Q2 2024 Sphere Entertainment Co Earnings Call

Participants

Ari Danes; IR; Sphere Entertainment Co.

James Dolan; Executive Chairman and CEO; Sphere Entertainment Co.

Andrea Greenberg; President, Chief Executive Officer; MSG Networks Inc

David Byrnes; EVP, CFO, & Treasurer; Sphere Entertainment Co.

Brandon Ross; Analyst; LightShed Partners, LLC

Paul Golding; Analyst; Macquarie Research

Benjamin Swinburne; Analyst; Morgan Stanley

David Karnovsky; Analyst; JPMorgan Chase & Co.

Devin Brisco; Analyst; Wolfe Research, LLC

David Joyce; Analyst; Seaport Research Partners

Presentation

Operator

Yes, yes, yes, good morning, and thank you for standing by, and welcome to the sphere entertainment Co. fiscal 2024 second quarter earnings conference call. (Operator Instructions) 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 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. So this will be followed by an update from Andrea Greenberg, President and CEO of MSG Networks, and then David 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 ANI is a non-GAAP financial measure. And with that, I'll now turn the call over to James.

James Dolan

Thank you, Ari, and good morning, everyone. As we said from the very start, the vision for fear 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 vSphere. We wanted to design a venue that would be Bizzy 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 sized venues in the world. Our original content category, the superior experience drove this volume grossing more than$1 million in average daily ticket sales at a high margin.
While the superior 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 fear and other events at the venue you too 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 extra sphere. And in November, we demonstrated what Spear can do for corporate partners through our collaboration with Formula one 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 superior 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. 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 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 overtime across multiple platforms. This includes a network of sphere venues around the globe with positive worldwide reaction to spear, 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 media.
Before I turn the call over to Andrea, I'd like to welcome Jennifer Koster, who was recently named President of spear business operations. Jennifer was as an extensive background of driving growth of premier technology and entertainment brands, including most recently at Google at spear, she will lead the development execution of all business operations.
I look forward to working with her on our growing our business. I would also like to welcome Dave burns. 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-'24 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 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 D to C offering more effectively.
On the advertising front, we welcomed several new partners, including in the pharmaceutical category, Aleve was named the presenting sponsor of MSG Plus wall modernity signed on as a presenting sponsor of our New York Islanders broadcast.
These new partners joined 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 guest network have developed expertise and technology with their direct to consumer launches.
With this 50-50 partnership will 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.
They 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 gas network on building this new opportunity. And with that I'll turn the call over to David.

David 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 spinoff 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, see our experience currently features postcard from her, which ran 191 times during the quarter.
Our results were also positively impacted by U. twos multi-month run. And while the band shows are drawing to a close. We look forward to hosting fish and debt and Co. later this fiscal year, we also benefited from Formula One's multi-day takeover of sphere for the inaugural Las Vegas Grand Prix as well as from a full quarter of advertising campaigns on the venues XL Sphere.
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 events and are looking at a record setting advertising revenue week for the ex U.S. here, 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 developments.
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 segment generated $146 million in revenues and $37 million in a while, 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.
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?

Question and Answer Session

Operator

Thank you. (Operator Instructions)
Brandon Ross, LightShed Partners

Brandon Ross

Hi good morning, Jim, in your prepared remarks, you talked about substantive discussions for international locations. 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?

James Dolan

Okay. Well, the gating factors me there really is no, I don't really see gating factors, right that the in exploring these markets, it's more like an evolution that layer. And we're I think we're pretty much out of time there. But I think the one thing, Brandon, is that still the this is the first full quarter of operations. That's a that this fear has gone through.
And so we're proving out the business model, right that by doing that, you're making now 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 US business and going to be profitable in the home.
And I think that were now that this this quarter's results are showing that, yes, we are going to be profitable and we are up now and now we just need to continue to and negotiate with those markets that have the key interest and we are doing so and I expect it will to conclude an arrangement.

Brandon Ross

Great. And then for MSG Networks, the debt is due in October. How do you think about the risk, the refinancing in terms of ensuring that that sphere segment has sufficient flexibility to grow and isn't encumbered by a challenge to assets 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?

James Dolan

But I'll let Dave answer the first part of the second one I'm not sure I'd say Brandon, have WebSphere.

