Sphere Entertainment: What To Consider Ahead Of Q2 2024 Earnings

Introduction

Sphere Entertainment Co. (NYSE:SPHR), a small-cap play on live entertainment and media space is due to announce its Q2-24 (the company follows a June ending fiscal year) earnings next week, on the 5 th of Feb. If you’re looking at exploring a position in this counter ahead of the key event, here are a few important themes to consider.

Earnings-related Considerations

SPHR has quite a wild track record during earnings season, and one wouldn’t expect the upcoming Q2 event to be any different. For some perspective, over the last 13 quarters, the stock has missed bottom-line GAAP estimates on 8 separate occasions and never met street expectations on any occasion. However. over the last couple of quarters, it has comfortably beaten street estimates, and that too by quite handsome margins. SPHR management typically doesn’t provide any explicit quantitative guidance, but in the upcoming Q2, consensus is currently budgeting for a GAAP loss per share of -0.45, and a non-GAAP figure of -0.06.

For the upcoming Q2 results, investors would also do well not to attach too much of importance to YoY progress, as the previous Q2, last year, included the impact of the now spun-off MSG Entertainment business, as well as the Tao Group Hospitality business, which was eventually sold in May 2023. Q2-23 also likely included certain corporate overhead costs which have become redundant since the spin-off.

Regardless, after delivering operating losses for 5 straight quarters, it is encouraging to note that SPHR could finally deliver a positive adjusted EBIT number in Q2. Meanwhile, it also looks like the revenue run rate could witness a surge by 2.5x from levels of $118m seen in Q1-24, as consensus is currently expecting a revenue figure of $305m. Given the high production and establishment costs associated with this business, it makes a big difference when the volume comes in, as the day-to-day maintenance expenditure is typically less onerous on the overall cost base.

A key driver in Q2 will be the full quarter impact of the company’s first Sphere in Las Vegas, which only went live towards the end of September. Sphere’s U2 concerts which offer an immersive experience appear to have been a big hit with the business now forced to offer 15 new shows in 2024 through March. Occupancy levels too appear to have been quite healthy with tickets sold for each concert equating to 16400, which means an implied rate of 88% (the seating capacity is 18600). It isn’t just the volume that’s worth commending; as recently as mid-Jan, tickets were being sold at peak levels of $750 per show. In the first two months of Q2, the U2 show was able to generate average revenue of around $15m per month, don’t be surprised to discover if this likely spiked to $20-$25m in Dec alone. All in all, we think the U2 event could have likely contributed $60m in the final quarter of 2023.

Darren Aronofsky’s Postcard from Earth, as part of the Sphere experience, will be another key catalyst (and is expected to be for a year at least) as it has been generating around 400K per viewing. The SPHR stock could get some re-rating if management elaborates on more original content initiatives than on the anvil. A greater contribution from original content can shift SPHR’s economics quite significantly in light of the dual advantages of being the content operator as well as the owner of the venue.

In November, SPHR would likely also receive a strong bump up from the inaugural Las Vegas Grand Prix. Formula 1 of course has signed a multi-year agreement with Sphere, so this could be a reliable source of revenue in the years ahead. Speaking of other sporting events, Q4 this year could also see some traction from the NHL draft which will be held in late June at the Sphere, although it looks like this could just be a one-off as draft day operations will be decentralized from 2025 onwards.

Then, Exosphere (this is the exterior of Las Vegas Sphere, believed to be the largest LED screen in the world) related ad campaigns too would only really have kicked on from October as it was only launched in early September. On the Q2 earnings call, management will likely elaborate on their pipeline of advertising campaigns, and potential tie-ups with various brands. However, investors need to recognize that for potential advertisers to leverage the true benefit of Exosphere, they can’t just use a one-size-fits-all campaign used in other mediums (such as those used as flat screen template), but rather need to devise a more customized an expensive campaign better suited to the spherical and 3-D structure of the Sphere. Regardless, if there’s one event that could give exosphere related advertising a shot in the arm, it could be the upcoming Super Bowl event due to be held on the 11th of Feb.

What will also likely abet the topline surge is the seasonal uplift on MSG Networks ad revenue during Q2 and Q3. On account of the spike in NBA and NHL-related viewership, MSG’s ad inventories typically see strong impetus during this period. Note also that MSG+, SPHR’s DTC product which only went live in June, will also benefit from more targeted marketing efforts in Q2.

Despite expected sequential progress on the topline and operating front, it doesn’t help that plenty of uncertainties still exist over how MSG Networks plans to settle around $829m of debt that will come due by October this year. Admittedly SPHR will push the envelope to find ways to suitably refinance a significant chunk of that figure (and one will be hoping for greater clarity on the earnings call regarding this), but it will still need to pay down a portion of that debt, and unless the Sphere model can be expeditiously replicated at scale across other terrains beyond Las Vegas (which is an outlandish proposition at this juncture) we don’t see how improving volume dynamics at Sphere can move the dial from a cash flow angle.

High Risk Play, Prone To Controversies

Prospective investors who are piqued by SPHR’s intriguing story should also consider that it can be prone to wide fluctuations which may put off those with conservative risk appetites.

Whilst MSG Networks’ debt and refinancing considerations could keep SPHR investors on tenterhooks, the situation is also often compounded by a series of C-Suite-related upheavals. Last year we saw quite a few big exits, including the abrupt departure of the CFO just ahead of the Q1 earnings event. Then, a couple of weeks back, the Chairman and CEO of Sphere Entertainment- James Dolan was also hit with a federal lawsuit, with the petitioner accusing him of sexual assault and sex trafficking. All in all, it’s worth considering that some of these developments have certainly enhanced the risk profile of the stock, with the standard deviation of its monthly returns (annualized figure) spiking up off late.

There’s clearly also a lot of bearish ammunition out there against SPHR, which is exemplified by an elevated short float % of 27%.

Closing Thoughts- Technical Considerations

Given some of the uncertainties and risks covered in this article, we can’t say we are prepared to fully embrace the SPHR stock, but certainly, if you’re someone who’s only driven by the technical narratives, things look fairly encouraging.

SPHR’s weekly price imprints on the chart below tell us that from May to July 2023, the stock had been quite resolute, trending up strongly, since then we’ve seen a healthy pullback involving 4 legs. Basically, it was evident that the stock was following a bullish flag pattern, which is essentially a continuation pattern. In recent weeks we’ve now seen the stock break beyond the upper boundary of the flag, and if Q2 results are seen as favorable, we may see the stock re-test the previous highs of around $44 levels.

Interest in SPHR could also be driven by the notion that the stock’s relative strength ratio (RS) vs other alternatives from the leisure and entertainment space is still trading around 20% off the mid-point of its long-term range, offering up some scope of mean-reversion.