Sphere Entertainment Co. ($SPHR)

Good morning, and thank you for standing by. Welcome to the Sphere Entertainment Co. First Quarter 2026 Earnings Conference Call. [Operator Instructions] 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 First Quarter 2026 Earnings Conference Call. Today's call will begin with our Executive Chairman and CEO, Jim Dolan, who will provide an update on our 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.

Thank you, Ari, and good morning, everyone. Today's financial results demonstrate our continued success proving out Sphere's business model. We remain focused on maximizing the model's full potential in Las Vegas, while executing on our long-term vision for a global network of Sphere venues. In Abu Dhabi, the project has been minimally impacted to date by the conflict in the wider region. The Department of Culture and Tourism has selected the venue site, which will be announced at the appropriate time. In addition, early-stage procurement work with contractors and vendors is now taking place. We look forward to the groundbreaking in Abu Dhabi. In January, we announced that we will bring the second Sphere in the U.S. to National Harbor. National Harbor welcomes over 15 million annual visitors and is just minutes from Washington, D.C. Financing discussions for this 6,000 feet Sphere are progressing as planned. We're also finalizing the venue design, which we coordinate with the Peterson Company on the site management plan and the preconstruction planning. In addition, we're working together with the state and the county on the various legislative approvals and incentives for the project. We continue to believe the venue could be open in 4 years or less. At the same time, we remain in discussion with a significant number of markets around the world regarding large and smaller scale Spheres, and we're confident about the path towards global expansion. We continue to demonstrate the power of Sphere's business model in Las Vegas to our potential expansion partners. Calendar 2026 marks our third full year of operation in the market with our business on track for substantial growth. This is led by The Wizard of Oz at Sphere, which continues to perform well. The production results reinforce our confidence that The Wizard of Oz will remain a strong performer in 2026 and beyond. And at the same time, we are continuing to work on our next Sphere Experience from the Edge as well as developing other projects in our pipeline. That includes the progress we are making with IP holders for additional Sphere Experiences as we build out a diverse slate of content. We also continue to see increasing demand from artists and brands to utilize this new medium. This is evidenced by ongoing growth in the number of concerts and brand events, as well as an expanding roster of advertisers and sponsors. So in summary, we continue to successfully prove out the Sphere business model in Las Vegas, which is now serving as a blueprint for our long-term vision, a global network of Sphere venues powered by our proprietary technology and immersive content. With that, I will turn the call over to Robert, who will take you through our financial results.

Thank you, Jim, and good morning, everyone. For the March quarter, we generated total company revenues of $386.4 million and adjusted operating income of $110 million. Our Sphere segment generated revenues of $266 million, an increase of nearly 70% compared to the prior year period. This growth was mainly driven by the Sphere Experience, primarily reflecting higher per show revenues for The Wizard of Oz at Sphere. In addition to higher revenues from the Sphere Experience, we also saw revenue growth in brand events, concert residencies and sponsorship and suite license fees. First quarter adjusted operating income for our Sphere segment was $74.3 million as compared to $13.1 million in the prior year quarter. This reflected the increase in revenues, partially offset by higher direct operating and SG&A expenses. The increase in direct operating expenses includes the impact of The Wizard of Oz at Sphere as well as higher expenses from brand events and concerts, primarily due to more events held in the current year quarter. SG&A expenses for the March quarter were $106.6 million, an increase of $10.2 million, or 11% year-over-year. The increase was primarily due to the impact of mark-to-market adjustments on certain share-based compensation awards driven by the appreciation in the company's stock price during the quarter. Excluding these mark-to-market adjustments, SG&A expenses would essentially have been in line with prior year quarter. Turning to MSG Networks, the segment generated $120.4 million in revenues and $35.7 million in AOI in the March quarter. This compares to $123 million in revenues and $22.8 million in AOI in the prior year period. These year-over-year results reflect a decrease in advertising revenues and an approximately 16% decrease in subscribers. This was partially offset by the impact of MSG Networks non-carriage period with Altice, which resulted in the absence of revenues for approximately 7 weeks in the prior year quarter. These results also reflect the amendments to MSG Networks media rights agreements with MSG Sports and certain other professional teams. Turning to our balance sheet. As of March 31, our Sphere business had approximately $596 million of unrestricted cash and cash equivalents, $259 million in convertible debt and a $275 million term loan related to Sphere in Las Vegas. At MSG Networks as of March 31, net debt was approximately $110 million. This included $143 million outstanding on the MSG Networks term loan, which, as a reminder, is that is recourse only to MSG Networks. Following the end of the quarter, MSG Networks repaid an additional $17.8 million on the term loan using cash on hand at MSG Networks, bringing the current principal outstanding to approximately $126 million. And with that, we'll now open the call for questions.

