Sphere Entertainment Co. (SPHR) Earnings Call Transcript & Summary

Good morning. Thank you for standing by, and welcome to the Sphere Entertainment Co. Second Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Ari Danes, Investor Relations. Ari, please go ahead.

Thank you. Good morning, and welcome to Sphere Entertainment's Second 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'll 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. For today's call, I'd like to discuss our progress in 2 important areas of the business, expanding the Sphere venue footprint around the world and developing a diverse slate of original content. In Abu Dhabi, we recently announced Sphere site location on Yas Island. Construction for Sphere is now underway and is expected to be completed by the end of 2029. Here in the U.S., we continue to advance our plans for Sphere at National Harbor. We expect to complete an agreement for third-party financing in the near term. This funding would be in addition to $200 million in state, local and private incentives. The contemplated structure would give us full operational control of the venue day-to-day. This would also allow us to consolidate the venue's financials and retain more of its economics. In addition, we recently filed our detailed site plan with Prince George's County as we work towards securing necessary permits. We continue to believe the venue could be open in under 4 years. We also remain in discussions with a significant number of markets regarding large and small-scale Spheres. At the same time, we continue to focus on developing a diverse slate of original experiences. Last month, we announced a new experience, the Rocky Horror Picture Show at Sphere, which we expect to debut in 2027. Bringing this production to Sphere will expand our content slate to a new genre. It also allows us to extend Sphere Experience showing later into the evening, increasing the utilization of the venue. Meanwhile, the Wizard of Oz at Sphere has now sold nearly 3.6 million tickets for approximately $450 million in ticket sales. We also remain in discussion with IP holders for other potential Sphere experiences. We will keep you updated on our progress. Turning briefly to MSG Networks. Yesterday, we announced the partnership making DAZN our exclusive direct-to-consumer streaming home. We believe both our subscribers and content will benefit from DAZN state-of-the-art platform. We have also continued to reduce the amount of debt at MSG Networks, which was down to $116 million at quarter end. As a reminder, that debt is nonrecourse to Sphere. So in summary, we are advancing plans across key areas of our business as we make headway towards our long-term vision for a global network of Sphere venues. And with that, I'll turn the call over to Robert, who will take you through our financial results.

Thank you, Jim, and good morning, everyone. For the June quarter, we generated total company revenues of $313.6 million and adjusted operating income of $50.9 million. Our Sphere segment generated revenues of $226.4 million, an increase of nearly 30% compared to the prior year period. This growth was mainly driven by the Sphere experience, primarily reflecting higher virtual revenues for The Wizard of Oz at Sphere. As Jim mentioned, The Wizard of Oz is performing well as it nears its 1-year anniversary. We also continue to work on both The Wizard of Oz 2.0, an enhanced version of the production as well as Postcard from Earth. Turning back to our results for the quarter. We also saw revenue growth in Exosphere advertising, sponsorship and suite license fees and concert residencies. This was partially offset by the impact of fewer brand events held at Sphere year-over-year. Second quarter adjusted operating income for our Sphere segment was $39.9 million as compared to $24.9 million in the prior year quarter. This reflected the increase in revenues, partially offset by higher SG&A expenses and direct operating expenses. The increase in direct operating expenses includes the impact of the Wizard of Oz at Sphere, mainly a result of higher per-show expenses. This was partially offset by lower expenses from brand events and other cost increases. SG&A expenses for the second quarter were $125.6 million, an increase of $29.2 million. This increase includes the impact of mark-to-market adjustments for certain share-based compensation awards, driven by the appreciation in the company's stock price during the quarter. I would also note that we cash settled over half of these awards during the quarter. Therefore, all else being equal, the mark-to-market impact will be lessened in future periods. Turning to MSG Networks. The segment generated $87.3 million in revenues and $11 million in AOI in the second quarter. This compares to $107.1 million in revenues and $36.5 million in AOI in the prior year period. These year-over-year results reflect an approximately 16.5% decrease in subscribers as well as a decrease in advertising revenue. These results also reflect the impact of retroactive adjustments for the 2024-25 season recorded in the prior year second quarter related to amendments for media rights agreements with MSG Sports and certain other professional teams. Turning to our balance sheet. As of June 30, our Sphere business had approximately $534 million of unrestricted cash and cash equivalents, $259 million in converted debt and the $275 million term loan related to Sphere in Las Vegas. At MSG Networks, as of June 30, net debt was approximately $98 million. As Jim mentioned, this included $116 million outstanding on the MSG Networks term loan, which again is debt that is recourse only to MSG Networks. And with that, we'll now open the call for questions.

[Operator Instructions] Your first question comes from the line of David Karnovsky with JPMorgan.

Jim, with Wizard of Oz, can you discuss how you see the progression of attendance from launch until now in terms of seasonality and maybe getting past that initial period of demand? And then how does that inform your view of the show from here as you lap the anniversary and look to put enhancements into the experience?

The show is performing very, very well. And it is subject to basically everything in Vegas is the seasonality, and we're in the middle of the summer, which is definitely the low season for it. But it's still doing very, very well. And I anticipate -- we could run Wizard of Oz for a long, long time and do very well with it. But that -- our plans really are to come out with the new version of Wizard of Oz sometime we hope in December. Excuse me, September, not December, and then, of course, the -- in March to add in Rocky Horror Picture Show, which will give us the ability to service families in the daytime and then a more adult audience in the evening. And I think that's going to work very well. But look, I always look at -- if you take a look at the show O in Las Vegas, right, which has been running now for over 30 years. And it doesn't seem like the appetite for that show has really diminished at all. The -- and I think that Wiz could easily go 10 years, playing in other spheres, occasionally playing in Vegas, et cetera. I think there's always going to be an audience for that product. And that's one of the reasons that we picked it was because it's so universally loved and it has tremendous legs and we'll have some fun modifications and additions that we'll make starting for 2.0, including that you're going to go for a ride with a wit and new kinds of flying monkeys. So I think you're going to see that the product remains robust in its demand. And if I could make more Wizard of Oz, I definitely would.

