Hello and thank you for being here. My name is Regina and I will be your conference operator today. I want to welcome everyone to the Sphere Entertainment Co. Fiscal 2024 Third Quarter Earnings Conference Call. All lines are muted to eliminate any background noise. After the speakers finish their remarks, there will be a question-and-answer session. I will now hand over the conference to Ari Danes from Investor Relations. Please proceed.

Thank you. Good morning and welcome to Sphere Entertainment's Fiscal 2024 Third Quarter Earnings Conference Call. Today's call will begin with our Executive Chairman and CEO, Jim Dolan, who will provide an update on Sphere. Dave Byrnes, our Executive Vice President, Chief Financial Officer and Treasurer, will then review 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 five and six 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 you know, Sphere was built with the idea of disrupting the traditional venue model. We saw this thesis begin to play out in the December quarter. Today, we reported results for our second full quarter of operations in Las Vegas. And while it is still early days, we're pleased with our progress and remain optimistic about our vision for this new medium. For the third quarter, Sphere welcomed nearly 1 million guests to more than 270 events. This event volume once again far exceeded the world's busiest venues. It also drove robust revenue and positive adjusted operating income for the Sphere segment for the second consecutive quarter. These results were led by The Sphere Experience featuring Postcard from Earth. Since its October debut, the signature content category has already generated over $200 million in revenue. That includes more than $1 million in average daily ticket sales in both the second and third quarters. These results reinforce our belief in the value of original content. And we are now developing new cinematic offerings to strengthen this core category. On the concert front, headline acts are seeing the advantages of performing at Sphere. U2's 40 show run grew an audience on par with a national arena tour. Phish sold out its four nights in less than one hour. And Dead & Co. has already extended their upcoming residency. When we first launched Sphere, we outlined three content categories as the foundation for its business: original content, concerts and residencies, and marquee sports and corporate events. We are now looking forward to our first corporate keynote event with Hewlett Packard next month. This event will showcase how the venue's technology and offerings provide a compelling platform to educate and demonstrate. We believe that this corporate category will become an important and growing component for us. Our overall business strategy also focuses on maximizing venue utilization. Later in June, Sphere will welcome the NHL Draft, which will be the first live event televised from inside the venue. Over this multi-day run, we will also show The Sphere Experience, demonstrating our ability to efficiently host multiple event types on the same day. In addition, we continue to explore other event types, such as EDM shows that can run on the same day as original content. Turning to the Exosphere, advertisers continue to see significant value in this platform. This is especially true during tentpole events in Las Vegas. We had two great examples this past quarter, the Consumer Electronics Show in January, followed by the Super Bowl in February. As we look ahead, we'll remain focused on exploring ways to maximize the potential of Sphere, not only in Las Vegas but also around the world. Expansion discussions with international markets are progressing, and we look forward to sharing more in the future. So we're pleased with our results this past quarter and are confident in our plans for this next-generation medium. With that, I will now turn the call over to Dave.

