Earnings Call Transcript - SPHR Q4 2025

Operator, Operator

Good morning, and thank you for standing by. Welcome to the Sphere Entertainment Co. Fourth Quarter and Year-end 2025 Earnings Conference Call. I would now like to turn the call over to Ari Danes, Investor Relations. Please go ahead.

Ari Danes, Investor Relations

Thank you. Good morning, and welcome to Sphere Entertainment's Fiscal 2025 Fourth Quarter and Year-End Earnings Conference Call. Today's call will begin with our Executive Chairman and CEO, Jim Dolan, who 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 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 4 and 5 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.

James Dolan, CEO

Thank you, Ari, and good morning, everyone. This morning, we reported our fourth quarter financial results, which serve as continued validation of the business model behind Sphere. Our success in Las Vegas, including most recently, the Wizard of Oz is an important blueprint for our long-term vision, a global network of sphere venues powered by our proprietary technology and immersive content. And we're now one step closer to realizing that vision. Last month, we announced that we will bring the second Sphere in the U.S. to National Harbor in Maryland, which is minutes from D.C. National Harbor is one of the top tourist destinations in the Mid-Atlantic with more than 15 million annual visitors. This 6,000-seat Sphere venue will be built with support from the Peterson Companies, the land owner and developer of National Harbor, as well as the state of Maryland and Prince George's County. The project will utilize a combination of public and private funding. This includes approximately $200 million in state, local, and private incentives. We are moving quickly to finalize agreements and secure necessary approvals and believe the venue could be open in 4 years or less. In Abu Dhabi, we have reached the final stages of preconstruction and expect to share additional updates in the near future, including details on the site location. We are also in active discussions with a significant number of domestic and international markets regarding large- and smaller-scale Spheres. We will update you on our progress over the course of the year. Moving beyond expansion, we continue to invest in immersive technology and experiential content to fortify Sphere's leadership position. As you've seen, the Wizard of Oz at Sphere has been both a critical and commercial success. With over 2.2 million tickets now sold and approximately $290 million in ticket sales. Later this year, we plan to release the Wizard of Oz 2.0, an enhanced version of the production with new scenes and new 4D effects. We are also on track to complete our next theater experience from The Edge later this year. In addition, we continue to have positive discussions with IP holders regarding new Sphere experience projects. So in summary, we are pleased with the momentum we're seeing across our business, especially our progress towards a global network of Spheres, which we believe positions the company for substantial long-term growth. With that, I will turn the call over to Robert, who will take you through our financial results.

Robert Langer, CFO

Thank you, Jim, and good morning, everyone. For the December quarter, we generated total company revenues of $394.3 million and adjusted operating income of $128 million. Our Sphere segment generated revenues of $274.2 million, an increase of over 60% compared to the prior year period. This growth was mainly driven by higher revenues from the Sphere experience, which reflects higher per-show revenues due to the impact of the Wizard of Oz, as well as an increase in the number of performances. In addition to higher revenues from the Sphere experience, we also saw revenue growth in concert residencies and Exosphere advertising and sponsorship. Overall revenue growth was only partially offset by the absence of a brand event held in the prior year quarter, as well as other revenue decreases. Fourth quarter adjusted operating income for our Sphere segment was $89.4 million as compared to an adjusted operating loss of approximately $800,000 in the prior year quarter. This reflected the increase in revenues as well as lower SG&A expenses, partially offset by higher direct operating expenses. The increase in direct operating expenses includes higher expenses associated with the Sphere experience. This was mainly a result of higher per-show expenses due to the impact of the Wizard of Oz, as well as a higher number of Sphere experience performances. SG&A expenses for the December quarter were $104.1 million, a decrease of $14.9 million year-over-year. This includes the impact of $4.6 million, primarily related to executive management transition costs in the current year quarter as compared to $12.4 million of executive management transition costs and nonrecurring costs related to MSG Networks in the prior year period. It also includes the impact of the company's focus on driving cost efficiencies this year. Turning to MSG Networks, the segment generated $120.1 million in revenues and $38.6 million in AOI in the December quarter. This compares to $139.3 million in revenues and $33.7 million in AOI in the prior year period. These results reflect an approximately 14.5% decrease in subscribers and the impact of lower affiliate rates, as well as the impact of recent amendments to MSG Networks media rights agreements with MSG Sports and certain other professional teams. Turning to our balance sheet. As of December 31, our Sphere business had net debt of approximately $56 million. This reflected approximately $477 million of unrestricted cash and cash equivalents, $259 million in convertible debt, and the $275 million term loan related to Sphere in Las Vegas. In January, the company refinanced the credit facility related to Sphere in Las Vegas. This refinancing extended the facility's maturity for a new 5-year term ending in January 2031 with an improvement in the borrowing rate and no change in the term loan balance. We also added a $275 million revolver, which is currently undrawn and will be available for general corporate purposes. At MSG Networks, as of December 31, net debt was approximately $128 million. This included $159 million outstanding on the MSG Networks term loan, which, as a reminder, is recourse only to MSG Networks. And with that, we will now open the call for questions.

Operator, Operator

Your first question comes from the line of Brandon Ross from LightShed.

