Q1 2024 Sphere Entertainment Co Earnings Call

Thank you for holding and welcome everyone to the sphere Entertainment company fiscal 'twenty 'twenty four first quarter earnings conference call.

All lines have been placed on mute to prevent any background noise after that.

The speaker's remarks, there will be a question and answer session.

If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.

If you'd like to withdraw your question again press the star one.

Thank you I will now turn the call over to Ari Danes Investor Relations Mr. James. Please go ahead.

Okay.

Thank you good morning, and welcome to spear entertainments fiscal 2024 first quarter earnings Conference call.

Today's call will begin with our executive Chairman and CEO, Jim Sullivan, who will provide an update on sphere.

This will be followed by an update from Andrea Greenberg, President and CEO of MSG networks. I will then conclude with a review of our financial results for the period.

After our prepared remarks, we will open up the call for questions.

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 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 four and five of today's earnings release, we provide consolidated statements of operations and a reconciliation of operating income to adjusted operating income or AOI.

Our non-GAAP financial measure with that I'll now turn the call over to Jim.

Thank you Ari and good morning, everyone.

Our company's next chapter officially got underway with the opening of sphere in Las Vegas at the end of September.

Many years in the making his debut drew the world's attention generating significant presence in social media coverage in fact, our estimated total reach in the days immediately after opening was approximately 7 billion per day.

Guest artists advertisers and potential sponsors are now able to experience firsthand this new product and we are very happy with the response.

Our journey with fear is just beginning and while it will take some time for <unk> to realize its full potential we're off to a great start.

As you know you to open the venue and are now in the midst of their multi show runs.

Every year to show so far has been sold out and in light of the demand. We recently announced that we are adding 11 more shows physical take the bands Ron It's fear into February with a total of 36 performances.

The incredible response to Youtube Ron at sphere has only increased interest from the artist community to play the venue.

And we're having conversations with artists across a wide variety of genres, including discussing runs of varying lengths.

We expect to host two additional resident fees in the second half of this fiscal year and look forward to sharing more detail as youre aware, we have designed sphere to be busy 365 days a year with multiple events per day on many days a core component of that strategy is the sphere <unk>.

<unk>, which debuted on October six with featuring postcard from Earth from Academy Award nominated Director Darren Aronofsky.

We've been very pleased with the reception to the sphere experience from our guests as well as the critical acclaim postcard through Earth.

Deeper, it's captivating visuals and use the venues immersive technologies to engage the senses and as yet our audiences.

This has translated into strong ticket sales to date through the end of October we have growth over $1 million in average daily ticket sales each day as.

As we learn more about our audiences in the venue, we're already planning ways to continue enhancing the signature content category.

This is the first of what will be different iterations of this we are experience that includes populating the atrium with additional technology exhibits and his time, introducing new cinematic content as we keep sphere at the forefront of innovative experiences.

Youtube and the sphere experience, we'll both take a brief pause next week when we welcome Formula one and its inaugural Las Vegas Grand Prix to our grafts were excited to showcase for you or to the millions of Formula one fan so we'll be watching around the world.

As part of our agreement at one will have a multi day takeover of sphere, including the use of the extra sphere display race related content compelling brand activation.

As I'm sure you've seen our momentum has been building with respect to advertising on the extra sphere.

In early September we welcome to our first official brand campaigns with Youtube and support of NFL Sunday ticket.

Youtubes two week campaign creatively transform exosphere into helmets have all 32 teams ahead of the start of the NFL season. This was quickly followed by campaigns from other prominent brands, including Playstation meta Xbox and Coca Cola as well as artistic content.

Now the artist will peak and at all.

As anticipating advertising campaigns on the extra sphere are being shared widely on social media. This amplifies the platforms overall reach well beyond the millions of tourists and local residents in Las Vegas significantly enhancing the value proposition for our partners.

We have a healthy pipeline of advertising commitments for the excellent year and over the coming months, you will see a constant rotation of impactful campaigns from many prominent global branch.

We are expecting a record setting revenue week for the excellence, we are around Super Bowl in Las Vegas. This February.