Thank you, Jim, and good morning, everyone. For the fiscal '24 third quarter, we generated total company revenues of approximately $321 million and adjusted operating income of $61.5 million. This included revenues of approximately $170 million and adjusted operating income of $12.9 million at the Sphere segment. These results were led by our original content category, The Sphere Experience, featuring Darren Aronofsky's Postcard from Earth, which generated over $100 million in revenue. The Sphere Experience ran 257 times in the third quarter versus 192 times in the December quarter. We also benefited from the conclusion of U2's multi-month run, with 15 performances during our third quarter compared to 23 in the December quarter. And as Jim mentioned earlier, another positive impact on our results was continued strong performance for the Exosphere. In the third quarter, this included robust demand around the annual Consumer Electronics Show in January, followed by a record-setting advertising week leading up to the Super Bowl in February. SG&A expenses for the third quarter were $109 million as compared to $98 million in the December quarter. This primarily reflects corporate overhead and expenses related to Sphere Studios and associated content and technology development. Turning to MSG Networks, the segment generated $151 million in revenues and $48.6 million in AOI, which represent decreases of 6% to 17%, respectively, as compared to the prior year period. The revenue decrease reflects lower distribution revenue, primarily due to a 12.5% decrease in subscribers, inclusive of the impact of MSG+, partially offset by higher affiliate rates. In addition, advertising revenue decreased year-over-year primarily due to lower per game advertising sales on the linear networks and lower branded content advertising, partially offset by advertising revenue related to MSG+. The decrease in AOI reflects lower revenue as well as higher direct operating costs, partially offset by lower SG&A expenses. So while the industry remains challenging, we continue to pursue incremental revenue opportunities like our direct-to-consumer app, MSG+, as we also remain focused on how we can operate our business more efficiently. Turning to our balance sheet. As of March 31st, we had approximately $681 million of unrestricted cash and cash equivalents. Our debt balance was approximately $1.4 billion as of quarter end, which reflected approximately $870 million outstanding on the MSG Networks' term loan, the $275 million credit facility related to Sphere in Las Vegas, and $259 million in convertible debt. With regard to the MSG Networks' term loan, we remain in discussions with our lenders regarding an extension of the credit facility on terms that would be satisfactory. And with that, I will now turn the call back over to Ari.

Thanks, Dave. Operator, can we open up the call for questions, please?

We will now begin the question and answer session. The first question will come from Brandon Ross with LightShed. Please go ahead.

Thanks for taking the questions, guys. I wanted to start off with your expansion plans. You said in the prepared remarks that things are progressing. Any more details on those discussions would be helpful to investors, kind of what the holdup is, when we could expect resolution? And then since the last call, has there been any additional interest or discussion with or from any other potential domestic or international markets?

Hi, Brandon. This is Jim. I don't see this as having a hold-up. Building a Sphere is quite different from constructing a McDonald's. It's a complex and costly project. This will be only the second one ever built in the world. Therefore, finalizing all the details, construction costs, and relationships involved takes time. There has been substantial interest throughout the year, but it wasn't until we launched the product in late September that people really began to understand what it was and how it could perform. Despite that, we are in conversations with multiple markets and anticipate reaching a conclusion in at least one of them soon. I'm not making any predictions on the timeframe, but it will be soon. We continue to receive inquiries from new markets as the Sphere gains recognition and people become more aware of its economic benefits and potential for our marketplace, maintaining strong interest.

Great. And then on Postcard, it was certainly up quarter-over-quarter, but the per show and per show day revenues appear to be at least flattening out, if not a little weaker. Can you provide an assessment of where you think Postcard stands today in terms of demand, the ticket price refinements that you made and showtime refinements that you made, and then what you think the longevity of that show is?

Yes. So this is our first year of operation. And what we're doing is we're learning about the marketplace itself. So when we schedule Postcard, the pricing of it, etc., how we market it, it fluctuates with the market. The Las Vegas market is an interesting market. It's an international market. It has over 40 million visitors a year, and understanding how those visitors come and go and what they do is something that we're still getting good at. And then having that reflect in both the scheduling and the pricing, etc., is what we're getting better at every day. Look, I do think that Postcard benefited from being the first show in. And the reason that people came right was, yes, to see Postcard, but to see the Sphere also. Las Vegas is a cyclical market, meaning that people go once a year for a convention or for their annual trip. So I do think that as we hit the annual mark for Postcard, we need to have new content in place, and that new content has to be able to draw people in. So it needs to be, honestly, better than Postcard and, in itself, something that draws the customer in. That's what we're preparing to do, and I think we're going to be very successful. But I can't give you too many details on it.

Perfect. Thank you very much.