Brandon Ross, Analyst

Jim, you mentioned in your prepared remarks that you're in several discussions on new big and small Spheres. How many Sphere expansion projects, full-size versus smaller scale, do you expect to be able to begin in the next few years? And knowing you're capital light on most, how many projects can you handle managing at once?

James Dolan, CEO

Well, it's a good question. My initial answer is basically as many as we can get, assuming that they're all profitable and make sense. I guess the limiting factor is how much can the management team and the operation handle, and we've decided the team can handle quite a few. So over the next few years, I don't think you should be surprised by 5 or 6 projects going on at once, hopefully in the best markets. But if we can figure out how to do more and there's more opportunity, we're going to try and take advantage of it, keeping in mind that we will separately finance them, right? So the resources will, I believe, be there.

Brandon Ross, Analyst

Got it. In the press reports about the capital Sphere, they said it was going to cost about $1 billion. Have the elevated construction costs had any impact on your conversations at all with potential partners?

James Dolan, CEO

The model continues to support that level of investment, and I'm optimistic that we can bring it in for a lower cost. We are currently focused on that. We are consistently exploring new construction methods that can help reduce expenses. Our company is proactive in trying new approaches, and we are examining these methods to find ways to lower costs. However, the model remains intact.

Operator, Operator

Your next question comes from the line of David Karnovsky from JPMorgan.

David Karnovsky, Analyst

Jim, just on National Harbor. Can you speak a bit more to how you settled on the location as optimal for the small-scale Sphere? Just any background on the process would be helpful. Thanks.

James Dolan, CEO

Good. The interesting question is that we would love to say we planned every detail meticulously. However, Virginia and Maryland were competing, which accelerated our evaluation of the project. We received a compelling offer for an excellent location, and we accepted it. This aspect even took us by surprise due to the dynamics involved.

David Karnovsky, Analyst

Okay. And then you noted for National Harbor, $200 million of funding against the $1 billion cost that you and Brandon were just discussing. Can you help us bridge that financing gap? And we haven't seen any mention of an operating partner. Is this a venue you potentially plan to run and consolidate in the financials?

James Dolan, CEO

Hang on, David, can you restate that?

Robert Langer, CFO

Yes. He just mentioned that the $200 million of government funding will be part of it, and we haven't mentioned we have an operating partner. How are we planning to fund the rest?

James Dolan, CEO

I believe there are many ways we can approach this. I assure you that we will find the most cost-effective method. We could rely primarily on standalone financing for the projects, as our lending institutions are optimistic and willing to support them. However, having partnerships has its benefits, especially with local partners. For instance, we are located near the MGM. While I’m not implying they will be our partner, the construction of the Sphere, similar to what we've observed in Las Vegas, positively impacts the entire community and local businesses. Therefore, collaborating with the community is likely a beneficial strategy. In summary, there are numerous sources we can explore.

Operator, Operator

Your next question comes from the line of Stephen Laszczyk from Goldman Sachs.

Stephen Laszczyk, Analyst

Jim, curious if you could talk a little bit more about how ticket sales for Wizard of Oz are trending into what's usually a seasonally weaker period in Vegas over the winter? And then if there's anything you're seeing on the demand front from the show that's encouraging your thinking in one direction or the other on things like show count and pricing as we head into the spring and the summer?

James Dolan, CEO

Well, with us today is Jen Koester, who wasn't expected to answer a question, but this is really her area. So go for it, Jen.

Jennifer Koester, SVP

Hey, Stephen. We've seen Las Vegas headwinds our way, but we've been resilient and experienced strong growth despite headwinds this past year, and we feel confident that we'll continue to do the same in the next year. In terms of ticket calendar and show calendar, we have been aggressively putting forward days where we have multiple shows side-by-side, and we continue to enhance that and grow revenue per day. So that's really been a lot of the strategy is demand forecasting based on visitor rates. We believe there will be a strong convention season next year, and we're putting together a show schedule that reflects that.

James Dolan, CEO

We discussed Wizard of Oz 2.0. I'm not entirely sure we actually need it given the current demand, but we will proceed with it regardless. I believe this will likely enhance the product's appeal even further. Additionally, we have another product in the pipeline that we think could be close to as successful as Wizard of Oz.

Stephen Laszczyk, Analyst

Great. And then, Robert, maybe on the cost side, SG&A came in a bit heavier in the fourth quarter, even adjusting for some of the management transition expenses. Just curious if there's anything more you can say on SG&A in the quarter and then perhaps the outlook for the expense line item in '26?

Robert Langer, CFO

Of course, Stephen. Let me start by pointing out that we are extremely focused on managing our cost infrastructure as efficiently as possible. We have identified a number of cost-saving opportunities in 2025 and brought the SG&A number meaningfully down versus the prior year. In regard to the fourth quarter SG&A numbers, you pointed out, they did include certain executive transition costs as well as expenses related to share-based awards, which are marked-to-market on our stock price. Adjusting for these items, our SG&A expenses in the quarter are actually quite similar to levels we saw for the rest of 2025. Looking to '26 and beyond, we will absolutely continue to look for further cost-saving opportunities wherever it makes sense. But we will balance that with ensuring that we have an infrastructure in place that supports the global vision in growth for Sphere, which Jim laid out. So as you would expect, there will be quarter-over-quarter fluctuations for timing reasons, market adjustments, or other nonrecurring expenses like the one we saw in the most recent quarter. But overall, we will continue to focus on managing our SG&A line efficiently, and we believe that our business is poised for significant growth in the year ahead.

