Good morning, and thank you for standing by, and welcome to the Sphere Entertainment Co. Fiscal 2024 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. 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 fiscal 2024 second quarter earnings conference call. Today's call will begin with our Executive Chairman and CEO, Jim Dolan, who will provide an update on Sphere. This will be followed by an update from Andrea Greenberg, President and CEO of MSG Networks. And then Dave Byrnes, our Executive Vice President, Chief Financial Officer, and Treasurer, will conclude with a review of 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 5 and 6 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. As we said from the very start, the vision for Sphere was to create a next-generation medium that would disrupt the traditional venue model. Now, with our first full quarter of operations in Las Vegas behind us, we can see from our results that our thesis is starting to play out. With Sphere, we wanted to design a venue that would be busy 365 days a year with multiple events per day. During the second quarter, we sold more than 1 million tickets to over 200 events. This volume is two to three times greater than what you would typically see from the busiest arena-sized venues in the world. Our original content category, The Sphere Experience, drove this volume, grossing more than $1 million in average daily ticket sales at a high margin. While The Sphere Experience is our key economic engine, residencies will continue to have an important place on our event calendar. High-profile residencies are not only profitable; they generate awareness for Sphere and other events at the venue. U2's sold-out extended run is a great example. We've also had strong demand from advertisers who have been quick to recognize the unique value of the Exosphere. And in November, we demonstrated what Sphere can do for corporate partners through our collaboration with Formula 1. With strong results from both events and advertising, our Sphere business segment generated positive adjusted operating income for our second quarter. This is an important financial milestone, demonstrating that the Sphere business model can be both profitable and self-sustaining. We know that this is just the first of many milestones to come as we continue to build our Sphere into a global entertainment and technology company. As we continue to learn more about our audience, we will refine our business model to maximize revenue opportunities. We will keep investing in technology, intellectual property, and content as we look to stay on the cutting edge of immersive experiences. Our plan is to monetize these investments not only at our Las Vegas venue but over time across multiple platforms. This includes a network of Sphere venues around the globe. With positive worldwide reactions to Sphere, we continue to have substantive discussions about expanding to international markets. So, we're pleased with our early results for Sphere in Las Vegas. However, we also believe we're only scratching the surface in terms of the global opportunity for this next-generation medium. Before I turn the call over to Andrea, I'd like to welcome Jennifer Koester, who was recently named President of Sphere Business Operations. Jennifer has an extensive background of driving growth of premier technology and entertainment brands, including most recently at Google. At Sphere, she will lead the development and execution of all business operations. I look forward to working with her on growing our business. I would also like to welcome Dave Byrnes. Dave previously served as MSG Entertainment's EVP and Chief Financial Officer and has now joined Sphere Entertainment as EVP, Chief Financial Officer, and Treasurer. You will hear from him a little later on. With that, I will now turn the call over to Andrea.

Thank you, Jim, and good morning. For the second quarter, we continued to execute on our plans for MSG Networks. This includes expanding how we deliver our networks to fans, strengthening our partnerships with distributors and advertisers, and building on our history of innovation. As we focus on these goals, we also remain mindful of our continued subscriber decline and its impact on our business. With regard to programming, we're in the midst of delivering another year of hundreds of live professional sports broadcasts and other award-winning original content, all with an eye on cost and operating efficiencies. We are halfway through the 2023/2024 NBA and NHL seasons, which also marked the first time we're making our games available through our direct-to-consumer authenticated streaming service, MSG+, and we're pleased with how the launch has gone to date. Since the start of the season, we've learned from subscriber behavior and have begun to utilize key takeaways to market our D2C offering more effectively. On the advertising front, we welcomed several new partners, including the pharmaceutical category. Aleve was named the presenting sponsor of MSG+ while Moderna signed on as a presenting sponsor of our New York Islanders broadcast. These new partners join a significant number of returning advertisers, which puts us on track for another year of solid advertising results. We also recently completed renewals with several distributors, including a multiyear agreement with one of our major affiliates. And lastly, we just announced a partnership with the YES Network to form Gotham Advanced Media and Entertainment, a new technology, sports, and entertainment streaming joint venture. Both MSG Networks and the YES Network have developed expertise and technology with their direct-to-consumer launches. With this 50-50 partnership, we'll combine these valuable insights to explore new products that further elevate the streaming experience for New York area sports fans. The joint venture will also offer a scalable turnkey and customizable solution to third-party content owners that want to deliver a state-of-the-art streaming experience to their customers. We look forward to sharing our progress as we work with the YES Network on building this new opportunity. And with that, I'll turn the call over to Dave.

