Sphere Entertainment Co. Price & Performance (SPHR)

The company disclaims any obligation to update any forward looking statements that may be discussed during this call. On Pages five and six of today's earnings release, 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. Thank you, Ari, and good morning, everyone. As we begin our calendar 2025, we're focused on a number of core priorities to drive profitable growth. These include developing new productions as we look to build our original content library, showcasing a diverse set of concert residences and other corporate and mark events optimizing the go to market strategy for the Exos Sphere and sponsorships, and driving operational and cost efficiencies across our business. As you know, another component of our strategy is market expansion. In Abu Dhabi, our plans are moving forward. Our team is now working closely with our partner DCT Abu Dhabi areas that include venue design, and pre construction planning. We are also in discussions with other markets as we In Las Vegas, the Sphere experience saw improvements in sell through and stronger sequential results in the December.

This reflects our ongoing efforts to repine both our schedule and pricing in order to maximize revenue and enhance the guest [indiscernible] The Sphere Experience has now generated over $450,000,000 in high margin revenue. We continue to make progress on our next Sphere experience Look forward to sharing more ahead of its debut this year. We also continue to see interest from a diverse set of artists who want to play the Sphere. Our first country artist, Kenny Chesney began a 15 show run in May, actually begins the 15 show run-in May. The Backstreet Boys will start an 18 show residency this summer. In terms of corporate partners, we saw solid advertising demand for the XO Sphere at the end of twenty twenty four, which is continued into the New Year. Operationally, we have brought our sponsorship and advertising sales efforts back in house. And as we build out this team, we will also be evaluating our go to market strategy for the Sphere and for our sponsorship assets. I'd now like to introduce Robert Langer, our new EVP Chief Financial Officer and Treasurer, Robert was previously with Disney Sphere he served in a range of financial leadership roles for over twenty five years.

His finance and strategy experience in media and entertainment is an asset to our business and we're pleased to have him on board With that, I'll turn the call over to Robert. Thank you, Jim. And good morning, everyone. I'm pleased to join you all here today in my new role at Sphere Entertainment.

For the December, we generated total company revenues of $308,300,000 and adjusted operating income of $32,900,000 Our Sphere segment generated revenues of $169,000,000 and an adjusted operating loss $800,000 These results were primarily driven by our original content category, the Sphere Experience, which generated $87,000,000 in revenue across 190 shows in the December. Our results already reflected 12 performances from the Eagles as well as five anime shows at the end of the quarter. In addition, December results included Formula One's takeover for the Las Vegas Grand Prix, an additional multi day corporate takeover, ongoing advertising campaigns on Sphere, and revenues related to our plans to bring the world's second Sphere Abu Dhabi. SG and A expenses for the December were $119,000,000 This includes the impact of $12,400,000 of executive management transition costs and non recurring costs related to MSG Network. Excluding the $4,600,000 cash component of executive management transition cost, the Sphere segment would have generated adjusting operating income of $3,800,000 With respect to the March, I would like to remind you that the Sphere segment benefited from the Super Bowl in Las Vegas last year. Included a record setting advertising week for the Exosphere. However, as discussed earlier, we continue to see solid underlying demand for the Sphere so far this calendar year.

Turning to MSG Networks, the segment generated $139,300,000 in revenues and $33,700,000 in EOI, in the December. This compares to the hundred and $46,400,000 in revenue and $37,300,000 in AOI the prior year period. The decreases in revenue and the Y mainly reflect lower distribution revenue driven by an approximately 11.5% decrease in subscribers. Inclusive of the impact of MSG plus As you know, on January 1, Altice USA dropped MSG Networks from its lineup. However, on February 22 MSG Networks reached a new multiyear agreement with Altice that returned its programming to the over 1,000,000 subscribers impacted. In connection with the preparation of our 10 ks T filing, and in light of the ongoing industry challenges facing MSG Networks, we reassessed the fair market value of the MSG Networks business. Recently took a $61,200,000 non cash goodwill impairment charge. Which you can see in today's operating income results. Turning to our balance sheet. As of December 31, had approximately $5.00 $2,000,000 of unrestricted cash and cash equivalents. Including approximately $104,000,000 at MSG Networks. Our debt balance was approximately $1,360,000,000 quarter end.