Operator, Operator

Your next question comes from the line of Joe Stauff from Susquehanna.

Joseph Stauff, Analyst

Jim, you had mentioned that you'll complete The Edge later this year. Wondering if you or Jennifer can talk about how we should think about when you might launch that? What's involved with that?

James Dolan, CEO

Well, I suspect that The Edge will debut sometime in the fourth quarter; that could slip into the first quarter. I mean, a lot of it depends on Wizard of Oz, right? I'm selling out the capacity, right? I'm not sure I want to disturb that model. And that's really what drives those decisions: the desire to maximize revenue inside the facility. But from The Edge and other products that we're working on are all designed to do just that, maximize the use of capacity and bring the highest return.

Operator, Operator

Your next question comes from the line of Peter Supino from Wolfe Research.

Logan Angress, Analyst

This is Logan Angress on for Peter. Jim, in the context of a broader sphere franchise rollout, how do you think about the potential cannibalization or competition between spheres? For example, would a potential franchisee on the East Coast be concerned at all that they'd have to compete with the newly announced National Harbor Sphere for demand?

James Dolan, CEO

I really don't see that. We're trying to go as fast as we can, right? And building more Spheres because we see great opportunity out in the worldwide and domestic marketplace. I mean Las Vegas, our total attendance this year is around 4 million, somewhere in that range, right? I mean, these markets can certainly handle that. So I'm really not concerned. I think that we will have a lot of opportunities. I don't see one, especially when you take a look at Las Vegas because, I mean, Las Vegas, we have our customers come to see us, right? But they also come for conventions and for lots of other reasons. Then the same thing will be true with National Harbor. That's why we say we already have 15 million people who come annually. And so I don't really see one market disturbing the other.

Operator, Operator

Your next question comes from the line of Ryan Sigdahl from Craig-Hallum Capital Group.

Ryan Sigdahl, Analyst

You mentioned positive discussions with other IP holders in your prepared remarks. If you could elaborate on that in the context of the success of Wizard of Oz and really the longevity of demand and strength there as it's continued for a handful more months than the last time we spoke. So I guess the question is, what does that pipeline look like? Any additional details you can give from interested IP holders and how those conversations are going?

James Dolan, CEO

We are currently engaging with various IP holders and there are several exciting products that we wish to develop in addition to our own IP. Progress is being made on this front. However, we must consider the current status of One Sphere, which is performing well, though not entirely sold out. We need to monitor its pacing and capacity. I can say that every IP holder we communicate with is very eager to explore the possibility of incorporating their IP into this new medium. They all have an interest in doing so, but the main considerations remain the return on investment for them, the value it brings, and the potential revenue we can generate from their IP.

Operator, Operator

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

Peter Henderson, Analyst

Can you provide an update on the residency pipeline through 2027? Just what you view as the sort of optimal number of residencies annually?

James Dolan, CEO

Yes, we're pretty much booked. I mean, I think there might be some slots available still in '27. I don't think there's hardly any left in '26. It might be a week at less than '26 somewhere. We're basically sticking to long weekends, right, taking advantage of how the Las Vegas market runs. There's no shortage of artists who want to play. And we're focused on these days on bringing the artist rigs in for the customers, right? And then we're running the Wizard of Oz right now in tandem with those events. So we're looking for customers who want to come to see us twice on the weekends. And so far, that's going pretty well.

Ari Danes, Investor Relations

We have time for one last caller.

Operator, Operator

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

David Joyce, Analyst

You made a recent announcement that included Delta having a new branded space within the Sphere. Could you please update us on the rest of the sponsorship strategy, just the updates there and on the excess of your progress?

James Dolan, CEO

That's a Jen question.

Jennifer Koester, SVP

So we're off to a strong start in '26. If you looked at our performance at CES this year, our year-over-year growth was strong with advertisers like Google and Delta and Lenovo running every day during CES. We also held the second CES keynote at the Sphere in a row. And then the other thing that we were particularly excited about, and I think it gives us some good projections on where we can go is that we debuted the first interactive game experience on the Exosphere in partnership with LEGO and Lucasfilm's Star Wars. We're going to continue to look for opportunities like that selectively that give us the opportunity to drive additional revenue as well as showcase our technology and innovation capabilities. We're making progress with our roster of official partners. You mentioned Delta. We also have recently announced Anheuser-Busch, and we're in active conversations with a lot of other food chip brands regarding this. So we expect to have more announcements like this throughout the year. Overall, I think we're well positioned for growth in this area for the coming year.

Operator, Operator

And that concludes our question-and-answer session. I will now turn the call back over to Ari Danes for closing remarks.

Ari Danes, Investor Relations

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

Operator, Operator

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