[Operator Instructions] We'll go to our first question from Brandon Ross at LightShed.

You mentioned the significant discussions that you're having on future Spheres. We're wondering if just given how profitable Vegas has become, it makes sense to own or at least operate and consolidate some of those venues instead of doing a franchise model like you have with Abu Dhabi.

Brandon, I wouldn't discount that. I think that you're right that the strength of the performance of Vegas is important and it impacts the equation. For us, we'd like to move as quickly as we can to building multiple Spheres. So the capital-light tactic is one of the ways to help speed it up. But with the strength of the operating model in Vegas, it does give us more options. So we can go probably either way.

Got it. And then as you think about expanding the footprint, can you just give us a little insight into how you think about choosing locations and ensuring there isn't cannibalization between the future Spheres at [indiscernible]?

Sure. Well, we're not worrying about cannibalization so much because, I mean, Washington is a long way away from Vegas. We like to be a global company. So we ultimately like to be on all 5 continents. I don't think that includes [indiscernible] Anyway. Because we don't want to -- let me be clear about this. We do not wish to go the Sphere in Antarctic. But we do want to be global. We think -- look, it's not just the building itself. It's the medium. We want -- we're looking to proliferate the medium. And so we're going to go wide, but it's not because we're worried about audiences cannibalizing one place versus the other. It's a big world, and I think there's a lot of opportunity and not many people have seen this Sphere. Only, I think to date, it's well under 10 million people. And you just -- we need more of them.

We'll move next to David Karnovsky at JPMorgan.

Maybe just following up on the conversations on the large and small market Spheres. Jim, just wanted to see if you could expand on the progress there and just whether there's been any impact generally from the macro volatility we've seen either to the pace or focus of those discussions.

The -- not seeing any impact from the global, I guess, the conflicts that are going on. And I think pretty much many people think this is not a long-term thing. So in terms of -- we have a lot of markets that are reaching out to us. We have -- and we're continuing to look ourselves. There are quite a few markets that we think that the Sphere would do well, either a full-size Vegas one or the National Harbor size one, the 6,000 seater. And I really think it's just -- the process itself is a little involved, involving land -- use of land and governments, et cetera. So it takes longer than I'd like, but the prospects look good.

Okay. And then maybe just staying on the macro, but shifting it to Vegas. Curious what you're seeing right now as it relates to visitor trends broadly and whether there's been any read-through to The Wizard of Oz or residency demand at the Sphere specifically.

Okay. I think, Jen Koester, you're on this call or you're not?

I am, Jim. I can take this one.

Take it.

So while we're mindful of the macro environment, we're not overly concerned at this point. And as you may know, Vegas visitation was down last year. That continued into January, but we've seen a shift and return to growth in visitation in February and March. So despite some recent market softness, our product still remains resilient. And in fact, one of the phenomenons we're seeing is that Sphere is actually driving incremental visitation to the market. So we all know concerts are a big driver of that. But interesting, we're also seeing that The Wizard of Oz playing a role in that. And I think that speaks to the quality of our content offerings. We're seeing solid demand for The Wizard of Oz from all segments of the market, and that includes our cost-conscious consumers, again, suggesting that, that value proposition for The Wizard of Oz is really resonating with consumers. In terms of residencies, again, strong demand. Phish just completed 9 sold-out shows. Backstreet Boys is returning this summer for another 21 nights. And Metallica sold out 24 nights after initially announcing only 8. And so that demand is also extending into our [ peak ] sales. We've got robust single night sales for Phish and Metallica's residencies. So we're going to keep a close eye on tourism, but the demand for our experiences remain strong and resilient.

We'll go next to Peter Supino at Wolfe Research.