David Byrnes

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 us. First fear, Tom, you mentioned the refi?
Yes, it's due in October. Just to touch on that. We are currently in regular contact with our lenders, and we're pursuing a number of potential options with regards to the ultimate refi, and we should have more on that in the coming months.

James Dolan

As far as the business itself goes that the how long we've been saying for quite some time and I think everybody is very aware that the monetization mechanisms for our content, our impaired, that would be a kind way of putting it that the with the move from from Dow from traditional cable linear business to streaming business, right that the I think that it's not only those two networks for sports and entertainment in general, all challenged by the model, having said that that the cell MSG Networks has some as great content, the consumers very much wanted that as.
Just a question about how are you going to monetize? It is still up in the air. But I do think that the progress that Andrew is making both in terms of developing streaming platforms, et cetera, are certainly part of the answer. But the answer.
We just have to continue along, but that is a very strong product, right? And it's soon, but how long that transition takes from linear to streaming and how the consumers consume it and what they pay for the year are key issues yet yet to be resolved.

Brandon Ross

Thank you.

Operator

Paul Golding, Macquarie Capital.

Paul Golding

Thanks so much of this is for either Jim or Dave, just after seeing this quarter that you grossed over $1 million in average daily ticket sales for as for your experience, I'm wondering if you could speak to whether you have a clear indication of the lifecycle of an original attraction. Now it's fear.
And if this informs subsequent of see or experience content that you might generate to keep that momentum going?

James Dolan

That's a very it's a good question. The go around here. We talk about it in light of what we call the first pancake. It's never perfect. But the now the demand is robust and Las Vegas is a great market for this as it renews itself almost every week with fresh customers yet. But how long will this VR experience last, um, you know, I think that that they will first off the scale.
You don't you don't like go at set amount of time and then cut it off the, um, now what happens is that the of what our plan is to do that is to replace it right, the but still wanted the arm and keep building up a library of contact, right that of course, when we open up new spheres, they'll have a whole if they won't, they won't be dealing with the first paycheck syndrome.
So the other part of it that probably hard to quantify, but they are consumers coming in for Yelp to see postcard SmartCentres and the current sphere experience are they just coming seats via the on the I know how much is the content drawn versus just the pure medium is technology. And now I'd say it's a mix of both, right. But over time, it will still move closer to content and we're preparing for that.

Paul Golding

Thanks, Jim. That's a great point. And then I wanted to circle back on the venue itself. And 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 original venue cost. As we think about what the ROI might be for a run rate model of franchising these venues? Thanks.

James Dolan

Well, I mean that is a franchising model, right? That the which means that now we don't carry the heaviest load capital into it. However, we do think we can deliver sales with new spheres, Tom, on a less costly basis than the first one.
Again, sort of that first pancake things we learned. 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. And hopefully, over time, we'll get really, really good at that. But the but it shouldn't go up, it should go down that the because of everything that we've learned are great.

Paul Golding

Thanks so much.

Operator

Benjamin Swinburne, Morgan Stanley

Benjamin Swinburne

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've kind of run rating around almost 100 a year now and residents we look at you to fission and debt Inco.
And then maybe just sticking with the pancake, how long do you think it'll take to build the next 10 K? Do you think it's going to the construction time line is shorter under the as you move forward with your with your partner or partners on and do you anticipate generating a revenue until that new venue opens for you guys.

James Dolan

Yes. Well, on fee, how do I parse apart your question, the what part would you like to answer grant residency and then package costs over time lines and subject. So Red residencies, right that the we've already announced that the next two ex the comm, I can tell you without telling you who that pretty much our calendar is full for this for this calendar year is that with the we don't have room beyond what we've already committed to do anything more significant than that.
But the demand from artists is continuing to grow that and building out the we expect to have in our 25 G. another for full year. I will say that the and what has surprised us with this slide Q2, which started off committing to around to around 20 shows and ended up with 40, right? We're seeing the same time as demand for tickets for efficient debt, et cetera.
And so these residencies look like they're going to go longer than we initially anticipated because the ticket demand. So that's a good sign that they are. If So does that answer your residency question.

Benjamin Swinburne

Yes, absolutely. And then you want to know what else is really how long we're trying to think about when your company can start benefiting from a cash flow point of view from additionals and beers, obviously, well time to build. So curious if you have an updated thought on time line.

