Sphere Entertainment Q2 2024 Earnings Call Transcript

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Provided by Quartr
February 5, 2024

There are 12 speakers on the call.

Operator

Good morning, and thank you for standing by, and welcome to the Sphere Entertainment Co. Fiscal 20 24 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.

Operator

Please go ahead.

Speaker 1

Thank you. Good morning, and welcome to Steer 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 Burns, 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.

Speaker 1

If you do not have a copy of today's earnings release, it is available in the Investors section of our 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.

Speaker 1

On Pages 56 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. 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 1st 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 Q2, we sold more than 1,000,000 tickets to over 200 events.

Speaker 2

This volume is 2 to 3 times greater than what you would typically see from the busiest arena sized venues in the world. Our original content category, the Sphere Experience, drove this volume, grossing more than $1,000,000 in average daily ticket sales at a high margin. While the SPEAR experience is our key economic engine, residencies will continue to have an important place on our event calendar. High profile residences 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.

Speaker 2

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 Business segment generated positive adjusted operating income for our 2nd 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.

Speaker 2

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.

Speaker 2

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 media. Before I turn the call over to Andrea, I'd like to welcome Jennifer Coster, who was recently named President of Sphere Business Operations. Jennifer has an extensive background of driving growth at premier technology Entertainment Brands, including most recently at Google. At Sphere, she will lead the development execution of all business operations.

Speaker 2

I look forward to working with her on growing our business. I would also like to welcome Dave Burns. Dave previously served as MSG as 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.

Speaker 3

Thank you, Jim, and good morning. For the Q2, 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 100 of live professional sports broadcast and other award winning original content, all with an eye on cost and operating efficiencies.

Speaker 3

We are halfway through the 2023, 2024 NBA and NHL seasons, which also mark the first time we're making our games available Through our direct to consumer authenticated streaming service MSG Plus 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 in the pharmaceutical category. Aliv was named the presenting sponsor of MSG Plus, while Moderna signed on as the 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.

Speaker 3

We also recently completed renewals with several distributors, including a multi year agreement with 1 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 fifty-fifty partnership, We'll combine these valuable insights to explore new products that further elevate the streaming experience for New York area sports fans.

Speaker 3

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.

Speaker 4

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 Q2 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.

Speaker 4

Due to these factors, our results are not fully comparable on a year over year basis. Turning to our fiscal 'twenty four second quarter results. On a total company basis, we generated revenues of approximately $314,000,000 and adjusted operating income of 51,000,000 The Sphere segment generated revenues of $168,000,000 and adjusted operating income of $14,000,000 in its 1st 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.

Speaker 4

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 FISH and DednCo later this fiscal year. We also benefited from Formula 1's multi day takeover 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.

Speaker 4

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 2nd quarter results also reflect the impact of SG and 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 117,000,000 related to our decision to no longer pursue a Sphere in London. As Jim mentioned, the company continues to have stand up discussions about bringing Sphere to other international markets. Turning to MSG Networks, the segment generated $146,000,000 in revenues and $37,000,000 in AOI, which represent decreases of 8% 22%, respectively, as compared to the prior year quarter.

Speaker 4

The decrease in AOI primarily reflected lower distribution revenue and higher direct operating costs, partially offset by lower SG and A expenses. Turning to our balance sheet. As of December 31, we had approximately 6 $15,000,000 of unrestricted cash and cash equivalents and our debt balance was approximately 1,400,000,000 These balances reflect our recent convertible debt offering for net proceeds of approximately $236,000,000 The convertible notes carry an annual coupon of 3.5 percent and mature in December 2028. We intend to use the net proceeds from the offering general corporate purposes, including Sphere related growth initiatives. With that, I will now turn the call back over to Ari.

Speaker 1

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

Operator

Thank We'll go first to Brandon Ross at LightShed Partners.

Speaker 5

Hi, good morning, Jim. In your prepared remarks, You talked about substantive discussions for international locations. I was hoping you could give detailed update on those international growth plans. There have been a few markets in the press like South Korea. What are the gating factors And how do you foresee deal structuring?

Speaker 5

I know you said asset light. What does that exactly mean?

Speaker 6

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 And we're I think we're pretty much on time. But I think that the one thing Brandon is that This is the 1st full quarter of operations that the Sphere has gone through.

Speaker 6

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, 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.

Speaker 6

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.

Speaker 5

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

Speaker 6

I'll let Dave answer the first part of the question and Matt will answer the second one.

Speaker 4

Sure. Hey, Brendan. 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.

Speaker 4

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.

Speaker 6

As far as the business itself goes, We've been saying for quite some time and I think everybody's very aware That 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 does MSP Networks, but sports and entertainment in general are all challenged by the model. Having said that, the MST Networks has some has great content. The consumers very much want it.

Speaker 6

And just the question about How are you going to monetize it? It's still up in the air. But I do think that the progress that Andrew is making, right, in terms of developing streaming platforms, etcetera, are certainly part of the answer. And We just have to continue along, but that is a very strong product, right? And it's 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.

Speaker 5

Thank you.