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 $829,000,000 outstanding on the MSG Networks term loan. Which as a reminder is that that is recourse only to MSG Networks.

In February, MSG Networks made a principal repayment of $25,000,000 using cash at MSG Networks. Hundred and $4,000,000 As you know, MSG Networks is pursuing a refinancing through a workout. With its lenders and since October has been in a forbearance period which currently runs through March 26. [indiscernible] Sphere I conclude, I would like to remind you ending December 31. This morning, we filed a transition report for the six months period which ended 12/31/2024. The next full twelve months fiscal year will run from 01/01/2025 through December 31, 2025. And with that, we'll now open the call for questions. Thank you. We will now begin the question and answer session. Your first question comes from the line of David Karnovsky from JPMorgan. Thank you for the question. Jim, for the Sphere Experience, is there any incremental detail you can give around the planned third show how you plan to launch or market that? And then related to this, just as that new content rolls on, what's your vision in terms of adjusting the overall show count or maybe the availability of postcards in YouTube? Thank you. David. Well, I don't want us to cut out of the bag.

So I'm going to have to dance around the first part of your question.

New experience which we will not name, We'll take advantage of the different [indiscernible] More so than anything we've done in the past.

So the immersive nature of it but the experiential nature of it will be Significantly more and significantly enhanced from the postcard experience that we put together.

Let's see what else can I tell you about it? It's like it will be iconic We expect to have announcements about it next month. Or later this month is the I guess it's March. As far as BU2 goes, that's an interesting product. Because we it is essentially attending the concert without having the band there. And so the BUT was the first of those, but we have been recording other bands. And sort of interesting part about this is it's not expensive at all.

In fact, to record a full performance of of the band is roughly less than $500,000 And then there's editing cost etcetera. So the cost of that product is quite low. And I expect that we'll continue to build up the library with that and you'll be seeing those kinds of experiences for years to come in the Sphere. Let's see, what was your what was the rest of your question or did that cover it?

It was about how the overall kind of show count might change or how we might see maybe the postcard show count change? Once the new show starts?

Well, likely is that you'll see a significantly reduced show cap for postcards. But it won't go away. And in fact, I expect that we'll be showing postcards in Abu Dhabi as well as BU2.

The It is Evergreen Products. At there's no reason for it to disappear. Having said that, [indiscernible] The way that we designed the Sphere business is for our competition to occur.

Between concerts, attractions, corporates, etcetera, And of course, the winner is the one who who brings us the most amount of AOI. So that's how the decisions will be made. Your next question comes from the line of Brandon Ross from Lightshed Partners.

Thanks for taking the questions. Good morning. Jim, on Networks, you did get the LT deal done but the landscape remains very challenged. In your view, what's the best way to go about thick Do license fees need to come down? What's the right capital structure?

Or does the industry just need a totally different local rights model?

Good question.

I don't think we know the answer to that question. And I don't think it's a question that's unique to MSG Networks. I think it's a question that really goes through all of the content providers right, across the landscape. And we're still seeing it. Right? I mean, obviously, there's a reduction in cable subscribers [indiscernible] The launch of the streaming product right. But in the end, it comes down to monetization of product, and what's the best way to monetize the product. Clearly, the traditional methods which really did a a great job of monetizing the product. Are no longer as viable as they used to be. So we do have to find underway, but I don't think that path is clear yet.

Okay. Then in the prepared, you mentioned your aim to drive cost efficiencies. Can you elaborate on that?

You've been running the business for what eighteen months now.

And presumably have a better handle on what the cost structure at the Sphere segment needs to be. Are there opportunities to take costs out at this point?

Yes. Well, not been I guess it has been just about eighteen months to the day. [indiscernible] And remember, that it's it's a brand new business.

That the no one's ever operated a business like this before. So yes, I think there's opportunities to take the [indiscernible] Think we're actually that you should expect a lot of that this year. With an improved bottom line. And I think we'll become and we are becoming more efficient and more efficient with content, we're more efficient with how we operate the business, how we schedule the shows.

Really across the board. [indiscernible] So I think that this upcoming year, will obviously be our best year yet, but it will reflect a significant change [indiscernible] in our efficiency, and our results to the bottom line. That's what we're expecting.

Great. Thank you very much.