A couple of questions on the experiences. Now that the Wizard has been out for over 6 months, what have your learnings been? And what do you hope from the Edge and content that comes after that will do for the business that maybe you didn't do with The Wizard of Oz? And then a second question on experiences. As you ramp your catalog beyond The Wizard of Oz, what do you think the main drivers of revenue growth will be? We're wondering if you envision running more shows than you're running today with just the Wizard or whether revenue growth might come from better sellout or higher pricing? I'd love to know more about that business model.

Okay. I love home people ask multiple questions than I can learn your first question.

[Technical Difficulty] Wizard yes, what you might do differently.

Well, the key -- the biggest learning for Wizard of Oz is that there's no place like home. But I mean, when we started off with Wizard of Oz, we were doing a show or 2 shows a day. We did -- if we were lucky, one show in conjunction with concerts. So I think the biggest learning that we've come up with the Wizard experience is that you can -- can you hear me?

Yes.

I think the biggest learning is that we can do multiple shows, even different shows, concert and features like Wizard of Oz all in the same day that the building can handle it, that the market can handle it. And of course, lately, having multiple shows of the day, it really is pretty good for the bottom line. As far as growth goes, look, I wouldn't mind if The Wizard of Oz stay the way it is for quite some time because it's a pretty fantastic product and quite resilient. But I think we'll continue to refine the model. I think when you take a look at these products out in the future, we're going to explore it. But I also think that you're going to see things like at 11:00 or 10:00 in the morning that The Wizard of Oz at 2:00 from the Edge, at 4:00 a different piece. You can have multiple views a day because the building is built that way. I mean there's literally very little changeover from one show to the other. The biggest changeover is when we do concerts and even that we were able to accomplish the changeover in under an hour. So we're going to keep pushing on that model. I think it's going to produce more revenue. We're going to get more efficient with how we operate. And so I think then really primarily, it's more skiers. So -- and that's going to be a big part of the growth.

We'll take our next question from Stephen Laszczyk at Goldman Sachs.

Jim, just a follow-up on Wizard of Oz. I'm curious if you could talk a little bit more about how attendance and sell-through have trended coming out of the first quarter? And what do you think that momentum might mean for ticket sales as you look out into later parts in the spring and then the summer seasons in Vegas?

Okay. Well, the real expert on this is my Chief Operating Officer, Jen Koester. So [indiscernible].

Thank you. So as we saw in today's results, Wizard of Oz continues to perform well. Our March quarter reflects. We've got robust per show attendance, average ticket prices and per cap spending that's consistent with our December quarter results. As of today, we've sold nearly 3 million tickets with over $370 million in ticket revenue for Wizard of Oz. Like any other market, seasonality is going to be a factor. So we're going to have ebbs and flows of visitors in the market. But as I've said before, we continue to maintain a relatively consistent market share of visitors since the debut. And we remain confident that we're going to continue to have a high performer through 2026 and beyond, and we really believe that there's a long life for Wizard of Oz.

Great. And then, Jim, I'm just curious, just given this momentum with Wizard of Oz that you're seeing, what leverage do you feel like Sphere has now to negotiate maybe more favorable royalty rates with potential new studio partners for new IP? How have those conversations been progressing?

Well, the leverage is that we're the only venue that does this. So it's not like somebody else can take that product and go put it into a big immersive environment like a Sphere. So the -- so it's really up to us which ones we choose. And then we obviously try and make the best deal that we can but there's a tremendous amount of IP product out there that none of which has been -- has obviously been seen in the Sphere and none of which has utilized this media. So I think we have a wide choice of product, and we're really mostly focused on what will convert well with the media and what really does well in an immersive environment. From the Edge is our own product, obviously. And the thing about from the Edge is that we're trying very hard to make that feature extremely experiential. So -- and we're right in the middle of making it. But it's extreme sports. And so when we go down a big wave, a 60-foot wave, we're really trying to make you feel like you're going down a 60-foot wave without making you get sick. So we're not going to get that product for nothing. But it is up to us which ones we choose.

We'll take our next question from Ryan Sigdahl at Craig-Hallum Capital Group.

It's nice to see the additional Exosphere advertising partners. You have Delta, you have Anheuser-Busch, evian recently. Jim or maybe, Jen, can you give an update on the Exosphere and really curious if you can quantify what the net retention is and utilization and then maybe how you think about that business going forward?

Jen?

