Sphere Entertainment Co.

Good morning and thank you for standing by. Welcome to the Sphere Entertainment Company first quarter 2025 earnings conference call. At this time, all participants are in a listen only mode. After the speaker's remarks, there will be a question and answer session. I would now like to turn the call over to Ari Daines, Investor Relations. Please go ahead.

Thank you. Good morning and welcome to sphere entertainments fiscal 2025 first quarter earnings conference call. today's call we will begin with our executive chairman and CEO Jim dole will provide an update on the business. Robert Langer 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 in the investor 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 filing for 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 five and six 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.

Thank you, Ari, and good morning, everyone. Today, we reported positive adjusted operating income in the March quarter for the sphere segment. And as we look ahead, we're confident that we can continue to drive growth this calendar year. We will get there by executing on the priorities we have previously outlined. These include hosting an array of concerts and other third-party events, optimizing the go-to-market strategy for the exosphere and sponsorships, and driving operational and cost efficiencies across our business. We are also focused on creating a diverse slate of original content for this new medium. This past quarter, we welcomed over half a million guests to the Sphere Experience, bringing total revenues for our original content category to over $500 million since its debut in October of 23. These results continue to demonstrate the importance of original content to Sphere's business model. We have multiple projects in development, and we remain on track to debut our next Sphere experience this year. We're also making progress in attracting a variety of music genres to the Sphere this year, including our first country and pop residencies. Due to strong consumer demand, we have routinely seen acts at shows at the venue. For example, both Dead & Company and the Eagles are on pace for over 40 performances at the Sphere. the equivalent of a national arena tours. In addition, Sphere is gaining traction as a platform for brands. This includes corporate takeovers of the venue. For example, this past January, during CES, we hosted a keynote event from Delta Airlines. We also recently announced new marketing partnerships with Pepsi and Google. Both of these agreements include significant exposure on the ExoSphere, which has continued to see strong overall demand. Turning to MSG Networks, last month MSG Networks and its lenders agreed to reduce and restructure its existing debt obligations. The proposed transaction would also see the Nixon Rangers reduce their local rights fees with MSG Networks. All parties have agreed to work together to support and finalize the transactions by June 27th. And with that, I would like to turn the call over to Robert.

Thank you, Jim. And good morning, everyone. For the March quarter, We generated total company revenues of $280.6 million and adjusted operating income of $36 million. Our sphere segment generated revenues of $157.5 million as compared to $170.4 million in the prior year period. The decrease was mainly driven by lower revenues from the sphere experience, as well as lower revenues from advertising campaigns on the exosphere. As a reminder, we benefited from the Super Bowl in Las Vegas in the prior year period, which included a record-setting advertising week for the Exosphere. These revenue decreases were partially offset by an increase in event-related revenues with 10 additional concerts in the quarter, as well as the impact of Delta's corporate takeover during this year's CES. Results for the quarter also include the impact of revenues related to our plans to bring the world's second sphere to Abu Dhabi. Adjusted operating income of $13.1 million was up modestly as compared to $12.9 million in the prior year period. This reflected the decrease in revenues and higher direct operating expenses more than offset by lower SG&A expenses. The increase in direct operating expenses was primarily due to higher event-related expenses and venue operating costs, partially offset by lower expenses associated with the Sphere experience. SG&A expenses for the March quarter were $96.4 million, a decrease of $12.6 million year over year. This includes the impact of the company's focus on driving cost efficiencies this year. Turning to MSG networks, the segment generated $123 million in revenues and $22.8 million in AUI in the March quarter. This compares to $151 million in revenue and $48.6 million in AOI in the prior year period. The decreases in revenue in AOI mainly reflect the impact of the non-carriage period by Altice from January 1st through February 21st, as well as lower distribution revenue driven by an approximately 11.5% decrease in subscribers. Turning to our balance sheet, as of the end of the quarter, we had approximately $465 million of unrestricted cash and cash equivalents. including approximately $110 million at MSG Networks. Our debt balance was approximately $1.34 billion at quarter end. This reflected $259 million in convertible debt and a $275 million credit facility related to Sphere in Las Vegas. It also included approximately $804 million under the MSG Networks term loan. As Jim discussed, MSG Networks and its lenders have reached a proposed amendment with respect to its outstanding debt. This proposed transaction would also result in amendments to the local rights agreements with the NICs and the rangers. We'll continue to keep you updated as all parties work towards completing these proposed transactions by June 27th. And with that, we'll now open the call for questions.

At this time, if you would like to ask a question, press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from Brandon Ross with LightShed. Please go ahead.

Hi. Thanks for taking the questions. I thought one of the more interesting announcements in the quarter was your work with Google AI and creating . And just want to hear a little bit more about that relationship. And it made me wonder whether AI could be more generalized here, whether it's lowering creation costs, or I know a barrier for .

