Sphere Entertainment Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 14, 2024

There are 10 speakers on the call.

Operator

Good morning. Thank you for standing by, and welcome to the Sphere Entertainment Fiscal 2024 4th Quarter and Year End Earnings Conference Call. At this time, all participants are in 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 Sphere Entertainment's fiscal 2024 Q4 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 Burns, 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 on the Investors section of our corporate website.

Speaker 1

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'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 exo Sphere.

Speaker 2

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 Postcards from Earth. This category again generated more than $1,000,000 in average daily ticket sales in our Q4. Since premiering in October, the Sphere experience has generated over $300,000,000 in high margin revenue.

Speaker 2

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 concert front, artists continue to benefit from the drawing power of Sphere. Dead and Company just completed their 30 show run on Saturday night.

Speaker 2

The Eagles kick off their residency next month with a 20 show run through January. And we recently announced that ANIMA will be our 1st EDM act with a multi night run around New Year's. Both the Eagles and ANIMA have been extended multiple times due to demand. And next month in another first, Sphere will host the UFC, which will be the 1st live sports event in the venue. We are also making progress towards our goal hosting multiple event types on the same day.

Speaker 2

The Sphere experience ran on the same day as select Ed and Co. Concerts in July 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 ExoStream, which is available 20 fourseven on our website and Exo Audio, custom audio synced to Ekso Spear content that is available both on-site and online via the live stream.

Speaker 2

We also welcome the 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 remain optimistic about what the future holds for this next generation medium.

Speaker 2

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

Speaker 3

Thank you, Jim, and good morning, everyone. For the fiscal 2024 Q4, we generated total company revenues of approximately $273,000,000 and adjusted operating income of $25,700,000 Our Sphere segment generated 4th quarter revenues of approximately $151,000,000 as we welcomed over 900,000 guests to more than 230 events, along with an AOI loss of $5,500,000 These results were driven by our original content category, the Sphere Experience featuring Postcard from Earth, which generated approximately $74,000,000 in revenue across 208 shows in the 4th quarter. They also reflected Fish's 4 night run-in April and the start of Ded and Co's residency in May with 18 performances during the quarter. 4th quarter results also benefited from Hewlett Packard's corporate keynote event and the NHL draft as well as advertising campaigns on the Exosphere. SG and A expenses for the Q4 were $102,000,000 This primarily reflects corporate overhead as well as expenses related to Sphere Studios, associated content and technology development.

Speaker 3

Turning to MSG Networks. The segment generated $122,000,000 in revenues $31,100,000 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 Plus. 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 Plus. The increase in AOI reflects lower SG and A expenses partially offset by the decrease in revenues.

Speaker 3

Turning to our balance sheet. As of June 30, we had approximately $560,000,000 of unrestricted cash and cash equivalents. Our debt balance was approximately $1,400,000,000 atquarterend. This reflected $259,000,000 in convertible debt and a $275,000,000 credit facility related to Sphere in Las Vegas. It also reflected approximately 8 $50,000,000 outstanding on the MSG Networks term loan, which as a reminder is debt that is recourse only to MSG Networks.

Speaker 3

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 has hired advisors 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

Thank you. We will now begin the question and answer session. Your first question comes from the line of Brandon Ross from LightShed Partners. Your line is open.

Speaker 4

Thanks for taking the question. I guess MSG Networks has stolen the day to day 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?

Speaker 2

Well, I wouldn't say that the NBA deal helped the regionals or MSG network, probably just the opposite. In terms of the workout, I'm going to let Mr. Burns answer the workout questions today. But yes, no, I don't think that's the speaking strictly from networks point of view, losing content is never good. And that was some very high profile premier content.

Speaker 2

So did not help our business at all.

Speaker 3

And then Brandon on the workout part of that, we can't speculate today the process is going to go going forward. We mentioned Networks has hired advisors. The advisors 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.

Speaker 4

Okay, great. And then on the Exosphere advertising, it was a little lower than the building's 1st couple of quarters. I realize 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?

Speaker 2

Well, it can definitely improve. But we're just we're really getting used to the marketplace. It's the 1st year of this product and so we're learning more about it. 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. Our pitches are much more branded.

Speaker 2

And we're still we're looking at the medium as being something that advertisers use to really introduce products, right, further brands, etcetera, and the pitches have changed in that way.

Speaker 4

Got it. Thank you.

Operator

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

Speaker 5

Yes, good morning. 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?

Speaker 5

Okay.

Speaker 2

I guess the answer to that is yes. Both. But branded content certainly has its appeal, right, 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, 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.

Speaker 2

It's an experience. So if the branded content does do that, then we're going to shy away from it. 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 pre instilled appeal to the marketplace.

Speaker 2

So you weigh one against the other.

Speaker 5

Okay, great. 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

Speaker 2

sort of reason for that? That? 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?

