Good morning, and thank you for standing by, and welcome to the Sphere Entertainment Co. fiscal 2024 second quarter 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 Danes, Investor Relations. Please go ahead.
Thank you. Good morning, and welcome to Sphere 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. This will be followed by an update from Andrea Greenberg, President and CEO of MSG Networks. And then Dave Burns, 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 AOI, a non-GAAP financial measure. With that, I'll now turn the call over to Jim.
Thank you, Ari, and good morning, everyone. As we said from the very start, the vision for Sphere 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 Sphere, we wanted to design a venue that would be busy 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 Sphere Experience, drove this volume, grossing more than $1 million in average daily ticket sales at a high margin.
While the Sphere 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 Sphere and other events at the venue. U2's 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 Exosphere. In November, we demonstrated what Sphere 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 Sphere 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, and 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 over time, across multiple platforms. This includes a network of Sphere venues around the globe. With positive worldwide reaction to Sphere, 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 medium. Before I turn the call over to Andrea, I'd like to welcome Jennifer Koester, who was recently named President of Sphere Business Operations.
Jennifer has an extensive background of driving growth at premier technology and entertainment brands, including most recently at Google. At Sphere, she will lead the development execution of all business operations. I look forward to working with her on 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.
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 2023-2024 NBA and NHL season, which also mark the first time we're making our games available through our direct-to-consumer authenticated streaming service, MSG+, 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 D2C 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+, while Moderna signed on as a presenting sponsor of our New York Islanders broadcasts. These new partners join 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 multi-year agreement with one of our major affiliates. 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 YES Network have developed expertise in technology with their direct-to-consumer launches.
With this 50/50 partnership, we'll 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 that 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 YES Network on building this new opportunity. With that, I'll turn the call over to Dave.
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 spin-off of MSG Entertainment last April, and the sale of its majority interest in TAO Group Hospitality last May. Results for the prior year's 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 2024 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. The Sphere Experience currently features Postcard from Earth, which ran 191 times during the quarter. Our results were also positively impacted by U2's multi-month run. And while the band's shows are drawing to a close, we look forward to hosting Phish and Dead & Co. later this fiscal year.
We also benefited from Formula 1'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 venue's Exosphere. 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 event and are looking at a record-setting advertising revenue week for the Exosphere. 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 development.
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, the segment generated $146 million in revenues and $37 million in AOI, 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. The 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.
Thank you, Dave. Operator, can we open up the call for questions?
... Thank you. At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. If you would like to withdraw your question, press star one again. We'll go first to Brandon Ross at Lightshed Partners.
Hi, good morning, Jim. In your prepared remarks, you talked about substantive discussions for international locations. I 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?
Okay. Well, gating factors. They're really, you know, I don't really see gating factors, right, in exploring these markets. It's more like an evolution, and we're, I think we're pretty much on time. But I think that the one thing, Brandon, is that, you know, this is the first full quarter of operations that the Sphere has gone through, and so we're proving out the business model, right? You know, by doing that, you're making the product more attractive, right? There's more confidence in it, and it removes one of the gating factors, which would be, is this thing gonna be profitable?
And I think that we're, you know, this quarter's results are showing that, yes, we are gonna be profitable, and we are profitable. And now we just need to continue to negotiate with those markets that, you know, have the keenest interest, and we are doing so, and I expect that we'll soon conclude an arrangement.
Great. And then for MSG Networks, the debt is due in October. How do you think about the refinancing in terms of ensuring that that Sphere segment has sufficient flexibility to grow and isn't encumbered by a challenged asset 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.
Well, I'll let Dave answer the first part of the question, and I'll answer the second one.
Sure. Hey, Brandon. With Sphere, 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 gonna be looking to do anything to hinder our ability to drive growth for Sphere. You mentioned the refi. Yes, it's due in October. Just to touch on that, we are currently in regular contact with our lenders. We're pursuing a number of potential options with regard to the ultimate refi, and we should have more on that in the coming months.
As far as the business itself goes, you know, we've been saying for quite some time that, and I think everybody's very aware, that the monetization mechanisms for content are impaired. That would be a kind way of putting it. With the move from traditional cable linear business to streaming business, right? I think that it's, you know, not only does MSG Networks, but sports and entertainment in general are all challenged by the model. Having said that, MSG Networks has great content. The consumers very much want it. And just the question about how are you going to monetize it, you know, is still up in the air.
