Sphere Entertainment Q1 2024 Earnings Call Transcript

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November 8, 2023

There are 9 speakers on the call.

Operator

You for holding, and welcome everyone to the Sphere Entertainment Company Fiscal 20 24 First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. I will now turn the call over to Ari Danes, Investor Relations.

Operator

Mr. Danes, please go ahead.

Speaker 1

Thank you. Good morning and welcome to Sphere Entertainment's Today's call will begin with our Executive Chairman and CEO, Jim Zolan, We'll provide an update on Sphere. This will be followed by an update from Andrea Greenberg, President and CEO of MSP 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.

Speaker 1

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 a 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 could 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.

Speaker 1

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.

Speaker 2

Thank you, Ari, and good morning, everyone. Our company's next chapter officially got underway with the opening of SPEAR in Las Vegas at the end of September. Many years in the making, SPEAR's debut drew the world's attention, generating significant press and social media coverage. In fact, our estimated total reach in the days immediately after opening was approximately $7,000,000,000 per day. Guests, artists, advertisers and potential sponsors Are now able to experience firsthand this new product and we are very happy with the response.

Speaker 2

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 multi show 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 will take the band's run at Sphere into February with a total of 36 performances.

Speaker 2

The incredible response to YouTube's run 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 lengths. We expect to host 2 additional residencies 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, was featuring Postcard from Earth from Academy Award nominated Director, Darren Aronofsky.

Speaker 2

We've been very pleased with the reception to the Sphere experience from our guests as well as the critical claim Postcards from Earth has received for its captivating visuals and use of the venue's immersive technologies to engage the senses and enchant our audiences. This has translated into strong ticket sales to date. Through the end of October, we have grossed over $1,000,000 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 this signature content category. This is the first of what will be different iterations of the Sphere experience.

Speaker 2

That includes populating the Atrium with additional technology exhibits and at times introducing new cinematic content as we keep Sphere at the forefront of innovative experiences. You too and the Sphere experience will both take a brief pause next week when we welcome Formula 1 and its inaugural Las Vegas Grand Prix to our grounds. We are excited to showcase fear to the millions of Formula 1 fans that we will 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 to display rates related content and compelling brand activation. As I'm sure you've seen, our momentum has been building with respect to advertising on the exosphere.

Speaker 2

In early September, we welcomed our 1st official brand campaign with YouTube in support of NFL Sunday Ticket. YouTube's 2 week campaign creatively transformed the exosphere into 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 Rafik Anadol. As anticipating advertising campaigns on the exosphere 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

Speaker 3

for the

Speaker 2

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 Round 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 Spirit's ability to inspire awe 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 medium in the future, 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, 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.

Speaker 2

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 will now turn the call over to Andrea.

Speaker 4

Thank you, Jim, and good morning. With the 2023-twenty 24 NBA and NHL regular seasons underway, we are excited to be back with We are also pleased to announce that we recently reached a multi year 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 MSP Plus, which launched in June. This product allows us to reach the millions of home in our region who do not currently receive our network through linear TV.

Speaker 4

In addition to authenticated subscribers of participating TV operators, Fans have the option to subscribe to MSG Plus directly by purchasing a monthly subscription for approximately $30 for an annual subscription for approximately $3.10 They also have the option To purchase single games for $9.99 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 up sell 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.

Speaker 4

We've started the season with a strong base of returning advertisers under multi year commitments and have already made strides in new sales with the introduction of our B2C offerings, including MSP Plus' new presenting partnership with ALLEVE. 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.

Speaker 1

Thank you, Andrea. As you're aware, Fear 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 2024 Q1 financials therefore represent the Q1 results on a fully standalone basis. I'd also note that these results are not fully comparable on a year over year basis. While results for the prior year Q1 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.

Speaker 1

$118,000,000 and an adjusted operating loss of $57,900,000 for the fiscal 2024 Q1. The Sphere segment generated revenues of $7,800,000 and an adjusted operating loss of 83,100,000 Revenues primarily reflected event related revenues from concerts at the end of the quarter as well as the launch of Exosphere advertising campaigns in early September. The adjusted operating loss of $83,100,000 primarily reflected SG and A expenses, including corporate overhead, expenses related to Sphere Studios and associated content and technology development, as well as costs related to operating the Las Vegas venue. With the venue now open, Sears' impact on our financial results the impact of additional Exosphere advertising campaigns and Formula 1's multi day takeover in November. Turning to MSP Networks.