We're also in active discussions with a number of blue chip brands about potential marketing partnerships and look forward to sharing more on our progress in.

In summary, we are already seeing <unk> ability to inspire all in wonder and the venue has become a landmark destination in Las Vegas, but we've only just begun to scratch the surface and are excited by how much further we can take this new entertainment medium in the future, including some new markets. So.

While you should not expect the venue to reach its full economic potential right away. Our momentum is building with artists promoters sponsors and guests from across the globe and we remain confident in the long term outlook for sphere.

Before I turn the call over to Andrea We announced last Friday that Gautam Ranjit resigned from his position as EVP, Chief Financial Officer, and Treasurer Affective November 3rd we thank him for all of his contributions during his time at the company and wish him well in his future endeavors and with that I will now turn.

Turn the call over to Andrea.

Thank you Tim and good morning.

With the 2023 'twenty four NBA and NHL regular seasons underway. We are excited to be back with extensive coverage of our five professional sports team.

New York Knicks Rangers, and Islanders, New Jersey Devils and Buffalo Sabres.

We are also pleased to announce that we recently reached a multiyear rights renewal with the New Jersey Devil.

This extension, which begins next season enables MSG networks to continue to offer a full slate of Devils game as well as compelling pre and post game coverage and other devils related programming across all of our platforms.

And this thing than local fans now have the opportunity to watch our award winning programming not only through their traditional linear TV package, but also through our new direct to consumer and authenticated streaming service, which launched in June.

This product allows us to reach the millions of home in our region, who do not currently receive our network through winter.

And Additionally, authenticated subscribers are participating TV operator.

And have the option to subscribe to MSG class directly by purchasing a monthly subscription for approximately $30.

Annual subscription for approximately $310.

They also have the option to purchase single game for 999 each.

First of its kind offering for any regional sports network.

Leading up to start of the season, we began marketing our offerings with targeted linear telco.

And digital channels.

While it's still early we are pleased with the initial interest we have seen so far including for our per game offering which offers a unique avenue for entry point transaction wider reach and upsell opportunities.

As we add subscribers and learn more about their screening behavior. Please.

We will further enhance our marketing strategies, even more effectively grow and sustain our subscriber base.

On the advertising front, we plan to build on last year's success.

Included record advertising revenue for our teams during the regular season and growth across our non ratings based initiative.

We started the season with a strong base of returning advertisers under multiyear commitments and have already made strides in new sales, but the introduction of our D to C offerings, including NFC pluses, new presenting partnership with the league.

So while the media landscape continues to evolve.

Believe with our premium content and commitment to innovation, we are uniquely positioned to continue driving value for our partners advertisers and viewers alike.

With that I will now turn the call back over to all right.

Thank you Andrea.

As you are aware fear entertainment completed the spinoff of MSG Entertainment in April and completed the sale of its majority interest in Tao group hospitality in May.

Our fiscal 'twenty four first quarter financials, therefore represent the first quarter of results on a fully standalone basis.

I'd also note that these results are not fully comparable on a year over year basis, while results for the prior year first quarter reflect MSG Entertainment and Tao group hospitality as discontinued operations.

Year period does include certain corporate overhead costs that sphere entertainment did not incur after the date of the spin and does not expect to occur in future periods, but did not meet the criteria for inclusion in discontinued operations.

Turning to our results.

On a total company basis, we generated revenues of $118 million.

And an adjusted operating loss of $57 9 million for the fiscal 'twenty for first quarter.

The sphere segment generated revenues of $7 8 million and an adjusted operating loss of $83 1 million.

Revenues, primarily reflected event related revenues from concerts at the end of the quarter as well as the launch of Exosphere advertising campaign in early September.

The adjusted operating loss of $83 $1 million, primarily reflected SG&A expenses.

Corporate overhead expenses related to sphere studios and associated content and technology developed.

As well as costs related to operating Las Vegas venue.

With the venue now open steers impact on our financial results will really begin to show in our fiscal second quarter, including Youtube Multimode run the <unk>.

Debut of the sphere experience featuring postcard for Merck <unk>.

The impact of additional episodes of your advertising campaigns and Formula one's multi day takeover in November.