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

Line is open.

Good morning and thank you for taking the questions. Two, just on the expansion opportunities, if I may. First, can you provide us with an update regarding the planned Abu Dhabi Sphere including estimated construction costs, when the venue is expected to open, etcetera? And then the second one is, I think you've you mentioned discussions with other markets in your prepared remarks. And just curious if you can provide an update on expansion efforts and whether or not you're considering expanding or currently in discussions to expand domestically? [indiscernible] I think I'll let Bigger answer the first part of that one.

Maybe I'll take the second part.

Sure.

With respect to Abu Dhabi, we're working very closely with DTC DCT Abu Dhabi, our partner on venue design and pre construction planning. We expect to share more details, including site as you mentioned, and estimated opening timing once DCT is finalized those plans, so we're not prepared to do that yet and need to do that in conjunction with them.

In terms of construction costs, we continue to work with DCP to finalize those plans. Look, we've learned and Jim has mentioned this before, we learned a lot during the construction of the Sphere in Las Vegas and we'll apply that obviously to those learnings to Abu Dhabi.

Most importantly, and as a reminder, our partner in Abu Dhabi is fully funding [indiscernible] As far as expansion goes, beyond Abu Dhabi, we're currently working on the architecture for a smaller Sphere. Which we think will be deployable to more market somewhere in the 5,000 seat range. [indiscernible] we're looking to take advantage of of the content we've created already and the business we've created already and bringing it out to to other markets. So I anticipate by year end we'll have more to say about that. But right now we're in the the planning and design phase. Thank you.

Next question comes from the line of Peter Cipino from Wolfe Research. Your line is open.

Hey, good morning, everybody.

A question about the Residency business.

In the first half of twenty twenty five, the Sphere set to host 55 shows I think there were 37 in the first half of last year.

We're wondering what you've learned that might have allowed you to host more residency shows this year and then I'll have another one if you would.

Sure. I mean, it's really I mean, we have a desire to do do those concerts. And the artist has the desire to play the Sphere. And it's driven by a bunch of of different factors. Probably one is most importantly is the experience that that the fans have in the street. Particularly having to do with the sound.

Which is really the best sound in the world.

So bands that value that, which is honestly most bands really want to come and play the Sphere. [indiscernible] we know that that the content costs right, are high for a band, but they're offset by the fact that it's a residency. So a band that is a touring band has to go to 50 cities right, pay for all the transportation, all of the lighting, everything moved from place to place. And you compare that cost up against the cost of of content and I actually think content is less expense. And so the bottom line for the band is they do better. And so that's part of what drives On the same subject, I wonder if longer term, if the main gating factor to residency and constant growth event volumes at even higher levels, is the produced content. And is that right? And if so, there an opportunity to make progress on making it easier to make the content?

Yes and no and yes. [indiscernible] I already kind of answered the content question, right? So I mean, I don't really see that as being a big barrier What I really see as the barrier to more concerts and it's not it's I don't know what barriers the right way, Is this competition is going to continue to go on? Right. The new show [indiscernible] etcetera, all vying for use stays the inside of the Sphere. And so if there's anything that's going to limit concerts, it's probably going to be that.

That's a good problem.

Yes, it is.

Your next question comes from the line of Ben Swinburne from Morgan Stanley.

Line is open. Thanks.

Good morning, Jim.

Wanted to continue this sort of topic of kind of mix of revenues and sort of optimizing monetization at the Sphere When you think about the longer term revenue growth drivers for the business, How do you sort of I don't know if you'll rank them for us, but but now that you've ramped up the residencies, but you're continuing to invest in in Sphere, what do you think as we look at the 2024 revenue base really drives the top line for the company on the Sphere side do you think that the residency that that answer to that question in Vegas is going to be different for the Abu Dhabi's and sort of the network of Sphere over time. Thank you.

Wow. Okay. I'll try and parse that question apart. Between Abu Dhabi and Las Vegas. I do not think that Abu Dhabi will be a carbon copy of Las Vegas when it comes to things like like residences etcetera. Although I definitely believe there will be residencies in Abu Dhabi. But I think that the content has to be customized to the marketplace. And the marketplace in Abu Dhabi is going to be different [indiscernible] the marketplace in Las Vegas. So So I think that there will be some differences. I think bottom line, going to be just as robust of a product and I was obvious it isn't Vegas, but probably with a different mix of content. All right. Let's see. Now what was the rest of your question? Basically just trying to understand how you see Vegas' revenue growth over time you did over $600,000,000 in calendar twenty four.