Yes, good morning, and thank you for taking the questions. Just following up on Brandon's question around Postcard and original content. Just wondering if you can sort of update us on the strategy and just in terms of when you expect the next original to debut, the type of content that you're considering and also how you're thinking about costs. I believe there's been some speculation around a potential U2 Sphere experience. Is that something that is in the works or could be in the works? And then on MSG Networks quickly, there's another big RSN dispute recently, this time between Comcast and Bally. Can you just update us on your thoughts around the RSN model and whether or not there are any considerations to extend your JV with YES or perhaps even form partnerships with other RSNs? Thank you.

Peter, you raised several questions, so let me break it down, starting with the second attraction. As I mentioned earlier, the second attraction needs to have its own unique appeal and a specific theme. We are utilizing a significant amount of technology in its development, and when we launch it, you will experience something unprecedented. I’m teasing a bit, but we expect to reveal our plans this summer. I can assure you we are implementing advanced technology, which includes a substantial use of AI. We are maintaining the same focus on experience and immersion but are incorporating additional technological elements that will impress you. Regarding the RSN model, it's an intriguing topic. Let's discuss RSNs more broadly. For sports like the NFL, the national model works effectively. However, for sports such as basketball and hockey, which have 82 games each season, that model doesn't entirely meet our needs; we require regional sports networks. The demand for local team coverage, especially for teams like the Knicks and Rangers, remains very strong. Therefore, we must maintain our RSNs and local components in our marketing and television strategies. Currently, those markets are facing challenges due to the shift from traditional linear media to digital and changes in viewership preferences. Historically, RSNs were distributed to major providers, mainly cable companies, and priced in a way that all cable subscribers received them, regardless of whether they watched them. This model is evolving, and pricing must adapt to this change. If we're not selling to everyone, those who do wish to watch still need to pay what we were receiving previously. We are in the midst of this transition and are likely nearing the bottom of this adjustment phase. We anticipate that as we move forward, online distribution and pricing will improve, leading to a new model taking shape. RSNs remain crucial for the league, and sports continue to be a vital aspect in every market, meaning I don't foresee their disappearance. As for our situation, we've announced our combined platform with YES and are actively exploring how we can enhance the consumer offering. The goal is to consolidate all local sports into one package, providing significant value to consumers. Even though we're currently in a low phase, I believe this product is essential, there is demand from consumers, and we need to determine a profitable way to monetize it.

Thank you.

Thank you. Good morning. Jim, regarding the Networks theme, I noticed in the prepared remarks that you mentioned discussions with lenders. What do you anticipate as the likely outcome of those discussions? What are your objectives as the October maturity approaches? Additionally, I have a follow-up on Sphere.

Hey, Ben, it's Dave. I'll take the Networks question. As I mentioned in the remarks, to your point, we do remain in discussions with our lenders regarding an extension. If we're successful in reaching an agreement, I just want to note that, that will continue to remain recourse only to MSG Networks. Any extension will likely include a partial pay down of the existing term loan using cash on hand at MSG Networks, as well as the cash contribution from the parent. But again, continuing from the parent, we're confident any cash contribution from the parent will not impact Sphere's ability to pursue any growth initiatives, including international expansion. We would expect to extend the maturity on the Networks loan by one year, which gives us the flexibility to continue to evaluate the right long-term path for the MSG Networks business. At this stage, we don't know how this will play out. If we're unsuccessful in reaching an extension with our lenders, you should assume that MSG Networks would decide to enter into a workout. And we'll continue to update you as we move through this process.

Got it. Thank you, Dave for all that detail. I guess, Jim, just on the residencies, which have been clearly a huge success, both in terms of revenue and profits. Has that changed at all your thinking of the right mix of residency nights and Postcard nights? And I know you want to be able to do more than one in a day. But it seems like the demand from artists is really strong, and consumer same thing. I'm just wondering if you think, as you look out over the next couple of years, that maybe the amount of residency volume might be higher than maybe your original expectations or any comments you have there would be great.