Thank you, Andrea. I'm pleased to join you all here today in my new role at Sphere Entertainment. I'd like to start by reminding you that Sphere Entertainment completed the spin-off of MSG Entertainment last April and the sale of its majority interest in Tao Group Hospitality last May. Results for the prior year second quarter reflect MSG Entertainment and Tao Group Hospitality as discontinued operations. However, the prior year period does include certain corporate overhead costs that Sphere Entertainment did not incur after the date of the spin and does not expect to incur in future periods but did not meet the criteria for inclusion in discontinued operations. Due to these factors, our results are not fully comparable on a year-over-year basis. Turning to our fiscal '24 second quarter results, on a total company basis, we generated revenues of approximately $314 million and adjusted operating income of $51 million. The Sphere segment generated revenues of $168 million and adjusted operating income of $14 million in its first full quarter of operations since opening Sphere in Las Vegas. These results reflect a number of items led by our original content category, The Sphere Experience, which debuted on October 6. The Sphere Experience currently features Postcard from Earth, which ran 191 times during the quarter. Our results were also positively impacted by U2's multi-month run. And while the band shows are drawing to a close, we look forward to hosting Phish and Dead & Co. later this fiscal year. We also benefited from Formula 1's multiday takeover of Sphere for the inaugural Las Vegas Grand Prix as well as from a full quarter of advertising campaigns on the venue's Exosphere. As Jim noted, we've been pleased with early demand from advertisers. This includes around tentpole events like the Super Bowl this coming weekend. We are running a number of advertising campaigns from premier brands ahead of the event and are looking at a record-setting advertising revenue week for the Exosphere. In addition to the impact of strong demand across events and advertising, our second quarter results also reflect the impact of SG&A expenses, including corporate overhead and expenses related to Sphere Studios and associated content and technology development. I would also note that operating income results at the Sphere segment include a non-cash impairment charge of $117 million related to our decision to no longer pursue a Sphere in London. As Jim mentioned, the company continues to have substantive discussions about bringing Sphere to other international markets. Turning to MSG Networks, the segment generated $146 million in revenues and $37 million in AOI, which represent decreases of 8% and 22%, respectively, as compared to the prior year quarter. The decrease in AOI primarily reflected lower distribution revenue and higher direct operating costs, partially offset by lower SG&A expenses. Turning to our balance sheet, as of December 31, we had approximately $615 million of unrestricted cash and cash equivalents, and our debt balance was approximately $1.4 billion. These balances reflect our recent convertible debt offering for net proceeds of approximately $236 million. The convertible notes carry an annual coupon of 3.5% and mature in December 2028. We intend to use the net proceeds from the offering for general corporate purposes, including Sphere-related growth initiatives. With that, I will now turn the call back over to Ari.

Thank you, Dave. Operator, can we open up the call for questions?

Thank you. We'll go first to Brandon Ross at LightShed Partners.

Hi, good morning, Jim. In your prepared remarks, you talked about substantive discussions for international locations. I was hoping you could give a detailed update on those international growth plans. There have been a few markets in the press, like South Korea. What are the gating factors to an announcement? And how do you foresee deal structuring? I know you said asset-light. What does that exactly mean?

I don't really see significant obstacles in exploring these markets. It's more of an evolution, and I believe we're on track. Brandon, it's important to note that this is the first full quarter of operations that Sphere has completed. By proving our business model, we're making the product more appealing and instilling greater confidence in it, which addresses one of the key concerns about profitability. This quarter's results indicate that we are indeed profitable. Now, we just need to keep negotiating with the markets that show the most interest, which we are actively doing, and I anticipate that we'll finalize an arrangement soon.

Great. And then for MSG Networks, the debt is due in October. How do you think about the refinancing in terms of ensuring that that Sphere segment has sufficient flexibility to grow and isn't encumbered by a challenged asset like MSG Networks? And then related, I guess, would love your updated outlook on where the MSG Networks business is going and the RSN business in general.

