Earnings Call Transcript - SPHR Q3 2025

Operator, Operator

Good morning, and thank you for joining us. Welcome to the Sphere Entertainment Co. Third Quarter 2025 Earnings Conference Call. I will now hand the call over to Ari Danes from Investor Relations. Please proceed.

Ari Danes, Investor Relations

Thank you. Good morning, and welcome to Sphere Entertainment's Fiscal 2025 Third Quarter 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 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. And with that, I'll now turn the call over to Jim.

James Dolan, CEO

Thank you, Ari, and good morning, everyone. For today's call, I'd like to focus on two important areas to the Sphere business model, the technology that powers Sphere and the opportunities it creates for our company, and our progress in expanding the Sphere venue footprint around the world. Behind virtually every aspect of what we do is the proprietary technology we have developed. This is reflected in what audiences experience at Sphere in Las Vegas to the work taking place at Sphere Studios in Burbank. We own key technology component providers to Sphere and have a portfolio of over 60 patents in the U.S., spanning across Sphere, venue design, audio delivery, video capture and display, 4D technologies, and more. We have also continued to secure international patents to protect our innovations around the world. And we are not standing still as we continue to invest in technology and content to extend our leadership position. The use of these technologies is also not limited to Sphere venues. For example, this year, we introduced our advanced audio system, Sphere Immersive Sound at Radio City Music Hall, transforming the audio experience in a nearly 100-year-old venue. And we're now exploring additional commercial opportunities for Sphere Immersive Sound as well as other aspects of our technology portfolio. In terms of original content, the Wizard of Oz in Sphere utilizes advanced technologies like generative AI in ways that haven't been done before. As we look ahead, we intend to use these AI tools in partnership with Google for additional Sphere Experience projects. We are also actively pursuing opportunities to utilize these AI tools for content on other distribution platforms. We expect to have more to share in the months ahead. Turning to our venue expansion plans. In Abu Dhabi, we are nearing completion of the preconstruction phase with the Department of Culture and Tourism. We also have discussions with a significant number of domestic and international markets as well as potential financing partners. These discussions span across small, medium, and large-scale Spheres. Our designs include seating capacities of approximately 3,000, 6,000, and 18,000. And behind each venue design is an economic model that we believe will generate an attractive return on investment. We look forward to updating you on our progress. And with that, I will now 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 September quarter, we generated total company revenues of $262.5 million and adjusted operating income of $36.4 million. Our Sphere segment generated revenues of $174.1 million, an increase of 37% against the prior-year period. This growth was mainly driven by higher revenues from the Sphere Experience and reflects approximately 1-month impact from the Wizard of Oz at Sphere, which launched on August 28 and has seen strong demand since its opening. As a result, in mid-October, the production passed 1 million tickets sold and achieved over $130 million in ticket sales already. In addition to higher revenues from the Sphere Experience this past quarter, we also saw revenue growth from concert residencies and Exosphere advertising and sponsorship and our efforts to bring the world's second Sphere to Abu Dhabi. Overall, revenue growth was only partially offset by the absence of a marquee sporting event and a corporate event held in the prior year quarter as well as other revenue decreases. Third-quarter adjusted operating income for our Sphere segment was $17.1 million compared to an adjusted operating loss of $26.3 million 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, mainly due to the impact of the Wizard of Oz at Sphere. It also reflects the increase in the number of concerts held at Sphere compared to the prior-year quarter, which was partly offset by lower other event-related expenses. SG&A expenses for the September quarter were $92.7 million, a decrease of $12.3 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 $88.4 million in revenues and $19.3 million in AOI in the September quarter. This compares to $100.8 million in revenues and $16.1 million in AOI in the prior-year period. These results reflect an approximately 13.5% decrease in subscribers 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 September 30, our Sphere business had net debt of approximately $205 million. This reflected approximately $329 million of unrestricted cash and cash equivalents, $259 million in convertible debt, and a $275 million credit facility related to Sphere in Las Vegas. In addition, as of September 30, MSG Networks had net debt of approximately $144 million. This included $200 million outstanding on the MSG Network term loan, which, as a reminder, is debt that is recourse only to MSG Networks. Following the end of the quarter, MSG Networks repaid an additional $31 million on the term loan using cash on hand at MSG Networks, bringing the current principal outstanding to approximately $169 million. During the quarter, we repurchased $50 million or approximately 1.1 million shares of our Class A common stock. Following these repurchases, we now have approximately $300 million remaining under our current buyback authorization. And with that, we'll now open the call for questions.