Turning to MSG networks.

This segment generated $110 2 million in revenues and $25 $2 million in AOR, which represent increases of 10% and 24% respectively as compared to the prior year quarter.

The decrease in NOI, primarily reflected lower affiliate revenue and higher rights fees expenses, partially offset by lower SG&A expenses.

Turning to our balance sheet as of September 30, we had approximately $434 million of unrestricted cash and cash equivalents and our debt balance was approximately $1 2 billion.

During the quarter, we received $65 million of proceeds from the delayed draw term loan with MSG Entertainment, which we then repaid using approximately $1 9 million retained msce shares.

We also received approximately $257 million in proceeds from the sale of our remaining approximately $8 2 million share position in MSP.

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

Certainly at this time, if you'd like to ask a question. Please press star one on your telephone keypad.

Our first question comes from the line of Brandon Ross with light shed partners. Your line is open.

Thanks.

Hey, Jim.

With the sphere urine completely unchartered territory now and.

I'm sure things have been a little bit different than what you expected since the opening.

Can you tell us what's exceeded your expectations and what disappointed you or may need some fine tuning.

Hi, how are you.

It's.

Well, mostly it's been good.

The product.

Came out and it was very well received.

Yes, and as probably the most important thing that.

If you look at with at least from my point of view.

Okay.

The social media things sort of really surprised us.

We thought we would do well, but it.

It really globally and.

And so that aspect of.

The businesses has exceeded it on the.

On the absolute side I'd say, it's mostly operational right things like ingress egress.

Turnover time between the concert in the sphere attraction.

All are.

Got its challenges in the opening but seems to be getting better we really.

The whole marketing model is we're still learning so much right now.

But as.

As I said in my comments and what we're doing on an annualized daily basis from ticket sales.

Pretty good not as good as I'd like it debate, but it's still early and there's a lot more refining to do when.

What the capacities are when the shows are running that those kinds of things. So I expect those numbers.

Improve.

And.

But all in all I'd have to say it was a pretty good success, they were pretty happy with the Opex.

Okay, great and you've been clear that Las Vegas is going to be the first of many fears. Since you opened has there been any movement in negotiations for additional locations and maybe what regions of the world should we expect the next set of venues.

Well.

There is certainly a great deal of interest.

And.

And substantive discussions with several mark.

Non which I can discuss here.

Today, but.

I will say that it does look like sphere will be a global brand.

And so we should expect the expansion globally, rather than just in the U S market.

Great and then if I could just sneak one more in I have to ask is there anything more you could share on why your CFO resigned.

Okay.

Yes.

I think it's.

<unk>.

You started off your comp your quest.

Question with I mean, it's a new business.

It's pretty challenging.

As.

I think we both.

Okay. So the conclusion that it probably wasn't a great fit.

And.

Thus we are there.

Some change coming but.

I don't.

There's no issues with with where.

Reporting or any of that stuff thats all.

That's all in good shape, it's much more about.

Just to fit a lot there's a lot there I will say the CFO job.

That's fair.

The operational component.

Probably we didn't foresee.

While we did Gallo.

So we're moving on.

And I don't expect much to change.

Thank you.

Ben Swinburne with Morgan Stanley Your line is open.

Hey, Jim Good morning.

A couple of questions.

Sticking with the Unchartered territory theme from Brandon as we as we track the business this year.

In the early quarters, how should we think about the amount of revenue you need to generate a profit against the kind of cost base that we're seeing at sphere and do you think we'll see that revenue during the fiscal 2004 year or do we need to think about maybe a longer duration.

Yes, sure that look they have been.

The spirit is already profitable.

The sky it depends on how you calculate that we're looking at the segment I guess, yes.

Yes.

The question is is it going to be profitable enough to.

As suggested by the capital expense that we put in.

We do we do think we do think it will be but it's got to develop.

Yes.

Watch.

If I'm watching the company I'm looking at you know.

How is the sphere experience doing radar sales continuing to hold up right.

Artists.

Youtube thing is just sort of off the charts right.

And I think it's challenged a lot of artists right.

<unk> that so you're liable to see.

More great brands and an <unk> comment.