So there is a very strong demand from artists. Honestly, stronger than we can even accommodate at this point. So there's no problem there. But when you take a look at things like the Postcard show, EDM, the corporates, etc., they all contend with each other for the use of the Sphere. And being the good catalysts that we are, we're going to go to the highest bidder. And so which ones will win, that's a really good question, right? But when we can do multiples on the same day, then everybody wins. And so that's kind of our model. It's a model that's built with contention in it between the uses of the Sphere. And the benefit of that is that the revenue, particularly the gross revenue, goes up.

Hey, following up on the last question around residencies, Jim, I don't know if you could say anything more about what the early fiscal '25 pipeline looks like. And then you talked of strong demand to play the venue from artists. Curious to know how that demand compares for current major touring acts versus some of the more legacy acts that have played so far. And then just one for David. Sphere's segment SG&A stepped up a bit quarter-over-quarter. I wanted to know if that's the right figure to think about going forward? Or are there some one-time items in there?

Sure, I'll go ahead and address the first question. We are aware of the need for a diverse range of acts, not just legacy rock groups, and those artists likely don't appreciate being labeled as legacy. They view themselves as still quite active. I'm referring to a wide variety of categories as we seek out the acts that can draw the largest crowds, those that have previously proven their ability to do so. We are in talks with several of these artists. It's important to note that whenever an act books the Sphere, they need to create engaging content for the performance. We will only host acts at the Sphere that can deliver compelling visuals on the screens. This process does take time, so we're careful in our selection. The more established acts, like U2, can earn more from the content across multiple performances, allowing them to reinvest in creating an even better show. We're seeing this trend currently. For instance, the Dead will debut on Thursday, and I believe even those who aren't fans will enjoy the show. The same expectation applies to The Eagles and future acts we plan to host.

David, regarding your question on SG&A, I won't be providing specific details. However, I can say that a large part of the SG&A increase in the March quarter, when compared to the December quarter, was driven by one-time expenses. This included some employee compensation issues and certain professional fees included in that figure.

Let me just chime in on that. Look, we all should understand this is the first year of operation, right? We're learning where to spend, where not to spend, what gives us a bang for the buck. And we're also learning about how to operate. I can tell you that, for instance, when we first opened the Sphere, right, some of the things like security, etc., might have been slightly overdone. And we're just learning how to be efficient with the model, and we're going to get better and better at that. And so I expect that overheads will drop, particularly operating overheads. And once we announce and begin the next Sphere, a bunch of that overhead is dedicated to being ready to build the next Sphere. So there will actually be some place to apply that overhead, which should also change the comps.

Hi. Thanks for taking my questions. I guess, first, as we're approaching the end of the fiscal '24, I'm curious if you can just talk candidly about the main priorities for Sphere in fiscal '25. And how should we think about regarding the main levers to pull for growth? And then you mentioned the appeal of the Vegas market and part of the genius with your original Sphere in Las Vegas. Curious generally for the future years, how do you think about those three or four Sphere Experiences per day working in those markets, because it seems like those three or four Sphere Experiences per day are sort of optimal for the Vegas market. Thanks.

Logan, it's Ari Danes. Can you repeat your first question, please? Just your first question, you were breaking up.

Oh, main priorities. In fiscal '25 and potential levers for growth, Logan, that's what I got. Okay. Well, I mean there are a bunch of priorities, right? The beginning of the construction of the second Sphere would certainly be a very high priority. Becoming efficient in our operations and being able to schedule multiple events on the same day, very, very high priority for the company. Getting our infrastructure in the right size so that it can execute on the strategy, that's a very big priority. There are a few others, but I'd say those are the three top, at least, business ones.

Got it. The next question was about the Technical Difficulty of the Vegas Sphere, which is in an optimal city to host multiple Sphere Experiences each day. How do you see the potential for a three or four Sphere Experience per day business model working in markets that differ from Vegas?

