Sphere Entertainment, the holding company of the Las Vegas venue and MSG Networks’ RSN business, reported first-quarter revenue of $227.9 million, nearly double the prior year quarter that only included a few days of revenue for Sphere, which opened with a US concert on Sept. 29, 2023.
Fans flocked to the $2.3 billion venue to see the first live sporting event, UFC 306, as well as Dead & Co. and The Eagles, who are in the middle of a 28-show residency. The quarter also introduced the second Sphere Experience, concert film V-U2, which joined Postcard from Earth. There were 207 Sphere Experience shows during the quarter, and they represented 56% of Sphere segment revenue; events, primarily concerts and UFC, were 32%. UFC 306 was the highest-grossing event in the first year of Sphere.
Sphere has received rave reviews from visitors, but turning a profit on the business remains elusive. The company’s Sphere segment posted an operating loss of $125.1 million for the quarter and $507 million for the last 12 months. The “adjusted” operating loss for the quarter was $26.1 million, which adds back depreciation and amortization, share-based compensation and other expenses.
The stock was down 11% mid-day but still up 16% year-to-date.
During the earnings call, Sphere CEO Jim Dolan compared the first year of operating the Sphere as the “first pancake.”
“It’s the first time we’ve done it, and we’ve learned, and we’re getting better at it,” Dolan said. “I wish that the day we lit it up, that we knew exactly how to run it, exactly how to sell it, and exactly how to, you know, program it, etc. But that’s just not the case.”
Dolan has long had global ambitions for more Spheres, and it is part of the economic model. “We built this company not to operate one building in Las Vegas,” Dolan said, citing the overhead and cost of content creation. “The more of these that we do, right, the more we utilize the investment that we made into the company itself.”
Last month, Sphere Entertainment and the Department of Culture and Tourism in Abu Dhabi announced that the United Arab Emirates capital would be the home of the second Sphere. DCT Abu Dhabi will pay Sphere a franchise initiation fee for the right to build the arena that will use the company’s proprietary designs, technology and intellectual property. DCT Abu Dhabi will fully fund construction, while Sphere Entertainment will collect annual fees for licensed content, such as Sphere Experiences, and the use of patents, technology and IP.
Multiple Wall Street analysts asked Dolan about the next acts at the venue, and he replied that they would have to wait for the “special sauce” just like everyone else. He did say the company was having trouble squeezing all the bands in for 2025 that have committed to play. He provided one hint on the acts. “You like The Eagles,” Dolan asked. “You are going to see a lot of Eagles for a while.”
Several big-name investors have embraced the potential of Sphere. Earlier this year, New York Mets owner Steve Cohen amassed a new 5.5% stake, according to a June SEC filing. During the same period, hedge fund titan Ken Griffin more than tripled his stake in the company and now owns 5.3% of the shares through his investment firm Citadel.
Last week, Morgan Stanley revealed it added 1.5 million shares to its position since June 30 and now owns 2.05 million shares, or a 7.2% stake. The move comes after Morgan Stanley increased its Sphere position by 49.5% in the second quarter to 541,781 shares.
Sphere Entertainment’s financial statements also provide a glimpse into the struggles of the RSN business, which is not unique to MSG. The network segment posted revenue of $100.6 million, a 9% decline from the prior year. Total subscribers declined 13%, which was partially offset by higher affiliation fees. MSG Networks’ operating income was $7.5 million, down 74%; adjusted operating income fell 36%.
As of Sept. 30, MSG Networks had $829 million in outstanding debt that matured Oct. 11. MSGN reached a month-long forbearance agreement with existing lenders to work on a debt restructuring that could involve some loan forgiveness. On Tuesday, Sphere said the forebearance period was extended to Nov. 26.
MSGN is likely worth less than the debt, providing Sphere with leverage with lenders because the debt is guaranteed only by the MSGN division that carries New York Knicks and New York Rangers games.
Last month, Wolfe Research analyst Peter Supino issued a report citing the debt as a possible overhang on the stock. Supino suggested the debt could be reduced from $829 million to $400 million, alleviating the need to issue new equity to manage the debt obligations.
–With assistance from Brendan Coffey.
