Sphere Entertainment Co. (NYSE:SPHR) Q2 2024 Earnings Call Transcript

Sphere Entertainment Co. (NYSE:SPHR) Q2 2024 Earnings Call Transcript February 5, 2024

Sphere Entertainment Co. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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: 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.

Jim Dolan: 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 two to three times 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.

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Q&A Session

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: 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 2023/2024 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.

Dave Byrnes: 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 non-cash 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: 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: Hi, good morning, Jim. 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?

Jim Dolan: Okay. Well, gating factors. They’re really — 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, that the — 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: 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.

Jim Dolan: I’ll let Dave answer the first part of the question, then I’ll answer the second one.

Dave Byrnes: Sure. Hey, Brandon. 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.