So momentum in this business is really continuing, and we're well positioned for growth in '26. So in terms of utilization, which I think was the first part of your question, we have a strategy where 50% of the Exosphere time is advertising and 50% is art and promotion. And this strategy is really a valuable differentiator for the Exosphere brand from more of the traditional out-of-home assets. It helps us drive social engagement when we put our Exosphere art up there. I mean our artist program, we're averaging about 1 million social media impressions per artist launch. It's also an important lever for us when we promote Sphere Experience ticket sales. On the other 50%, which is the advertising side, brands are also viewing the Exosphere as a leader in driving cultural moments. You mentioned Anheuser-Busch before. They use Sphere to highlight the USA Olympic hockey team winning the goals, Coinbase used Sphere to amplify their Super Bowl commercial. TikTok used it as a place to celebrate their creators during TikTok Global Live festivals. I mean those are just a few examples in Q1 of the types of moments and brand advertisers that we're getting. And so when we think about the utilization question, we're consistently evaluating our inventory, and we're utilizing premium pricing on the higher demand periods. We've also created diverse offerings so that we can have some solutions that help us capitalize more on the Vegas conferences. We're investing in technology on the studio capability side, and that allows us to have quicker production and turnaround times, and that gives us access to some of those dollars that are just shorter-term brand campaigns. And going back to your question, repeat advertisers, we're continuing to see returning brands like Adobe, Google, Amazon, MGM and others. And so right now, we're currently on track to grow the number of repeat Exosphere advertisers by strong double-digit percentages in 2022. So overall, I think we're really pleased with the progress on our utilization of the Exosphere and some of the new strategies that are really helping us to continue to drive that repeat business.

Helpful. Maybe just a clarification. You target 50-50 art versus advertising. Are you willing to quantify if you're at that 50% today or where you're at?

Yes. That's -- I mean that's how we operate it to 50% time advertising, 50% art and promotion.

I think he wants to know if you're sold out, Jen.

During peak times, right, over the past year, we have experienced times of sellout. [ CES ] was a sellout period for us, and we anticipate that to be the phenomenon going through the rest of the year.

My answer would be you're not doing your job well if you're sold out.

Well, I did say we're using pricing tactics during times of weak demand.

We'll move to our next question from Peter Henderson at Bank of America.

Just wondering if you can provide maybe any insight on how we should think about SG&A for the remainder of the year, I mean, especially considering the impact of the stock appreciation on share-based comp.

Okay. Boy, I'm really tempted to crack a joke here. So I guess I will. So SG&A is a great basketball player. And when we get to the finals, I'm sure we're going to beat them. But having said that, -- having said that, I think I'll turn the real question over to Robert.

Thank you, Jim, and thank you, Peter. Let me start by reiterating that we are extremely focused on managing our infrastructure and SG&A cost base as efficiently as possible. We identified a number of cost savings opportunities in '25 and brought SG&A costs meaningfully down versus the prior year in that period. So our SG&A numbers in this quarter, as you alluded to, didn't include certain expenses which are related to share-based awards. These awards are mark-to-market on our stock price and will be cash settled once exercised. That's why they show up here. Adjusting for these items, though, our SG&A expenses in the quarter would essentially have been flat on a year-over-year basis. Looking out for the remainder of 2026, we will likely continue to see quarter-over-quarter fluctuations, which will include mark-to-market impacts of these awards in light of our stock price performance. But we will also look for further cost savings opportunities wherever it makes sense, but we will balance that with ensuring that we have an infrastructure in place that supports the global vision for Spheres, which Jim has laid out in his prepared remarks.

Operator, we'll take one last caller.

And we'll take that question from Joe Stauff at Susquehanna.

I was just wondering if you could update us on your residency strategy. In the near term, we could see that the Friday, Saturday windows are pretty much locked up through the end of September. There is some availability in Wednesday and Thursday. And just wondering, Jim, with your comment that, it only takes an hour to set it up, if you think about how you use residencies differently going forward and what the outlook may look like?

Look, I think you actually answered your question yourself. We don't announce everything as soon as it gets agreed upon, et cetera, with [indiscernible]. So I would say that we're pretty much out of date for this year. We are seeing some expansion into Wednesdays and Thursdays. No doubt is actually playing tomorrow, will be show, I believe. So that's good. I don't see us going through a concert model 7 days a week, anything like that. But the demand is high, and I don't see it abating at all. Demand on the actual base.

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

Thank you all for joining us. We'll speak with you on our next earnings call. Have a good day.

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