Every market is unique, and Las Vegas stands out because of the transient nature of its visitors. New York, on the other hand, is a much larger market, while some other markets are smaller. We can also tailor our Spheres to fit different market sizes. The key consideration is the number of potential attendees who can see our product in a year, especially those who aren't specifically coming to see the Sphere. I believe that as time goes on, more people will come specifically for that experience. In New York, for instance, visitors often take in a Broadway show, and it's important for us to be one of those shows they choose. Analyzing each market helps determine how to effectively market to them. Internationally, there are several markets that can support a full-sized Sphere, taking into account both local and visiting populations. There's sufficient demand to replicate the success we've achieved in Las Vegas.

Thanks, Logan. Operator, we'll take the next question.

Thank you. I've got two questions, Jim. The first is just wondering how the Exosphere advertising has been trending post Super Bowl and CES. Is it a medium that can maintain price even when special events or particular conventions are not in town? And then I've got a follow-up.

Sure. Look, Las Vegas is an international marketplace, right? I was thinking about this earlier. If you go ask a yak herder in Siberia, right, about Las Vegas, he knows what Las Vegas is. And the Sphere has now become sort of the showcase for Las Vegas. And what we put on the Sphere, right, garners attention around the world, not just the advertising but the art and the other things that we do on there. One of the interesting things that happened when we opened up the Exosphere, when we turned it on, is that the casino hotels have a surcharge if you get a room that faces the Sphere. So that doesn't happen with the billboard, and it gives you sort of an idea of the power that the Exosphere can have. And a lot of it depends, by the way, on the advertiser or the artists themselves. The more compelling the content they put up there, right, the more they will go social, go worldwide, etc. And finally, we think that there's more to do with the Exosphere. We think that we'll be able, this year, probably this summer, to be able to add an audio component that goes along with the Exosphere, which will make, of course, the medium even more attractive. So we're still pretty bullish on the Exosphere.

Okay. Great. And then second, I was wondering what the strategy is for sponsorship and naming rights from here. How often should we expect new sponsors to be announced and come online?

I think we're still, I mean, I think you're going to see more for sure. We're in discussions with a bunch of major sponsors now. Naming rights, I won't take it off the table, but it will be a big number. And so I don't know if we're going to get there or not with it. So, yes, I think you're going to continue to see it grow. I think advertisers are definitely getting used to the medium, right, understanding what it can do for them. And so we're starting to see repeat business, which is really a good sign for the medium.

Operator, we'll take one last caller.

Thanks so much. I was just wondering if there had been any progress in determining the construction cost savings potentially that a subsequent venue might yield when thinking about franchising opportunities. And then as part of your conversations, any indication that you might be able to share around how much that construction cost figure is driving a decision as to whether to do a venue or where to do it or how large the capacity might be? Thanks so much.

Certainly. The first part is about the construction costs. Typically, the initial attempt isn't the best. If we were to start over in Las Vegas, we could likely reduce construction costs significantly. Factors like supply chain issues and COVID are unpredictable, similar to injuries in sports. However, I believe we can construct a venue of the same size for a lower cost. We have a range of Sphere designs, even as small as 5,000 seats, allowing us to tailor the project to the market size. It's not just about costs when we discuss this with potential clients; it's more about the impact on the market. Similar to acquiring a major sports team, having a Sphere can significantly enhance the local market. Therefore, the primary consideration isn't price. In fact, despite what we spent on the Las Vegas Sphere, if you compare it to other arenas built in various markets, you'll find they have similar costs but cannot provide the same experiences that a Sphere offers.

I will now turn the call back to Ari for closing remarks.

Before we conclude, I want to mention an important development from the past two weeks. We recently acquired a controlling interest in a company called HOLOPLOT. This company is responsible for the sound system used inside the Sphere. Their technology is unique and patented, specifically known as Beamforming sound. We believe this technology has significant potential, as it's essential for the functionality of the Sphere. We are excited about this acquisition and the positive impact it will have on our company.

Thanks, Jim, and thank you all for joining us. We look forward to speaking with you on our year-end call in August. Have a good day.

That will conclude today's meeting. Thank you all for joining, and you may now disconnect.