Speaker 1

The segment generated $110,200,000 in revenues and $25,200,000 in AOI, which represent decreases 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 and A expenses. Turning to our balance sheet. As of September 30, we had approximately $434,000,000 of unrestricted cash and cash equivalents and our debt balance was approximately $1,200,000,000 During the quarter, we received $65,000,000 Proceeds from the delayed draw term loan with MSC Entertainment, which we then repaid using approximately 1,900,000 Retained MSG shares. We also received approximately $257,000,000 in proceeds from the sale of our remaining approximately 8,200,000 share position in MSGE.

Speaker 1

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

Operator

Our first question comes from the line of Brandon Ross with LightShed Partners. Your line is open.

Speaker 3

Thanks. Hey, Jim. With the Sphere, you're 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's disappointed you or may need some fine tuning?

Speaker 2

Hi, how are you? It's well, Mostly it's been good. The product came out and was very well received. And as probably the most important thing that you look at with it, at least from my point of view, The social media things sort of really surprised us that the I mean, we thought we would do well, but It really went globally. And so that aspect Of the business has exceeded it.

Speaker 2

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 are, had its challenges in the opening, but seems to be getting better. We really The whole marketing model is we're still learning so much right now. But As I said in my comments, what we're doing on an annual on a daily basis with 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 refining to do when what the capacities are, when the shows are running Those kinds of things.

Speaker 2

So I expect those numbers to improve. And But all in all, I'd have to say it was a pretty good success. They were pretty happy with the opening.

Speaker 3

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?

Speaker 2

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

Speaker 3

Great. 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?

Speaker 2

Look, I think it's the as you started off Your question was, I mean, it's a new business. It's pretty challenging. And I think we both came to the conclusion that it probably wasn't a great fit And thus, we're making there's some change coming. But I don't there's no issues with Reporting or any of that stuff, that's all in good shape. It's much more about Just to fit, there's a lot there.

Speaker 2

I will say the CFO's job at Sphere has a heavy operational component Probably we didn't foresee nor probably did gout them. So we're moving on And I don't expect much to change.

Speaker 3

Thank you.

Operator

Ben Swinburne with Morgan Stanley, your line is open.

Speaker 5

Hey, Jim. Good morning. Couple of questions sticking with the uncharted 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 'twenty four year?

Speaker 5

Or do we need to think about maybe a longer Duration?

Speaker 2

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

Speaker 5

Looking at the segment, I guess.

Speaker 2

The question is, is it going to be profitable enough to justify the capital expense that we put And we do think it will be, but it's got to develop that Watch the 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 YouTube thing is just sort of off the charts, right? And I think it challenged a lot of artists, right, to match that. So you're liable to see more great residences Coming and those are the components that will make the project successful.

Speaker 2

I will say The way we designed this business was for the Sphere itself To support the expense structure underneath it. 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, etcetera. 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 We'll expand our revenue base, which we could justify the expense base on.

Speaker 2

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. I think there's a lot of room for that in this project.

Speaker 5

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

Speaker 2

That's correct. But I mean, look, if you spend like a drunken sailor on the content, you're going to have it's going to be a little It's going to be a little difficult. You 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, etcetera. So there's that balance.

Speaker 2

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.

Speaker 5

Terrific. Thanks so much.

Operator

David Karnovsky with JPMorgan, your line is open.

Speaker 6

Hey, thank you. Just a few on Sphere. Assuming there are more Superior Builds maybe 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?

Speaker 2

Yes. I mean, the team always talks about what they call the 1st pancake effect. So the first pancake, 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.

Speaker 6

Okay. And then just following up on the original content, I'm interested, how long do you envision a show like BuzzCard 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. Thank you.

Speaker 2

So right now, we're thinking that the current show will run about a year. But 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, especially as you talk about new spheres, Right, etcetera. Those marketplace obviously haven't seen postcards, So I mean, it will still be very viable there. And the way the Las Vegas market is, I expect that will do versions of postcards For years to come, but probably in 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?