Speaker 2

Then recording them actually in the Sphere itself is probably the most perfect place to make an experience for 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.

Speaker 3

Great. Thank you.

Operator

Your next question comes from the line of Daniel Durant from Morgan Stanley. Your line is open.

Speaker 6

Hi, good morning. Thank you for taking my question. Jim, I believe that on the last two 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?

Speaker 6

Thank

Speaker 2

you. The interesting thing about that question is that topic is sort of you know, 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. And I think that's about all I can say, right, other than you're going to know when it happens.

Speaker 6

Got it. Thank you. And just one follow-up. I believe Postcards was about an 85,000,000 dollars investment. Can you give us a sense of how much the other 2 in process see your experiences comparing cost?

Speaker 6

Thank you.

Speaker 2

Yes, I think, look, they probably won't be much more. They could be much less that they were still figuring out some of those dynamics. Postcards, we call postcards the first pancake, right? You know what it's like to make the first pancake. The second pancake is always better, usually at least.

Speaker 2

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 for 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 they we're likely to stay in and around that range.

Speaker 6

Got it. Thank you very much.

Operator

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

Speaker 7

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

Operator

Sure.

Speaker 2

Actually, this I tend to think about this at least once a week, because as we're going out to other marketplace and then to other potential owners of Spheres, the question of we obviously bring the expertise of how to build a sphere, right. But when you take a look at this last year we're 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 know 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 that we talked about in the script, right, was what we call side by sides, right. That's where we have more than one event, right, in the sphere on the same day.

Speaker 2

The next Sphere will automatically know how to do that because of what happened in the Sphere in Las Vegas. How to change, 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 1, right, and then bring in an audience for another one and have them exit and do the experience, etcetera. 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 1 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.

Speaker 7

Got it. And then regarding some of the non music events like NHL or the upcoming UFC fight, interest 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? Thanks.

Speaker 2

Okay. I'm going to answer that in a slightly different way than you asked it. Because the strategy as I was just talking about was that the 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. Earth.

Speaker 2

We can run postcards from earth 3 65 days a year and run nothing else. We could do that. And that will generate X amount of revenue per day. So 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 how many corporates do we have, how many of residences etcetera.

Speaker 2

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 corporate clients.

Speaker 2

Still the ones with a lot of imagination and foresight, etcetera, 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 they and they think it's really cool to be in the Sphere. So that's sort of how it plays out.

Speaker 5

Thank you.

Speaker 2

Did that answer your question?

Speaker 5

It does. Thanks, Ken.

Operator

Your next question comes from the line of Peter Cepino from Wolfe Research. Your line is open.

Speaker 8

Hi, good morning. I have a question on the postcards from Earth and the Sphere traffic dynamics and then another one on 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'm wondering 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?

Speaker 8

Thank you.

Speaker 2

Why don't you do the

Speaker 3

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 on the workout.

Speaker 2

And on the second part of that, that second that feels sort of like a chicken and egg question. Is it the egg or is it the inside of the egg? And look, I think it's a bit of a combination of both. I mean, it's a very interesting building to see from the outside and it dominates the landscape, right? And that clearly makes people really want.

Speaker 2

But then they ask questions like, well, what's inside, right? And what does it do, right? And 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?

Speaker 2

And many of them know what it is. And every time we do something like Debt and 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?

Speaker 2

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 see 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, etcetera, just continues to add on to that.

Speaker 2

So I mean, I don't think you could peg it to be one thing versus the other.

Speaker 8

We look forward to more pancakes. Thank you.

Speaker 5

Operator,

Speaker 2

we'll take I'm surprised with that.

Speaker 1

We'll take one last caller, operator.

Operator

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

Speaker 9

Thank you. 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?

Speaker 9

And what's involved with the creative that they put on and kind of the lead time that they need to work with you on that.

Speaker 2

What was the last part of that about the content?

Speaker 3

How much lead time do you not create?

Speaker 2

How much time do you not create about it? Okay. Well, 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 'twenty five, right.

Speaker 2

That will wet people's appetite. The look it takes you know anywhere from 3 to 6 months to get ready to do one of these. Right. It depends on what you're trying to achieve. So we're about that We're at least that far out.

Speaker 2

I think that you're going to see, I think the Eagles are not going to be satisfied with a 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.

Speaker 8

There's still a lot of

Speaker 2

demand from the artist by the way.

Speaker 9

Okay. Another question on sponsorship. If you could talk about how talks are progressing with I just wondering how that side of the business is evolving and how does Crown Properties' new JV play into that? Thank you.

Speaker 2

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

Speaker 3

Towards the end of calendar 'twenty three.

Speaker 2

Yes, right. 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 that. So we're starting to see some interesting new clients, right. And I don't know, we'll just see we'll see how they do have a feeling that they're going to do well.

Speaker 2

But I'm not out there selling, they are.

Speaker 4

All right. Thank you.

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.

Speaker 1

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.

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