But I do think that the progress that Andrea is making, right, in terms of developing streaming platforms, et cetera, are certainly part of the answer. That the and we just have to continue along, but that is a very strong product, right? And, but how long the transition takes from linear to streaming and how the consumers consume it and what they pay for it, right? That the are key issues yet to be resolved.
Thank you.
We'll move next to Paul Golding at Macquarie Capital.
Thanks so much. This is for either Jim or Dave. Just after seeing this quarter that you grossed over $1 million in average daily ticket sales for the Sphere Experience, I'm wondering if you could speak to whether you have a clear indication of the life cycle of an original attraction now at Sphere. And if this informs subsequent Sphere Experience content that you might generate to keep that momentum going.
It's a good question. You know, around here, we talk about it like what we call the first pancake. It's never perfect. But you know, the demand is robust. Las Vegas is a great market for this as it renews itself almost every week with fresh customers. But how long will the Sphere Experience last? You know, I think that it will, first off, you know, you don't like go a set amount of time and then cut it off. You know, what happens is that, you know, what our plan is is to replace it, right? But still run it and keep building up a library of content, right?
That, of course, when we open up new Spheres, they'll have a whole... You know, they won't, they won't be dealing with the first pancake syndrome. So, the other part of it that's probably, you know, hard, hard to quantify, but are our consumers coming in for, you know, to see Postcards from Earth and the current Sphere Experience, or are they just coming to see the Sphere? You know, how much is the content draw versus just the pure medium and the technology? And, you know, 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.
Thanks, Jim. That's a great point. And then I wanted to circle back on the venue itself. 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.
Well, I mean, it is a franchising model, right? Which means that, you know, we don't carry the heaviest load capital into it. However, we do think we can deliver, you know, new Spheres on a less costly basis than the first one. Again, it's sort of that first pancake thing. We learned a lot. We're already in the midst of looking at the new designs and taking costs 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 it shouldn't go up, it should go down because of everything that we've learned.
Great. Thanks so much.
We'll go next to Ben Swinburne at Morgan Stanley.
Thanks. Good morning. Jim, you guys have a pretty full residency calendar this year. I'm just wondering if you think this is, you know, the right mix of residency versus experiences. I think, I think you're kind of run rating around almost 100 a year now, in residency. We look at U2, Phish, and Dead & Co. And then maybe just sticking with the Sphere, how long do you think it'll take to build the next Sphere? Do you think the construction timeline is shorter under the as you move forward with your with your partner or partners? And do you anticipate generating any revenue until that that new venue opens for you guys? Thanks.
Yes. Well. How do I parse apart your question? The what part would you like answered first?
Re- residencies-
Uh..
and then, pancake costs or the timeline. Sorry.
Okay. So residencies, right? That we've already announced the next two acts to come. I can tell you, without telling you who, that pretty much our calendar is full for this calendar year. That we don't have room beyond what we've already committed to do anything more significant. But the demand from artists is continuing to grow. And, you know, we expect to have, you know, 25 be another full year. I will say that what has surprised us with this is like U2, which started off committing to around 20 shows and ended up with 40, right? We're seeing the same kind of demand for tickets for Phish and Dead, et cetera.
And so these residencies looks like they're gonna go longer than we initially anticipated because of ticket demand. So that's a good thing. So does that answer your residency question?
Yeah, absolutely.
And then you wanna know, what else did you-
Just wondering how long... You know, we're trying to think about when your company could start benefiting from a cash flow point of view from additional spheres?
Well-
Obviously, these take some time to build, so curious if you have an updated thought on timeline.
So I mean, it's a franchise model, and we have a construction and development division that you know services that franchise model. They don't work for free. And so yes, they will be generating revenue right from the start to support the you know the build and construction process. So you know there's different revenue streams that go along with the franchise model, but the construction model has revenue associated with it. And essentially our you know our minimum goal here is that there won't be any losses associated with Sphere with construction. Most likely, there will be profits.
But then beyond construction, there's the ongoing servicing and providing of content, which will provide a revenue stream, like a franchise model, that is ongoing.
Got it. Great. Thank you so much.
... We'll move to our next question from David Karnovsky at JP Morgan.