Operator, Operator

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

Brandon Ross, Analyst

Jim, I want to let you enjoy the Oz success you're having, I guess, especially this quarter, but I wanted to ask you about the original content program beyond Oz. And to that end, what have you learned from Oz's success? And do you expect it to influence the original content program going forward from here? I know Edge or From the Edge is next, but afterwards, are you going to lean more into known movie IP like you did with Oz?

James Dolan, CEO

Okay, let's reflect on what we've learned. First, we've realized that there's truly no place like home. The Wizard of Oz serves as the initial content that reveals the potential of this medium. One of the insights we've gained from Wizard is that the 4D effects are even more crucial to the content than we initially anticipated. We expected the screen and sound to play significant roles, but 4D has proven to be more vital for our customers. However, there's still much to explore in this medium. From the Edge should allow us to delve deeper, especially since it approaches the medium in a completely different way than Wizard. Wizard is a remake of a classic from 1939, whereas From the Edge involves live capture and employs our Big Sky system to create immersive environments and experiences. This represents a distinct method of content creation compared to what we did with Wizard of Oz. I'm eager to see the results. Looking ahead, after From the Edge, we plan to explore additional ways to enhance the medium and offer even richer experiences for our customers, as that's clearly their interest.

Brandon Ross, Analyst

Great. You initially mentioned the value of your technology, and I would like you to elaborate on which technologies in your portfolio, aside from audio, possess third-party value. What are the potential use cases? Additionally, do you anticipate that licensing this technology will significantly contribute to revenue and, more importantly, to AOI over time?

James Dolan, CEO

It serves multiple purposes, and your question has two parts. Regarding the platforms, I mentioned before that we are migrating technology to other platforms. With Wizard of Oz, we collaborated closely with Google to establish a process and pipeline for handling AI. Over the two years it took us to develop Wizard of Oz, we became quite proficient in using AI, transferring data effectively, and building the necessary infrastructure. By the time Wizard of Oz was completed, we had a well-developed structure for processing AI. We are now looking into how we can leverage that infrastructure beyond the Sphere. As I mentioned in my comments, we will have more updates on this next quarter. This represents a technological advancement for Sphere Studios that we believe we can monetize, and we expect to make some notable announcements in the next three months regarding this. Additionally, I want to highlight Sphere Immersive Sound. I don’t want to dwell too much on this, but we conducted a full orchestra test yesterday at Radio City. The impact of a great sound experience on a venue should not be underestimated. If you’ve been to a large stadium, you understand how muddled the sound can be with announcers or concerts. Improving that experience in live settings is significant, and I believe we can monetize it, potentially extending its reach to home users. I’m excited about the developments at Radio City and eager to see if our customers recognize the enhancement in quality and view it as a crucial feature that makes our content even more appealing.

Operator, Operator

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

David Karnovsky, Analyst

Jim, with Wizard of Oz, I wanted to see how you're thinking about optimizing revenue from here in terms of price, show count, or adding sections? And then maybe as a follow-up to a prior question, assuming Oz demand remains strong through 2026, when would be the right time to launch From the Edge, which I believe you've announced for the next calendar year?