Those are the components that will make the.

The projects successful I will say that.

The way we designed this business was for the sphere itself to support.

The expense structure underneath it.

So that.

It doesn't have to be expansion.

In order to justify the expenses that go along with business, particularly the production expense et cetera.

Sure.

So but.

It's fine tuning.

An economic equation.

And we're bullish that we are going to have more spheres.

And that of course will.

To expand our revenue base, which we can justify that the expense base I mean, we will probably get more aggressive as we as we rollout more spears will get more aggressive with content.

And keep trying to make the product bigger greater more appealing.

I think theres a lot of room for that project.

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

That's correct.

Now if you spend like drunken sailor on the content, you're going to it's going to.

We own it all.

Got to be a little difficult you got you've got to be a little discipline, a moderate but you still want to have great product, we still want to explore the medium.

<unk> et cetera, so as that balance and the.

And we're paying a lot of attention to it.

That balance will have a lot to do without successful the company yes.

Terrific. Thanks, so much.

David Karnofsky with Jpmorgan Your line is open.

Hey, Thank you just a few unsphere.

Assuming there are more sphere builds maybe financed by your partners. How do you think construction cost by compare to the initial venue.

Given how much impact the pandemic had can you lower that expense that the capital return profile for partners potentially looks different.

Yes, I mean.

Yes.

The team always talks about what they call the first pancake effect.

All right.

So the first pancakes, a little little difficult.

So we're moving onto our sector pancake.

And we do expect it to the cost last we also think we can make improvements in the product.

Okay and then just following up on the original content I'm interested how long do you envision a show like postcard running and at what point do you start to think about replacing that show and I don't know if you can ballpark kind of a figure for what production expense should look like for some of your original thank you.

So.

Right now.

We're thinking that.

The current show will run about a year.

But what I want to point out that the.

Just if we if we put in a new show, which we will do that.

It doesn't obsolete the ultra.

Especially as you talk about new spheres, right et cetera.

So those marketplace, obviously haven't seen.

Postcards et cetera, So I mean, there will still be very viable there and the way in Las Vegas market as I expect that we'll do versions of postcards for for years to come, but probably and lesser less number of extra patients on an annual basis as we feather in.

The new concept.

So what was the other part of your question.

Was there another part don't you could ballpark.

Park, the production expense and whether that would be incremental so yes.

Yes.

Again production by like the one with Darren again, Thats, another sort of first pancake kind of thing.

<unk>.

I expect that we'll be able to do more exploration of the medium, but also I think we are we will definitely be able to reduce costs.

What it takes to produce.

Producing shows.

Thank you.

David Joyce with Seaport Research partners. Your line is open.

Thank you.

A few questions for you. Please Jim first what are your early learnings on the postcard familiar in terms of.

What are the variables that you might fine tune in terms of number of events pricing.

The seating capacity and I'll have some follow ups.

Well I think we started off David pretty conservative.

Right.

With all of those with all of those factors.

There are shows capacity et cetera.

So explore expanding.

Look the thing about the sphere experiences that.

The margin is really really hot because you've already invested obviously in the building you've already invested in the content and the creation of the content and the actual cost of running that Ronnie.

It's very very well.

So yes.

So we're trying to obviously maximize out the.

Number of.

Customers that come in Western World and I think we priced low to start off with right. So.

There's probably some pricing flexibility in that.

The marketing is also.

We're just we're really still learning about that the Las Vegas market is I mean, it wasn't a perfect market for us to open them, but because it has an ever regenerating marketplace of customers right up to like 50 million people conclude that market.

Every year.

And so.

Our ability that reach those people right.

And sell them a ticket and interest in our products that were still refining so.

So I think there's I think there's upside both in in all of those parameters marketing number of shows price per show price per ticket et cetera.

Those are the things that we're studying heavily now and I expect to see improvement.

Okay, Great and the second question is on naming rights, that's already referred to as the spirit the Venetian but there are there other than leeming opportunities surrounding the asset.

Yeah.

There are.

I think we're going to be pretty careful about that.

Let's see.

This fear as already.

As a sort of global profile right.