James Dolan

So I mean, it is the franchise model so that the and we have a construction and development, the vision that the that the services, that franchise model, the arm, they don't work for free now and the So yes, they will be generating revenue right from the start that the U.S. to support the the building construction process.
So what were the different revenue streams that go along with the franchise model, but the construction model has as revenue associated with it. And essentially our our our minimum goal here is to do that. There won't be any losses associated with Spear with construction.
Most likely there will be profits for the year. But then beyond construction, there is the ongoing servicing and providing of content, which will provide a revenue stream like a franchise model, Tom, that is ongoing.

Benjamin Swinburne

Great. Thank you so much.

Operator

David Karnovsky, JPMorgan

David Karnovsky

So thanks, Tim. Just following up on the a residency question, interested and how you think about the venue in Vegas as a destination, not just for residencies, but maybe for music touring generally, is it feasible for an artist to consider Spear is a one or two night stop for a tour when they're in Vegas?

James Dolan

Not at this time. None of the investments at the artist it has to make in order to create the show do the content right, is requires more than just one or two shows that the I mean, when when an artist designed for they're playing in over 40th markets, they build a show and they amortize their their show investment over the 40 markets.
But the with that with the sphere because of how unique it is what they build for Spirit really doesn't move to no into a touring model or at least most of it doesn't say the so they need to justify it based on the run that they have at the spear. So one or two shows doesn't do it.

David Karnovsky

Okay. And then on networks, following up on the term loan expiration question, I was just wondering how you're thinking about potential costs that you could still take out of the business as far as programming SG&A or even amid great 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?

Andrea Greenberg

I'll take that, David. High And well, as you know, a significant percentage of our costs are fixed. That includes human rights fees that we pay our teams in that segment. We're always looking for ways to run our business more efficiency efficiently and considering the pressures facing all similar companies that is and will remain a big focus of ours.
We previously mentioned, I think on our last call that we had renewed our depots rights agreement. That renewals did reflect the realities of the current landscape. At the same time, we do expect to see operating efficiencies and screening coming from our new venture with the gas network.
As to your second question about think of potential a large 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 for our business. Yes.

Operator

Devin Brisco, Wolfe Research.

Devin Brisco

Thanks for taking my question. Congrats on the results. First, just curious, acknowledging the spirit is still very new to what extent are you seeing opportunities to drive greater efficiencies at the spear in terms of either venue venue utilization or costs specifically, do you expect you want to do both for your experiences and concerts or residencies in the same day at some point during this fiscal year?

James Dolan

Yes, that arm and that's exactly what we're driving towards by the sphere is designed and strategize for run multiple events on a day by not just the same event multiple times, but different events that the year.
And we are No, Bob, yes, we do want to have a concert and SPR experience on the same day. 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 now on how far we can stretch this thing out. We've talked about it and I don't know if we're going to get to three different kinds of events in a day. But we do definitely due to the net adds.
Yes, a big part of the old venue model is was what they called the load in and load out. Right? And how much time that took another there basically is no load in and load out with the with the steer. So that enables us like we do with you to right now have a concert on Wednesday and Thursday by Thursday at noon. We're running the superior experience, which is why you're seeing some of that in results now, but there's a great deal of refinement that that is still to come on this. They know both on the expense and the revenue side.

Devin Brisco

Great. Thanks and then on the access Sphere side, I'm curious how much does social media reach factor into how you price access for your ads? And I guess is the reach on social media as important for advertisers as the physical reach at the venue is?

James Dolan

Not yet side, I'd say probably I wouldn't just limit it to social media, but the but on book the what advertisers are seeing the with the spear and when the axles fear is that them by designing, particularly by taking content and specifically designing it for the XO sphere.
So that the amount of patients that it grabs a lot of it through social media, right, is significant enough for them to look at using it to launch new brands, new products like make statements through the states that marketers and advertisers want to do quite 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 like that. So we have quite a robust group of advertisers using it and adjust that way.

Devin Brisco

Great. Thanks so much.

James Dolan

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

Operator

Thank you.
David Joyce, Seaport Research Partners

David Joyce

Thank you for Jim. Can you please update us on the status of the sponsorship business. You've had a few announcements lately post quarter.
And so I was just wondering where do you see that going from here? How do you differentiate between sponsorship opportunities and excess shared advertising? And just some more color there would be helpful.

James Dolan

Yes, Tom. So I mean that most of those activities are focused on the ex-US fair at this point, right? Which is the predominant sort of medium for advertisers, but a sponsorship is something that we're going to continue to develop lately.