We'll listen to the next question and come back to him when he can get a better connection. Yeah, we'll do. Brandon, you're coming across very choppy. Do you want to try that one more time? And if not, maybe we'll circle back to you later in the call.

Your next question comes from David. with JP Morgan. David, please go ahead.

Hi. Can you hear me? Jim would be interested to hear a bit more on what you're observing for the tourism market in Vegas right now, just kind of given the macro. Has there been any notable change in visitation or spending worth calling out? And then for SPHERE, do you have a sense of your original content or residencies, the percentage of guests coming from international markets, and any kind of mid-shift there to date?

Thank you. I can answer. Well, let me answer the first one. Maybe you can give me that second one again. Look, Las Vegas has over 40 million visitors every year. So far, we've seen that international accounts for a little over 20% of the guests to Sphere and then 10% for concerts. We really haven't seen any change, right? So I think, you know, there's a little bit of a chicken little going on in our economy with that, right? Maybe later on, we'll see some substantive, you know, uh, reaction from, uh, from the marketplace, but right now we're, we're really not seeing it. So, um, and, and even if we did, it doesn't account for that bit, that big of a, uh, of a difference. Right. And, uh, you know, I think in general, when, when it comes to concerts, demand exceeds, um, you know, uh, capacity. So we have room to absorb any issues from that should they occur.

What was the second part of your question? The second part was on international visitation, but the first part was just on forward demand generally.

Did I just answer that? Yes. Thank you. Okay. Thanks, David.

Your next question comes from Steven Lazachick with Goldman Sachs. Please go ahead.

hey thanks for taking the questions uh jim would be interested uh if you could talk a little bit about the opportunity you see for the new sphere experience shows oz and from the edge to drive higher revenues compared to what that business is is running out today uh just curious any early expectations on drivers like show count pricing sell through um would be would be curious and your thoughts there well we we are you know i mean the postcards from earth was our

what we call around here our first pancake. So, yes, we're expecting the second pancake to be better. Maybe we'll add some blueberries in. But, yeah, no, I think, you know, both productions take better advantage of the medium, right, are going to be more experiential, more impactful, and so therefore a better product. And along with a better product, yes, comes probably higher ticket prices, et cetera. And yeah, we're expecting great things from both of those products. So I think the answer is yes.

Thanks for that. maybe just on residencies and not sure how much she can say at this point, but, uh, would be curious in an update on the opportunity to add concert residencies and 25 above and beyond what, what you have today. And then any early look into the slate into 26.

So, um, you know, we're, we, uh, we try not to get ahead of the, of the announcements, right. The, the, but I'll give you an overall characterization with the, uh, We still are in a great position here. We're in discussions with multiple artists. We have more demand from artists than we have availability of slots, which is good for us, but we're trying to accommodate everything. The other thing that's going on is that the artists who have been here are extended. Right. Once they get used to playing the sphere, for an artist, it's a pretty good situation. They don't have to travel. They don't have all the overhead costs that go along with that. They get similar kind of revenues that they do for when they mount a tour, but without a lot of the expenses and a lot of the headache. And then, of course, probably most important is the experience that they're providing for their own fans. which is really over the top. So, you know, I don't want to get ahead of ourselves in terms of announcements, but the pipeline is very full. I'll put it that way.

Thank you.

Your next question comes from Peter Cepino with Wolf Research. Please go ahead.

Good morning. Thanks. A question about your sphere expansion around the world. Is it fair to assume that most of the conversations that you are having about future spheres are with parties outside of the United States? And if that's the case, has the broader geopolitical tension led to any change in sentiment with these parties and specifically in Abu Dhabi?

Thanks. Sure. Yes, we're definitely talking worldwide about SPHERE. But we do have another initiative that I think is very important that we're undertaking this year. And that is we're right in the middle of designing a smaller SPHERE, right, that would be deployable to markets inside and outside the U.S. The strategy there is to build faster, cheaper, have a ROI that, you know, not only justifies it, but makes, hopefully, investors enthusiastic. I'm enthusiastic. And so, I mean, I expect that by the end of the year, we'll be talking about that new smaller sphere product as another way of expanding the business, as well as continuing to build like we are in Abu Dhabi and in other markets.

Thanks, Peter. Operator, we'll take the next caller.

Your next question comes from Peter Henderson with Bank of America. Please go ahead.

Good morning. Thank you for taking the questions. I have two. First, for Jim, I mean, you recently entered into the transaction support agreement with lenders that's going to reduce the debt and local media rights agreements to fees for the NICs and the rangers. Can you just discuss the long-term plan for MSGN and the potential for strategic transactions, including potentially an outright sale or merger with other RSNs? And then the second question is for Robert. Expenses for SPHERE came in better than forecast in the quarter. I'm just wondering how you think about or how we should think about costs moving forward and the opportunity for you to take out more costs. Thank you.