So short term meaning like this year, right? I think that the biggest opportunities are in the operating efficiencies and and how well we exploit the marketplace. Right, the nuts and bolts of operating the business. I think that short term is going to provide a boost. Longer term, it's an interesting competition right, about but if I had to pick one, I would probably say that that the expansion of more spheres is probably my one I think will deliver the most. I mean essentially it's a bit of a franchise model right?

And what we make to play in Las Vegas will play everywhere else. And so therefore, you get to spread the capital cost out across a greater base. And so as far as like the overall business equation goes, I think that's probably best opportunity. But there are plenty of other opportunities that are there and probably some we don't know yet. But that would be my number one.

That's very helpful. If I could ask a follow-up maybe to Robert on on the sort of liquidity free cash flow front. Obviously, we'll see how networks plays out here in a couple of months, but that's that's still a cash generating asset for the company today. Can you just talk about how we should think about [indiscernible] liquidity position and kind of funding sphere particularly if we sort of remove networks from the equation as we look at the next year or two?

Thanks for your help. Sure, Ben. As I mentioned kind of early in the prepared remarks, we are actually quite comfortable with our liquidity position. We had year end, we ended year end with slightly above $500,000,000 in cash balance, dollars 104,000,000 was with MSG. It's Network.

So we have $400,000,000 in unrestricted cash and equivalents at this [indiscernible] As Jim was, I can point out, we're actually [indiscernible] driven by kind of new offerings at the Sphere segment, but the other as well as kind of your cost initiatives, which we're putting in place, both on the operational as well as kind of on the overhead side. So we do believe that we have the potential to drive adjusted operating income in a meaningful way this year. And this will put us in a great position to invest both short and longer term into content and technology. So kind of overall, we think we are in a very sound position here.

Thank you.

Thanks Ben. Operator, we have time for one last caller.

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

Line is open.

Thank you. A couple related to sponsor June, you alluded to earlier that you brought the sponsorship sales efforts back in house. But how does that change the go to market strategy for the sponsorship and for the Sphere, if you could drill down on that a bit more. And then also kind of related to that, what are the largest untapped opportunities for sponsorship including the various types of naming rights? I'm going to turn that over to my Chief Operating Officer, [indiscernible] [indiscernible] charge of making it all work? Let him have a check. Thank you, David.

So as Jim mentioned earlier, we've brought our sales efforts back in house and we're building out that team. So that in combination with the year of learnings under our success. We really continue to see a lot of solid interest from brands to advertise on the Sphere. With all those learnings, we're going to take a fresh look at our go to market strategy. So we will be looking at a adjusting pricing and packaging, CMOs and media agencies directly. We're going to look at more targeted efforts that are aligned with the convention market in Vegas. So it's premature to say, but we are definitely more confident in the upside from here. Let me get your do you had a second question? Just what the largest untapped opportunities are in So we've announced a number of deals already, Verizon, Ticketmaster, [indiscernible] There's a lot of opportunity And in terms of ongoing discussions, the Sphere is always going to be a big draw when we have those conversations. As well as other premium inventory opportunities like entitlements and integration. When we think about the various spaces within that beautiful venue. And Sears Sphere a premium global brand. So we're going to continue to be protective of that brand and thoughtful in terms of who we partnership partner from with from a sponsorship standpoint naming rates and the potential there still remains, but I think that's going to be a pretty high bar if we move forward there.

I don't really think to be honest that you're going to ever see a name in front of Sphere. Right now, you see a name after the sphere. [indiscernible] [indiscernible] But I don't think that you'll ever see a name in front of it, just like there's no name front of Madison Square Garden. The value of the brand equity is too high right, to sacrifice that to a naming opportunity.

Makes sense. Thank you very much.

And that concludes our question and answer session. I will now turn the call back over to Ari Danes for closing remarks. Thank you all for joining us. We look forward to speaking with you on our next earnings call. A good day.

This concludes today's conference call. Thank you for your participation. You may now disconnect.