James Dolan, CEO

So we're still working on From the Edge, and it's not finished yet. I expect it will be ready by the end of the summer, but that doesn't mean we'll launch it then. It will continue to evolve, and we plan to keep running Wizard of Oz until we notice a decline in demand, which could last longer than a year. Additionally, we're planning an enhanced version of Wizard of Oz, which we'll launch on the anniversary of the premiere. This could include new features, like a ride on a witch's broom during the show, and I think that could bring some excitement to Wizard of Oz. I often remind my team that Cirque du Soleil's O has been running for 30 years in Las Vegas with essentially the same show, so I wouldn't be surprised if Wizard of Oz is still being shown ten years from now. Right now, we're creating the show for one venue, and that's great because we can monetize the content in that venue. However, we're also looking to build more venues, which will allow us to distribute content costs and overhead across more revenue streams, making the company significantly more profitable.

Operator, Operator

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

Stephen Laszczyk, Analyst

Jim, maybe just following up on that last point there, you've had this incredibly successful debut of Wizard of Oz over the last few months, and it certainly seems to be surpassing Postcard in a lot of ways. I would just be curious, as you look ahead into 2026, to get your thoughts on what you think the trajectory of Oz could look like from a business and performance perspective? To what extent you think this momentum that we're seeing in adding show count and some of the higher sell-through that we've seen over the last couple of months can continue into the next 12 months? Or perhaps a framework you're thinking about as it compares to Postcard as you look out into '26 and try to gauge how meaningful and successful this piece of content can be?

James Dolan, CEO

Postcards was an initial attempt that wasn't perfect but did a decent job of introducing the medium. Wizard of Oz is expected to elevate that experience. I believe it has long-term potential. Las Vegas is an excellent market with over 40 million visitors each year, which presents numerous opportunities. One reason O was successful is that most visitors to Vegas have seen it. I anticipate that Wizard of Oz can achieve similar success. The Sphere offers us flexibility; unlike O, which required significant initial investment and has remained largely unchanged, we can rotate shows like Wizard of Oz at 1:00 PM and From the Edge at 5:00 PM, with the possibility of adding more events. Our technology allows us to manage the Sphere efficiently to keep it in demand for an extended period.

Operator, Operator

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

Logan Angress, Analyst

This is Logan Angress on for Peter. Jim, you mentioned in an interview that you hope to have a small Sphere announcement by the end of the year. I'm curious if you can share any insight into expectations for that venue? And specifically, is the expectation that it will be capital free? Or do you expect to be a minority investor in that venue or in venues to come?

James Dolan, CEO

Well, let's see. Do we expect to be capital free? We have a model where we are capital free, and I think that is a preferred model. Would we invest? I believe it's a really good investment; the economic models we've developed around all the different versions of Sphere have strong ROIs. As we have free cash to invest, that is something we will likely do. Additionally, taking 10% of the equity shows a level of confidence in the project, which also aids the lending model. So, I think we’re flexible in that regard. As for when we'll announce something, that's what announcements are for.

Logan Angress, Analyst

Got it. And then a quick follow-up. You mentioned you're in conversations with a bunch of different potential partners. I'm curious how, if at all, the success of Wizard of Oz has changed those conversations with those potential franchisees?

James Dolan, CEO

I believe Wizard of Oz has significantly increased our inquiries, whether through emails or texts, from various locations worldwide. The work we're doing in Abu Dhabi is particularly intriguing, although I can't share the exact location. However, Sphere is part of a larger development plan for the area, serving as a key feature in their marketplace, akin to a diamond in a ring. This has a substantial influence on urban development and entertainment initiatives. When assessing global marketplace development and urban infrastructure, especially in entertainment, Sphere aligns perfectly with those goals. I think Wizard of Oz has heightened awareness of this, which is why we're experiencing such strong interest.