Operator

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

Speaker 7

Thanks so much. This is for either Jim or Dave. Just after Seeing this quarter that you grossed over $1,000,000 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 your experience content that you might generate to keep that momentum going?

Speaker 6

It's a very it's a good question. 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 that

Speaker 2

the but how long will the Sphero experience last?

Speaker 6

I think that it will first off, you don't like go at set amount of time and then cut it off. What happens is that what our plan 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 1st pancake syndrome. So the other part of it that probably hard to quantify, But are our consumers coming in for to see postcards and the current Sphere experience Or they just come and see the Sphere? How much is the content Draw versus just the pure medium of the technology. And I'd say it's a mix of both, right.

Speaker 6

But over time, it will move closer to content and we're preparing for that.

Speaker 7

Thanks, 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 to what the original venue cost as we think about what the ROI might be for a run rate model of franchising these venues? Thanks.

Speaker 6

Well, I mean, it is a franchising model, right, which means that we don't carry The heaviest, lower capital into it. However, we do think we can deliver new spheres on a less costly basis than the first one. Again, it's sort of that first pancake thing. We learned a lot. We're Already in the midst of looking at the new designs and taking cost out of it, making the construction go faster and be more efficient.

Speaker 6

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.

Speaker 7

Great. Thanks so much.

Operator

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

Speaker 8

Thanks. Good morning. 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 Resonant's when you look at Q2, FISH and Ded and Co. And then maybe just sticking with the Pancake, how long do you think it will take to build the next Pancake?

Speaker 8

Do you think it's going to the construction timeline is shorter under the as you move forward with your partner or partners? And do you anticipate generating any revenue until that

Speaker 6

Oh, I parse apart your question. What part would you like answered for?

Speaker 8

Residences and then pancake costs, timeline.

Speaker 6

Okay. So residency is right that 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. We don't have room beyond what we've already committed to do anything more significant. But the demand from artists is continuing to grow.

Speaker 6

And We expect to have 25 be another full year. I will say that 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 kind of demand for tickets for Fish and Dead, etcetera. And so these residences look like they're going to go longer than we initially anticipated because of ticket demand. So that's a good thing.

Speaker 2

So does that answer your residency question?

Speaker 8

Yes, absolutely.

Speaker 6

And then you want to know what else

Speaker 8

Just wondering how long we're trying to think about when your company could start benefiting from a cash flow point of view from additional smears. Obviously, these take some time to build. So curious if you have an updated Thought on timeline?

Speaker 6

So I mean, it's the franchise model. So that the and we have a construction and 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.

Speaker 6

And essentially, Our minimum 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 is the ongoing servicing and providing of content, which will provide a revenue stream like a franchise model that is ongoing.

Speaker 8

Got it. Great. Thank you so much.

Operator

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

Speaker 9

Hi, thanks. Jim, just following up on the residency question, interested on how you think about the venue in Vegas as a destination, not just for Residences, 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?

Speaker 6

Not at this time. The investment that the artist has to make in order to create the show, do the content, right, is 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.

Speaker 6

So 1 or 2 shows doesn't do it. Okay.

Speaker 9

And then on Networks, following up on the term loan expiration question, just wondering how you're thinking about potential costs that you could still take out of the business as far as programming, SG and 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?

Speaker 3

I'll take that, David. Hi. Well, as you know, a significant percentage of our costs are fixed. That includes the rights 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.

Speaker 3

We previously mentioned, I think, on our last call that we had renewed our doubles rights agreement. That renewal did reflect the realities of the current landscape. At the same time, we do expect to see operating efficiencies and streaming coming from our new venture with the YES Network. As to your second question about A potential a 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.

Speaker 4

Thank

Speaker 1

you.

Operator

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

Speaker 10

Hi, thanks for taking my question. Congrats on the results. First, I'm just curious acknowledging the 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?

Speaker 6

Yes. And that's exactly what we're driving towards, right? The sphere is designed and 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.

Speaker 6

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 EDM 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. 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. Now there basically is no load and load out with the Sphere.

Speaker 6

So that enables us like we do with U2 right now, have a concert on Wednesday and then Thursday 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.

Speaker 10

Great. Thanks. 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?

Speaker 6

Yes. I'd say probably, I wouldn't just limit it to Social media, but the but what advertisers are seeing with the sphere, Right. 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 from social media, right, is significant Enough for them to look at using it to launch new brands, new products, right, make statements to the states 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.

Speaker 10

Great. Thanks so much.

Speaker 1

Thanks, Logan. Operator, we'll take one last caller.

Operator

Thank you. We'll take that question from David Joyce at Seaport Research Partner.

Speaker 11

Thank you. For Jim, could you please update us on the status of the sponsorship business? You've had a few announcements lately post quarter.

Speaker 10

So I

Speaker 11

was just wondering, where do you see that going from here? How do you differentiate between sponsorship opportunities and exosphere advertising? Just some more color there would be helpful.

Speaker 6

Yes. So I mean that 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 and I expect that this year we'll have some significant announcements That yes, involve the exosphere, but more involved the direct association between the client and the product, Right. And even the content that runs in the product.

Speaker 11

All right, great. Thank you.

Operator

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

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 3

Goodbye.

Operator

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

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