I'll let Dave answer the first part of the question, then I'll answer the second one.

Sure. Hey, Brandon. With Sphere, we're obviously looking at a long-term growth opportunity here. That's why we did the convertible debt offering this December to ensure that we have appropriate financial flexibility to drive that growth. And we're not going to be looking to do anything to hinder our ability to drive growth for Sphere. You mentioned the refi. Yes, it's due in October. Just to touch on that, we are currently in regular contact with our lenders. We're pursuing a number of potential options with regard to the ultimate refi, and we should have more on that in the coming months.

As for the business, we've been saying for a while now that the methods of monetizing content are struggling, which is a mild way to phrase it. The transition from traditional cable to streaming is challenging not just for MSG Networks but for the sports and entertainment industry as a whole. That said, MSG Networks has excellent content that consumers want. The main issue is how to monetize it, which remains uncertain. However, I believe the advancements Andrea is making in developing streaming platforms are definitely part of the solution. We need to keep moving forward. The product is strong, but the length of the transition from linear to streaming and how consumers engage with and pay for it are critical issues that still need to be addressed.

Thank you.

We'll move next to Paul Golding at Macquarie Capital.

Thanks so much. This is for either Jim or Dave. Just after seeing this quarter that you grossed over $1 million in average daily ticket sales for The Sphere Experience, I'm wondering if you could speak to whether you have a clear indication of the life cycle of an original attraction now at Sphere and if this informs subsequent Sphere Experience content that you might generate to keep that momentum going?

It's a good question. We refer to it as the first pancake. It's never perfect, but the demand is strong. Las Vegas is an excellent market because it continually attracts new customers. Regarding the duration of The Sphere Experience, we don't have a fixed timeframe for it. Our plan is to replace it while still operating and growing a library of content. When we open new Spheres, they won't be affected by the first pancake syndrome. Another aspect that's difficult to quantify is whether our consumers are coming to see "Postcard from Earth" and the current Sphere Experience or simply to experience the Sphere itself. It's a blend of both, but over time, the focus will shift more towards content, and we're preparing for that.

Thanks, Jim. That's a great point. And then I wanted to circle back on the venue itself. As you continue to engage in these substantive conversations with potential partners, is the construction cost estimate of potential subsequent venues becoming clearer relative to what the original venue cost as we think about what the ROI might be for a run rate model of franchising these venues? Thanks.

Well, I mean it is a franchising model, right, which means that we don't carry the heaviest loads capital into it. However, we do think we can deliver new Spheres on a less costly basis than the first one, again, sort of that first pancake thing. We learned a lot. We're already in the midst of looking at the new designs and taking costs out of it, making the construction go faster, be more efficient. And hopefully, over time, we'll get really, really good at that. But it shouldn't go up. It should go down because of everything that we've learned.

Great. Thanks so much.

We'll go next to Ben Swinburne at Morgan Stanley.

Thanks, good morning. Jim, your residency calendar looks quite busy this year. I'm curious if you believe you have the right balance of residency and experiences. It seems you're currently averaging around 100 residents annually with U2, Phish, and Dead & Co. Additionally, regarding the new venue, how long do you anticipate it will take to build? Do you expect the construction timeline to be shorter as you progress with your partners? Also, do you foresee any revenue generation before the new venue opens? Thanks.

Yes. Let me clarify your question. Which part would you like me to address first?

Residencies and then pancake costs or timeline, sorry.

Okay. So regarding residencies, we have already announced the next two acts that will perform. I can tell you that our calendar is nearly full for this year and we do not have the capacity to take on anything more significant beyond our current commitments. However, the demand from artists continues to increase, and we expect 2025 to be another full year for us. What has surprised us is that similar to U2, which initially committed to around 20 shows but ended up with 40, we are seeing the same level of demand for tickets for artists like Phish and Dead. Therefore, these residencies are likely to extend longer than we had anticipated due to ticket demand. That’s a positive development. So, does that address your question about residencies?

Yeah, absolutely.

And then you want to know what else?

How long are you considering before your company could start seeing cash flow benefits from additional Spheres? Obviously, you need some time to build, so do you have an updated thought on the timeline?