Hi, thanks. Jim, just following up on the residency question. Interested on how you think about the venue in Vegas as a destination, not just for residencies, but maybe for music touring generally. You know, is it feasible for an artist to consider Sphere as a, you know, one or two-night stop for a tour when they're in Vegas?
Not at this time. The investment that the artist has to make in order to create the show, do the content, right, is requires more than just one or two shows. The, I mean, when an artist is on tour, they're playing, you know, 40 markets. They build a show, and they amortize their, their show investment over the 40 markets. With the Sphere, because of how unique it is, what they build for Sphere really doesn't move to, you know, into a touring model, or at least most of it doesn't. So they need to justify it based on the run that they have at the Sphere, so one or two shows doesn't do it.
Okay. And then on networks, following up on the term loan expiration question, 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 amended rights fees. And then separately, with the Gotham 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?
I'll take that, David. Hi. Well, as you know, a significant percentage of our costs are fixed. That includes, you know, the rights fees that we pay our teams. You know, that said, we're always looking for ways to run our business more 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 doubles rights agreement. That renewal did reflect the realities of the current landscape. At the same time, we do expect to see operating efficiencies in streaming coming from our new venture with the YES Network.
As to your second question about a potential larger deal with YES, the deal that we announced related to the streaming venture and only to the streaming venture, but, you know, as always, we're open to exploring opportunities that make strategic and financial sense for us.
Thank you.
Did that answer or do we have more?
We'll move next to Logan Angress at Wolfe Research.
Hi, thanks for taking my question. Congrats on the results. First, I'm just curious, acknowledging the Sphere is still very new, to what extent are you seeing opportunities to drive greater efficiencies at the Sphere in terms of either venue, venue utilization or costs? Specifically, do you expect to be able to do both Sphere Experiences and concerts or residencies in the same day at some point during this fiscal year?
Yes. And that's exactly what we're driving towards, right? The Sphere is designed and strategized to run multiple events on a day, right? Not just the same event multiple times, but different events. And we are, you know, yes, we do wanna have, you know, a concert and a Sphere 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. You know, how far we can stretch this thing? You know, we've talked about it. I don't know if we're gonna get to three different kinds of events in a day, but we can definitely do two.
You know, a big part of, you know, the old venue model is, was what they call the load in and the loadout, right? And how much time that took. Now, there basically is no load in and loadout with the Sphere. So that enables us, like we do with U2 right now, have a concert on Wednesday, and then Thursday, by Thursday at noon, we're running the Sphere Experience, which is why you're seeing some of that in the results now. But there's a great deal of refinement that you know is still to come on this both on the expense and the revenue side.
Great, thanks. And then on the Exosphere side, I'm curious, how much does social media reach factor into how you price Exosphere ads? And I guess, is the reach on social media as important for advertisers as the physical reach at the venue is?
Oh, yes. I'd say probably... You know, I wouldn't just limit it to social media, but look, what advertisers are seeing, with the Sphere, right, with the Exosphere, is that by designing, particularly by taking content and specifically designing it for the Exosphere, that the amount of attention that it grabs, a lot of it's from social media, right? It's significant enough for them to look at using it to launch new brands, new products, like, make statements. Do the things that marketers and advertisers want to do, right? Well beyond reaching just the Las Vegas market. And that's how we're seeing them utilize it now.
You'll see in the Super Bowl, right, that we have quite a robust group of advertisers using it in just that way.
Great. Thanks so much.
Thanks, Logan. Operator, we'll take one last caller.
Thank you. We'll take that question from David Joyce at Seaport Research Partners.
Thank you. For Jim, could you please update us on the status of the sponsorship business? You've had a few announcements lately, post-quarter. I was just wondering, you know, where do you see that going from here? How do you differentiate between sponsorship opportunities and Exosphere advertising? And just some more color there will be helpful.
Yeah, I mean, most of those opportunities are focused on the Exosphere at this point, right? Which is the predominant sort of medium for advertisers. But sponsorship is something that we're gonna continue to develop. I expect that this year we'll have some significant announcements that, yes, involve the Exosphere, but more involve the direct association between the client and the product, right? And even the content that runs in the product.
All right, great. Thank you.
That does conclude the question and answer session. I would like to turn the conference 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. Have a good day.
Goodbye. And this concludes today's conference call. You may now disconnect.