And so we don't want to we don't want to lose any of that so.

So naming rights would have to be something thats consistent with that kind of strategy.

So that's.

It's not.

No it's not purely financial in terms of its consideration.

Understood and finally curious about the XO sphere advertising opportunity and logistics basically like how many ads could you run or how long are the AD campaigns typically going to be or also I'd be interested in understanding what's the.

Production time, and the expense involved in producing.

Sure.

He is a production time.

I don't think its really that much different for advertisers than other mediums right.

I mean, you can do it really fast.

Need to right.

Yes.

But most advertisers to clients or take their time, but thoughtful about it I will say that.

A different media, it's fair call right.

Its three dimensional.

So youre content apps liquid form does that take.

Flat screen advertising.

Our content and just.

Playful atmosphere it doesn't look good.

Yes.

It won't bring you the value that you're that you are <unk>.

Spending at Lithia.

No I mean, when an advertiser comes on the sphere and they do a great piece of content on.

It goes viral right away.

And on the Advertiser gets all of Israel extra benefit.

Lot of exposure right, so, but you have to Dupont that that does that.

So there are some advertisers are spending a lot of.

I am and money on making sure that there.

Have something that will be.

Totally.

The resonate with.

With the marketplace.

Others are a little a little quicker than they need to get their message out, but but all of them seem to be wanting.

Wanting to take to get that that global sort of Av.

Push with it.

So they are there.

We're paying attention to their creative we've seen some really great creative.

From some of our advertisers sort of blowing us away and it's interesting because that means that they don't want to talk too much about but some of it based on through our <unk> studios some of it they did on their own right.

And.

The results so far pretty good.

And do you have any requirements for minimum AD campaign length or.

Requirements on how many ads per day or per hour.

Well.

Yes.

This is an exactly an answer to your question but.

We do have a kind of a standing rule.

With the with our sales force that 50% of the inventory is dedicated to our community.

And the other 50% is dedicated to sponsorship so that.

So if you're if you're visiting Las Vegas, or you're looking at it on your social media Theres always something interesting auto sale again key even to.

It's trying to.

Reached the global community.

So far that's been that's been pretty successful.

But I think we're going to stick to that 50, 50 formula right because I think in the long run that will make it.

But more valuable.

I appreciate it congratulations.

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

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

Thanks, so much.

Maybe a different angle of attack here.

Networks few questions I guess could you give any color on the uptake of subs for the OTT product across the three pricing tranches.

And then I have a couple of follow ups.

Hi, Paul.

Well well MSG plus initially launched back in June we really only began our targeted marketing efforts at the beginning of the season. So it's still relatively early for meaningful numbers, but I can say, we're very pleased with the initial response.

<unk> for the early demand, we're seeing for our per.

Per game offering.

We've as I mentioned teen brand Advertiser interest they have a new presenting partnership with the lead there and new advertisers to our brand.

No.

All in all we continue to expect <unk> to be value accretive to our business.

Thanks, Andrea and then.

In the prepared remarks, you noted the Devils.

<unk> renewal, we've seen pressure in the <unk> space to the downside we've seen pressure in the national REIT space to the upside.

Any color you could give on how this deal shook out for you on right Steve.

Sure we've had a we've had a long and productive relationship with the Devil.

Can say, we're pleased with the renewal term.

Beginning next season.

We can't get into specifics.

But certainly.

And having these discussions both we and the Devil.

Mindful of the changing pay TV environment.

Great and if I could sneak one last one in here on networks just conscious of the.

Networks that.

So October 24, our maturity any progress there on refinancing or anything that we should.

Keep in mind is as that date approaches.

Okay.

Hi, Paul it's Ari so with respect to the refinancing of the network's term loan. It remains early in the process. As you noted the loan matures in October 24, we are in constant contact with our lenders. There are a number of potential options with respect to the ultimate refi and we'll know more in the coming months.

Great. Thank you.

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

Thank you all for joining US we look forward to speaking with you on our next earnings call have a good day goodbye.

This concludes the sphere Entertainment company fiscal 2024 first quarter earnings Conference call. We thank you for your participation you may now disconnect.

Okay.

Okay.