It's a franchise model, and we have a construction development division that supports this franchise model. They are compensated for their work. Therefore, they will start generating revenue right away to facilitate the build and construction process. There are various revenue streams associated with the franchise model, and the construction aspect also contributes revenue. Our primary objective is to ensure that there are no losses related to Sphere's construction, and we anticipate profits. Additionally, there will be ongoing services and content provision, which will create a continuous revenue stream similar to a franchise model.

Got it. Great. Thank you so much.

We'll move to our next question from David Karnovsky at JPMorgan.

Hi, thanks. Jim, just following up on the residency question, interested in how you think about the venue in Vegas as a destination not just for residencies but maybe for music touring generally? Is it feasible for an artist to consider Sphere as a one or two-night stop for a tour when they're in Vegas?

Not at this time. The investment that the artist has to make in order to create the show and do the content, right, requires more than just one or two shows. I mean, when an artist is on tour, they're playing 40 markets, they build a show and they amortize their show investment over the 40 markets. With The Sphere, because of how unique it is, what they build for Sphere really doesn't move into a touring model, or at least most of it doesn't. So, they need to justify it based on the run that they have at The Sphere. So one or two shows doesn't do it.

Okay. And then on networks, following up on the term loan expiration question, I'm just wondering how you're thinking about potential costs that you could still take out of the business as far as programming, SG&A, or even amended rights fees? And then separately, with the game JV with YES, do you view this purely as a technology tie-up, or is there opportunity down the line to bundle content and go to market together in the New York area?

I'll take that, David. Hi. Well, as you know, a significant percentage of our costs are fixed. That includes the right fees that we pay our teams. That said, we're always looking for ways to run our business more efficiently. And considering the pressures facing all similar companies, that is and will remain a big focus of ours. We previously mentioned, I think, on our last call that we had renewed our Devils rights agreement. That renewal did reflect the realities of the current landscape. At the same time, we do expect to see operating efficiencies and screening coming from our new venture with the YES Network. As to your second question about a potential larger deal with YES, the deal that we announced related to the streaming venture and only to the streaming venture, but as always, we're open to exploring opportunities that make strategic and financial sense for us.

Thank you.

We'll move next to Logan Angress at Wolfe Research.

Hi, thanks for taking my question. Congrats on the results. First, I'm just curious, acknowledging that Sphere is still very new, to what extent are you seeing opportunities to drive greater efficiencies at The Sphere in terms of either venue utilization or costs? Specifically, do you expect to be able to do both Sphere Experiences and concerts or residencies in the same day at some point during this fiscal year?

Yes, that's exactly our goal. The Sphere is designed to host multiple events in a single day, not just repeat the same event, but rather different ones. We aim to have a concert and a Sphere Experience on the same day, which we believe will be quite profitable. Additionally, we're exploring options such as a late-night EDM show. While we may not reach three different types of events in a day, we are confident we can manage two. A significant aspect of traditional venues was the load-in and load-out time, which is virtually eliminated at The Sphere. This allows us to schedule a concert on Wednesday and have The Sphere Experience up and running by Thursday at noon, as reflected in our current results. However, there's still considerable refinement needed on both the expense and revenue sides.

Great. Thanks.

Thanks, Logan. Operator, we'll take one last caller.

Thank you. We'll take that question from David Joyce at Seaport Research Partners.

Thank you. For Jim, could you please update us on the status of the sponsorship business? You've had a few announcements lately post-quarter. So, I was just wondering, where do you see that going from here? How do you differentiate between sponsorship opportunities and Exosphere advertising? Just some more color there would be helpful.

Most of our current opportunities are centered around the Exosphere, which is the main platform for advertisers. However, we also plan to further develop our sponsorship initiatives. This year, I anticipate some significant announcements that will not only pertain to the Exosphere but will also focus on the direct relationship between clients and their products, as well as the content featured within the product.

All right. Great. Thank you.

And that does conclude the question-and-answer session. I would like to turn the conference over to Ari Danes for closing remarks.

Thank you all for joining us. We look forward to speaking with you on our next earnings call. Have a good day.

Goodbye.

And this concludes today's conference call. You may now disconnect.