can do with the building. They see how they can display their information that the -- and they think it's really cool to be in Sphere. So that's sort of how it plays out. Did that answer your question?

[David Karnovsky, analyst]

It does. Thanks, Jim.

[Operator]

Your next question comes from the line of Peter Supino from Wolfe Research.

[Peter Supino, analyst]

I have a question on the Postcard from Earth and the Sphere traffic dynamics and then another one on the MSG Networks refinancing. On the latter, if you could just help us with color on why the prior refinancing process didn't work and why you decided on this new workout strategy? And then on Postcards, I wonder if you can share any data or analysis with us on what drives visitors to the Sphere? And what does that mean as you transition from Postcards and from year 1 to whatever comes next and year 2 when more people will have been there once?

[James Dolan, executive]

Why don't you do the...

[David Byrnes, executive]

Peter, I'll take the first part of that. Last time we spoke, we mentioned that we were in discussions with our entire bank group to amend and extend Networks' credit facilities. We had strong support from a number of our larger relationship banks to participate in the refinancing. However, we were just unable to get sufficient overall support from the full lender group to complete the full syndication. And that's what led us to where we are here right now in the workout.

[James Dolan, executive]

And on the second part of that, that second -- that feels sort of like a chicken and egg question. That the -- is it egg or is it inside of the egg. And look, I think that it's a bit of a combination of both. I mean it's a very interesting building to see from the outside that dominates the landscape, right, and that clearly makes people really want. But then they ask questions like, well, what's inside, right? And what does it do, right? And that the -- then you take a look at things like the social media, right, and how this product only being a year old, right, you could go almost anywhere in the world and say Sphere and people know what it is, know where it is, right?

The -- and many of them know what it does. And every time we do something like Dead & Co., it just blossoms out again and a whole new group of people learn all about what the Sphere can do, right? So are they there for the building? Are they there for the content? Are they -- I think it's a combination of both. You did mention that a lot of people have seen it, right? Well, a lot of people have seen it from the outside, but actually not a lot of people have seen it from the inside. So there's still plenty of marketplace available there. And then as we keep changing up the content and then we promote it and we do more residencies and more [ events ], et cetera, it just continues to add on to that. So I mean, I don't think you could peg it to be one thing versus the other.

[Peter Supino, analyst]

We look forward to more pancakes.

[James Dolan, executive]

[indiscernible] for that. No.

[Ari Danes, executive]

We'll take one last caller, operator.

[Operator]

Certainly. Your final question comes from the line of David Joyce from Seaport Research Partners.

[David Joyce, analyst]

Jim, my first question is on the residency pipeline. I was wondering if you could help provide some more color into and visibility into 2025 after the Eagles, what other groups are you talking to? And can you announce or what genres are they? And what's involved with the creative that they put on and the kind of the lead time that they need to work with you on that?

[James Dolan, executive]

What was the last part of that -- about the content? How much time do you need to create a model. Okay. Well, we're obviously not going to make any announcements today about who's coming. You did ask it in a way that I can -- about categories, right? So you can expect something in the country category coming in '25, right? That will whet people's appetite. The -- look, it takes anywhere from 3 months to 6 months to get ready to do one of these, right. The -- it depends on what you're trying to achieve. The -- so we're about that. We're at least that far out. I think that you're going to see -- I think the Eagles are not going to be satisfied with the 20-show run and neither will their fans, but we haven't announced anything yet in terms of that.

The interesting thing about the Eagles show, though, if you might have noticed, is that they basically play on for 2 weeks and then they go off for 2 weeks. So the -- when we get to [ '25 ], likely is that we will fill in the 2 weeks that they're not playing, right, with another high-profile premier type act probably with a woman. And that's as much as I'm going to say about that.

[David Joyce, analyst]

I appreciate that.

[James Dolan, executive]

So it depends upon the demand from the artist by the way.

[David Joyce, analyst]

Okay. Another question on sponsorship. If you could talk about how talks are progressing with other partners? I know you mentioned earlier, Verizon is sponsoring the live streams. But just wondering how that side of the business is evolving. And how does Crown Properties JV play into that?

[James Dolan, executive]

So Crown Properties really started actively working on this, what, 6 months ago, Dave?

[David Byrnes, executive]

Yes, towards the end of calendar '23.

[James Dolan, executive]

Right. The -- so they're now starting to really get into the swing of things. If you know anything about that business at all, it takes a while to build up pitches and client lists and all of that. So we're starting to see some interesting new clients, right? The -- and I don't know, we just see -- we'll see how they do have -- I have a feeling that they're going to do well. But the -- I'm not out there selling, they are.

[Operator]

And that concludes our question-and-answer session. I will now turn the call back over to Mr. Ari Danes for some 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.

[Operator]

This concludes today's conference call. Thank you for your participation. You may now disconnect.