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Sphere Entertainment (NYSE:SPHR) Reports Sales Below Analyst Estimates In Q1 Earnings


Full Report / May 10, 2024

Content production and distribution company Sphere Entertainment (NYSE:SPHR) missed analysts' expectations in Q1 CY2024, with revenue up 98.2% year on year to $321.3 million. It made a GAAP loss of $1.33 per share, improving from its loss of $1.64 per share in the same quarter last year.

Sphere Entertainment (SPHR) Q1 CY2024 Highlights:

  • Revenue: $321.3 million vs analyst estimates of $324.7 million (1% miss)
  • EPS: -$1.33 vs analyst estimates of -$0.19 (-$1.14 miss)
  • Gross Margin (GAAP): 52.1%, up from -29.6% in the same quarter last year
  • Market Capitalization: $1.45 billion

Famous for its viral Las Vegas Sphere venue, Sphere Entertainment (NYSE:SPHR) hosts live entertainment events and distributes content across various media platforms.

Sphere Entertainment made its initial splash with the Las Vegas Sphere, a unique venue sporting advanced technologies in media production. This venue looks like a giant orb and is covered with LED panels on the inside and outside to create an immersive digital experience. Beyond The Sphere and live event production, the company's offerings include content creation and distribution across various media platforms.

Sphere Entertainment generates revenue through live events, content distribution agreements, and media partnerships. Specifically, its Las Vegas Sphere has a two-sided business model, where live events within The Sphere generate ticket and concession revenue while the outside of the venue pulls in advertising revenue from companies seeking to display large-format digital ads. On the content distribution side, the company operates regional sports and entertainment networks, MSG Network and MSG Sportsnet, along with a direct-to-consumer streaming product, MSG+.

The expansion of its Sphere venues is key for growth, but new locations are subject to regulatory approvals, presenting risks (as seen in its December 2023 denial of a London location).

Leisure Facilities

Leisure facilities companies often sell experiences rather than tangible products, and in the last decade-plus, consumers have slowly shifted their spending from "things" to "experiences". Leisure facilities seek to benefit but must innovate to do so because of the industry's high competition and capital intensity.

Competitors in the live entertainment and content production industry include Live Nation (NYSE:LYV), Endeavor (NYSE: EDR), and Madison Square Garden (NYSE:MSGE).

Sales Growth

Examining a company's long-term performance can provide clues about its business quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Sphere Entertainment's annualized revenue growth rate of 3.3% over the last five years was weak for a consumer discretionary business. Sphere Entertainment Total RevenueWithin consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends. That's why we also follow short-term performance. Sphere Entertainment's annualized revenue growth of 51% over the last two years is above its five-year trend, suggesting some bright spots.

We can better understand the company's revenue dynamics by analyzing its most important segments, Sphere and MSG Networks, which are 53% and 47% of revenue. Over the last two years, Sphere Entertainment's Sphere revenue (live events and advertising) averaged 13,305% year-on-year growth. On the other hand, its MSG Networks revenue (content distribution) averaged 8% declines.

This quarter, Sphere Entertainment achieved a magnificent 98.2% year-on-year revenue growth rate, but its $321.3 million of revenue fell short of Wall Street's lofty estimates. Looking ahead, Wall Street expects sales to grow 29.7% over the next 12 months, a deceleration from this quarter.

Operating Margin

Operating margin is an important measure of profitability. It’s the portion of revenue left after accounting for all core expenses–everything from the cost of goods sold to advertising and wages. Operating margin is also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Given the consumer discretionary industry's volatile demand characteristics, unprofitable companies should be scrutinized. Over the last two years, Sphere Entertainment's high expenses have contributed to an average operating margin of negative 30.4%. Sphere Entertainment Operating Margin (GAAP)

In Q1, Sphere Entertainment generated an operating profit margin of negative 12.6%, down 47.5 percentage points year on year.

Over the next 12 months, Wall Street expects Sphere Entertainment to shrink its losses but remain unprofitable. Analysts are expecting the company’s LTM operating margin of negative 38.5% to rise to negative 18.6%.

EPS

Analyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability and efficiency of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions. Sphere Entertainment EPS (GAAP)

Over the last four years, Sphere Entertainment cut its earnings losses and improved its EPS by 37.1% each year.

In Q1, Sphere Entertainment reported EPS at negative $1.33, up from negative $1.64 in the same quarter last year. Despite growing year on year, this print unfortunately missed analysts' estimates, but we care more about long-term EPS growth rather than short-term movements. Over the next 12 months, Wall Street expects Sphere Entertainment to perform poorly. Analysts are projecting its LTM EPS of $10.89 to invert to negative $2.93.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money the business raised (debt and equity).

Sphere Entertainment's five-year average return on invested capital was negative 9.2%, meaning management lost money while trying to expand the business. Its returns were among the worst in the consumer discretionary sector.

Sphere Entertainment Return On Invested Capital

Balance Sheet Risk

As long-term investors, the risk we care most about is the permanent loss of capital. This can happen when a company goes bankrupt or raises money from a disadvantaged position and is separate from short-term stock price volatility, which we are much less bothered by.

Sphere Entertainment, which has $693.9 million of cash and $1.54 billion of debt on its balance sheet, was unprofitable over the last 12 months. It posted negative $316.8 million of EBITDA, and as investors in high-quality companies, we seek to avoid indebted loss-making companies.

We implore our readers to do the same because credit agencies could downgrade Sphere Entertainment if its unprofitable ways continue, making incremental borrowing more expensive and restricting growth prospects. The company could also be backed into a corner if the market turns unexpectedly. We hope Sphere Entertainment can improve its profitability and remain cautious until then.

Key Takeaways from Sphere Entertainment's Q1 Results

We struggled to find many strong positives in these results. Both its revenue and operating margin missed. The stock is flat after reporting and currently trades at $41.4 per share.

Is Now The Time?

Sphere Entertainment may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We cheer for all companies serving consumers, but in the case of Sphere Entertainment, we'll be cheering from the sidelines. Its revenue growth has been weak over the last five years, but at least growth is expected to increase in the short term. And while its EPS growth over the last four years has been fantastic, the downside is its projected EPS for the next year is lacking. On top of that, its relatively low ROIC suggests it has historically struggled to find compelling business opportunities.

While we've no doubt one can find things to like about Sphere Entertainment, we think there are better opportunities elsewhere in the market. We don't see many reasons to get involved at the moment.

Wall Street analysts covering the company had a one-year price target of $42.50 per share right before these results (compared to the current share price of $41.40).

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