Operator, Operator

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

Ryan Sigdahl, Analyst

Jim, you mentioned in an interview with the New York Post in late August that the Sphere had bookings until September 2027 with a strong residency pipeline. This suggests that the pipeline continues to grow well with many artists interested in performing there, although there's healthy competition for the Sphere's space. My question is, do you expect more concerts in 2026 compared to 2025? Additionally, what do you envision as the upper limit for the number of concerts per year at the Sphere?

James Dolan, CEO

It's interesting you asked that because we just discussed the best combination for a day at the Sphere. We concluded that the ideal mix is an evening concert, like those by the Eagles or Zac Brown, paired with two to three afternoon shows of something like the Wizard of Oz. This setup generates the most cash flow. The challenge we're facing, which my former manager used to call a first-class problem, is finding more opportunities to host events at the Sphere. I believe concerts are crucial to its success, especially for visitors to Las Vegas who attend a concert and then see the Wizard of Oz the following day. That's a solid formula. Fortunately, there hasn't been any slowdown in the number of artists wanting to perform at the Sphere. In fact, we are currently trying to accommodate the high demand from artists, as I have more requests than available capacity at this time.

Operator, Operator

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

Peter Henderson, Analyst

So just two, if I may, one on Sphere, one on MSG Networks. First on Sphere, regarding the Exosphere and sponsorship, I was just wondering if you can give us an update on the go-to-market approach, the forward demand outlook, and progress in establishing a recurring book of business? And then on MSG Networks, just wondering if you have any updated thoughts around the possibility for a strategic acquisition?

James Dolan, CEO

Okay. I'm going to let you take that first question, Jen.

Jennifer Koester, Executive Vice President

I think the excitement and the interest that Jim was talking about coming from our live residencies and Wizard of Oz isn't just kind of opening the floodgates when we think about additional Spheres and expanding our physical footprint, we're seeing a lot of renewed interest and incremental interest when it comes to advertising and sponsorships with the Sphere. We've talked about it. This has been a year of transition for us, right? We've adjusted our go-to-market strategy. We brought in our sales team in-house as of September, that sales team is largely in place. And we're seeing positive results already. This past quarter, we had a double-digit percentage increase when it comes to our sponsorship and Exosphere sales. And I think we've got a strong start to next year already. Part of our go-to-market strategy adjustment was to really lean into tentpole events. And if I look at what we're seeing ahead for CES, we've got strong growth year-over-year for that conference, and it is part of our key strategy to lean in the conferences that are in town. We're also leaning into the creation of these multiyear sponsorships. And we've recently announced a few of those with Lenovo and Zoox, and we will be announcing a few more in the coming months. So I think we continue to build a really solid base when it comes to Exosphere advertising and sponsorships. And I think during the next calendar year is a high barrier of growth for us.

James Dolan, CEO

And the second part of the question, what was the second?

Jennifer Koester, Executive Vice President

Networks.

James Dolan, CEO

As far as networks go, we were able to pay down some of the debt again, which was good. Regional sports remain a very powerful product, but the challenge in that business is the shift from linear to streaming. This transition has significantly impacted the monetization of that product, and it's still navigating its way through. The positive aspect is that the product itself continues to be highly valued in the marketplace. For example, the opening game for the Knicks had over 50,000 streams, and if we value those streams at $10 each, that amounts to $0.5 million for just one game. When this revenue is added to linear revenue, it illustrates that while the business is still finding its footing, it possesses a very strong product. Strategically, I envision a single seamless offering for all teams in the New York market, excluding football since that's all national. However, we are not there yet. We are partners with the Yankees and have recently included the Nets. We're making progress, but in terms of the business's future, that approach is likely the way to strengthen it, though there is still considerable work ahead. Any mergers and acquisitions or other developments leading to that product are uncertain at this point.

Operator, Operator

That concludes our Q&A session. I will now turn the call back over to Ari Danes for closing remarks.

Ari Danes, Investor Relations

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

Operator, Operator

Ladies and gentlemen, thank you all for joining, and you may now disconnect. Everyone, have a great day.