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

Jim, you mentioned Rocky Horror represents a different genre of content for the Sphere. It also gives you the opportunity to show content on a different schedule compared to what you've historically shown was. I was wondering if you could maybe talk a little bit more about this, how investors should think about the role of complementary IP within the broader content strategy as well as the opportunity it could afford you to increase show count over time at the Sphere.

Look, the Rocky Horror picture show, I think, is going to be -- I think it's going to be a smash just take a step to the left. but the -- it's a little like movie theaters in a way in that you -- the content fits the daytime and what time you're showing it, et cetera. But the whole business equation, the strategy here is to create reusable content that goes from Sphere to Sphere, et cetera. And nobody in Abu Dhabi has seen Rocky Horror Picture Show. So I'm wondering how they're going to like that. And the Wiz, the same thing is true of National Harbor, et cetera. So as we continue to build out Spheres, our ability to create and monetize content also increases. And I really would like to get ahead of that as much as we can before the openings of these venues because I just think it will make their results even more robust.

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

Jim, regardless of the seasonality and whatever it is that's impacting Oz, I think we can all agree it's been a pretty massive hit and the concert calendar in Vegas is already really full. So with that in mind, can you take a step back and talk about what the growth levers are for the Las Vegas Sphere specifically in 2027 and beyond?

Sure. You're right about concerts, right? As I've said in previous calls, right, we're not shy of demand from artists to come play to Sphere. And we have some great artists coming up, which I'm not going to tell you their names today. But the whole strategy, the business strategy behind the creation of Sphere is utilization of the venue. And that's where the growth -- that's where we look at the growth to come, right? The Madison Square Garden, right, runs approximately 200-and-something events a year. And it is hamstrung by the fact that you have to load in, you have to load out, it's different shows. But of course, the Garden does very well. But when we created Sphere and created the business model around it, it was all about increasing utilization and increasing utilization through our own IP and our own content. So I mean, we're going to continue to pursue that. I don't think that we have refined the model to the point where we've maximized the revenue potential there. And I think we have new products that some of which we haven't talked about and won't talk about at this point that will increase the utilization. And that's where I think the growth will come. So.

Your next question comes from the line of Matt Condon with Citizens Bank.

Jim, in terms of original content, do you have the capacity to take on additional projects? And has the time to market gotten shorter since the development of the Wizard of Oz? And just relatedly, how many Sphere experiences could we expect to be playing in the venue by the end of 2027?

Okay. That's a good question. The first part of it is really about how quickly we make and how efficiently we make it. And we are definitely getting faster and becoming more efficient. Rocky Horror is a good example. I mean, Wizard of Oz really took 2 years to make and Rocky Hour Picture Show is going to take less than 12 months. And we're getting better at it, particularly when it comes to the use of AI and the production techniques that we developed for Wizard of Oz. So I expect that we'll be able to create more content at a less expensive and more efficient fashion. And that will bode well for, of course, for Vegas, but for the other Spheres. How many will we have by the end of '27? It's just a guess, Matt, but I'd say 3 to 4.

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

Jim, on National Harbor, can you explain why you think the OpCo model is advantageous versus a traditional franchise model? And then second to that, if you have interest in pursuing a similar structure for future Spheres and if there could be situations where you maybe pursue multiple different operating models.

Okay. Well, look, the -- I'll answer part of this. Finger will answer the other part of it. Do we think that National Harbor is the optimal model? I know -- look, it's the model that works for National Harbor. The -- but -- the idea here is to build as many of them right, as quickly as we can, right, because that helps the overall business strategy. Now I'm going to let [ Dick ] talk about what we're thinking about with National Harbor.

Sure. As Jim mentioned, as we look at the overall expansion strategy, we analyzed several financing structures. We see a number of benefits for what we call a build-to-suit and leaseback structure for National Harbor, similar to a sale leaseback, but it's really build-to-suit because it's new construction. First, the third-party partner that would fund the total construction of the venue. While that third party will own the venue, we will enter into a long-term lease and have day-to-day operational control of the venue, which we think is really important given our business in Las Vegas and leveraging off of our whole management team and operational structure. We'll also fully consolidate the National Harbor results on our financials. And I think most importantly, this type of financing will enable us to retain more of the AOI and also the potential upside in the future. And I think lastly, as Jim mentioned, as we look at other structures, it could be a combination. It could be a franchise strategy, it could be the build-to-suit. It could be a minority equity investment. It could also include debt structures. So we will really look at each one individually and look to maximize our returns.

I think the thing about these structures is that a, we're looking to go fast and build as many as we can. And by utilizing multiple structures, our availability of capital, right, it's not unlimited, but it's quite robust. So that really helps us move the strategy along.

If I may ask one quick follow-up on that. You own Vegas, MSG owns the Garden. They benefited from value appreciation of the real estate of the property. There's a ton of IP in the spheres. I guess, why not self-finance this if you want to operate it and keep control of it?