Speaker 2

Or was there another part? I don't

Speaker 6

know if you Ballpark the production expense and whether that would be incremental? So

Speaker 2

again, the production might Like the one with Darren, again, that's another sort of first pancake kind of thing. 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 and what it takes to produce

Operator

David Joyce with Seaport Research Partners, your line is open.

Speaker 7

Thank you. A few questions for you please, Jim. First, What are your early learnings on the postcard 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 I'll have some follow ups.

Speaker 2

Well, I think we started off, David, pretty conservative, right, with all those factors, number of shows, capacity, etcetera. We're starting to explore expanding the look, the thing about the Sphere experience is that The margin audit 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 and the actual cost of running the experience is very, very low. So we're trying to obviously maximize out the number Our 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 The marketing is also we're just we're really still learning about that. The Las Vegas market is

Speaker 1

I mean,

Speaker 2

it wasn't a perfect market for us to open it, right, because it has an ever regenerating Marketplace of customers, right. They up to like 50,000,000 people come through that market every year. And Our ability to reach those people, right, and sell them a ticket and interest Our product 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, etcetera. Those are the things that we're studying heavily now and I expect to see improvement.

Speaker 7

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

Speaker 2

There are. I think we're going to be pretty careful about that. The Sphere has already has a sort of global profile, Right. And so we don't want to lose any of that. So naming rights would have to be something that's consistent with that kind of strategy.

Speaker 2

So it's not purely financial in terms of its consideration.

Speaker 7

Understood. And finally, curious about the Exosphere advertising opportunity and the logistics basically. Like 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 The production time and the expense involved in producing an ad.

Speaker 2

So The production time, I don't think it's really that much different for advertisers than other mediums. Right. I mean, you can do it really fast if you need to, right. But most advertisers, the clients are Take your time, they're thoughtful about it. I will say that it's a different medium.

Speaker 2

It's spherical, right? It's three-dimensional. And so your content has to conform to that. You can't take a flat screen advertising content and just Please, please, Spheres. It doesn't look good and it won't bring you the value that you're spending on that they No, 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.

Speaker 2

And the advertising gets all of this real extra benefit and a lot of exposure, right? So But you have to do content that does that. So there the some advertisers are spending a lot of I'm in money. I'm making sure that they're that they have something that will be really Resonate with the marketplace. Others are a little quicker.

Speaker 2

They need to get Their message out, but all of them seem to be wanting to get that global Sort of a push with it. And so they're paying attention to that creative. We think some really great creative From some of our advertisers sort of blowing us away. And it's interesting because I mean that they I don't want to

Speaker 1

talk too much about it, but

Speaker 2

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 are pretty good.

Speaker 7

And do you have any requirements for minimum ad campaign length or requirements on how many ads Per day or per hour or a year?

Speaker 2

Well, This isn't exactly an answer to your question, but we do have a kind of a standing rule at With our sales force that 50% of the 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 Social media is right. There's always something interesting out of there. Again, keeping to keep trying Reached the global community and so far that's been pretty successful. But I think we're going to stick to that fifty-fifty formula, right, because I think in the long run that will make the product a lot more valuable.

Speaker 7

Appreciate it. Congratulations.

Speaker 1

Thank you. Thanks, David. Operator, we'll take one more caller.

Operator

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

Speaker 8

Thanks so much. 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

Speaker 1

a couple of follow ups.

Speaker 4

Hi, Paul. Well, while MSG Plus initially launched back in June, We've really only began 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 offerings, we've, as I mentioned, seen robust advertiser interests. We have a new presenting partnership with the leads. They're a new advertiser to our brand.

Speaker 4

So All in all, we continue to expect MSG Plus to be value accretive to our business.

Speaker 8

Thanks, Andrew. 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 to the upside. Any color you could give on how this deal shook out for you on rights, Steve?

Speaker 4

Sure. We've had a long and productive relationship with the devil. I can say we're pleased with the renewal terms. Those terms begin next season. We can't get into specifics, but certainly And having these discussions, both we and the devil are mindful of the changing pay TV environment.

Speaker 8

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?

Speaker 1

Hi, Paul, it's Ari. 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 of 24. 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.

Speaker 8

Great. Thank you.

Operator

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

Speaker 1

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

Speaker 4

Goodbye.

Operator

This concludes the Sphere Entertainment Company fiscal 2024 Q1 earnings conference call. We thank you for your participation. You may now disconnect.

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