All right. I'll go first. You go second. All right. So in regards to the networks, um we're we're pursuing a new model um the uh which is you know a bit of a hybrid between the old traditional linear distribution and and the streaming distribution and uh that has not i mean this is this is something that's facing the entire content world not just us not the uh so we have to learn how to how to make a real a business out of that let the uh um and the idea of partnering with other other groups that are in the same business probably i would say you know is of interest to us um the the uh but you know we're first we're happy to get through the restructuring because under the old structure there was no way that we could have pursued that business that they uh um so that they uh So now having been through, now getting through that, and we're not through it till the end of June. We're going to focus on the new model. We're going to look at the, yes, the possibilities of strategic partnerships, all keeping an eye on, you know, what will the consumer really, you know, latch onto and accept as a place to come view all these great events.

Peter, on your question about cost, so this year we're really quite focused on driving profitable growth. And one of the priorities here is to optimize our infrastructure. This includes on the one hand to identify areas for potential cost efficiencies, while on the other hand, we obviously want to maintain our structure where we can deliver on our vision for global network spheres over time, which offer a diverse and, you know, kind of different, immersive and exciting set of experiences to our guests. So heading into this year, we identified a number of areas where we are able to reduce our SG&A costs, such as corporate support functions, and that's what you see reflected in our Q1 results. As we are only our second full year of operations, we'll obviously continuously look for other efficiency where it makes sense for us, but likely we'll also find new opportunities for growth and reinvestment as well.

Thank you. Another question?

Your next question comes from Brandon Ross with LightShed. Brandon, please go ahead. Welcome back, Brandon.

Go on, Brandon.

Brandon Ross, your line is open.

I think Brandon must be at Boston. I heard all their Wi-Fi and connectivity went down last night. Sorry, Brandon. In anticipation of Brandon's question, I'd like to just talk about something. And that's really the entire business. When you all look at this business and when you invest in it, it is not the venue business. In fact, we built this business on a disruptive model that utilizes the venue 365 days a year. right and even had multiple events during you know during a day so you know key to like concerts that the concerts would not be as profitable as original content right the the if if on a concert day we only did the concert right but like with the eagles right the and with the dead we're running two shows two original content shows on the same day as the as the uh um know as the concert and that that makes for a very profitable day the and so um so when you look at the company and it's and it's development when i look at the company and it's development it's all about growth right it's all about our ability to take what we see as a great product and then expand it out across the globe um and when so do not expect us right for instance and questions about how we use our capital, right, it's going to primarily be towards growth, right, so that we can make the business bigger and reach the goals that we have for it versus, you know, the necessarily returning capital to shareholders, right, et cetera. So, and I take a look at this new project, of building a smaller sphere. And there's a real, I think, real opportunity. There's tremendous amounts of opportunity inside of this business, inside of this medium. And we'd be foolish to sit there and say, okay, we're good here and call it a day. And so when you look at the company, that's how I think you should look at it. That's how I look at it.

Operator, is there any other analysts in the queue?

Yes. Your final question comes from David Joyce of Seaport Research Partners. David, please go ahead.

Thank you. I wanted to ask about the exosphere and sponsorship. Could you please update us on the go-to-market strategy and your outlook there? Any further color on the sponsorship activations you're seeing or expecting that would all be helpful? Thank you.

I think Jen Koster, our COO, is on the call. Are you on the call, Jen?

Yes, I am, Jim. Can you hear me?

Are you ready to answer this question?

Sure. Thanks, David. So as Jim mentioned earlier in his opening remarks, we have been taking a fresh look at our go-to-market strategy, and that includes a number of focus areas. So we've been evaluating changes to our packaging and pricing, establishing and expanding our relationships with our media agencies and really thinking about more targeted efforts related to the convention and conferences market in Vegas. So I'm pleased they were making progress in all of these areas. So first, when we start pricing and packaging, we're introducing new offerings and these offerings are really aimed at better maximizing value for advertisers. So we've got new features like 15 second bumpers or 60 second ad spots. instead of the previous 90-second ones we were using, and that's going to allow for more frequent exposure and delivery across our social media platforms, which is, you know, highly advantageous to our advertisers. We are also making progress when it comes to media agencies, and we'll have more to announce in the coming months, but looking to formalize those relationships so that we really can lock in those upfront ExoSphere ad buys so that we can create that recurring business model. The focus on convention and conference market, we are really seeing that resonating with our brands. And so you saw that in this past quarter results, and that reflected advertising buys during CES as well as the Adobe Summit. And finally, when we think about sponsorships, we really remain focused on building that because, again, it's this recurring book of business. And as Jim mentioned earlier, we've announced multi-year partnerships already this year with major brands like Google and Pepsi. So we're making progress with brands, and I really expect to have more to share in the coming months. So thanks for the question.

Great. Thank you very much.

That will conclude our question and answer session. I will now turn the call back over to Ari Daines for closing remarks.

Thank you all for joining us. We look forward to speaking with you on our next earnings call. Have a good day.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.