Hello and thank you for standing by. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the Sphere Entertainment Co. Fiscal 2024 Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Ari Danes, Investor Relations. Please go ahead.

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…

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. [Operator Instructions] And the first question will come from the line of 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 really see this as having a holdup. I just think that building a Sphere it's not like building a McDonald's. It's complicated. It's a very expensive project. This will only be the second one -- that one we'll build, will only be the second one in the world that have been built. And so working out all the details and the construction cost and the relationships that are in there does take time. And remember, I mean, I don't think that -- there has been plenty of interest over the year, but not until we launched the product in late September that people really get to see what it was and begin to see how it can perform. So with all that, though, we have -- we are in discussions with several markets. We think we're going to conclude at least one of those markets soon. How soon? I'm not going to predict, but soon. And we continue to hear from new markets too. As the Sphere becomes better known and people begin to understand the economics behind it and what it can do for our marketplace, the interest remains strong.

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 ticker 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, et cetera, 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, et cetera, is what we're getting better at every day. Look, I do think that Postcards benefited from being the first show in. And the reason that people came, right, was, yes, to see Postcards, 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 Postcards, that 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 Postcards 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.

Your next question will come from the line of Peter Henderson with Bank of America. Please go ahead.

Yes, good morning, and thank you for taking the questions. Just following up on Brandon's question around Postcards 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 would 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, there's at least six questions in there. So let me try and parse it, starting with the second attraction. So like I said before, the second attraction has to have its own pull the bias, you know, what theme it pursues et cetera. But there is a tremendous amount of technology that we're employing and building a second transaction and you -- the second attraction. You will see something you've never seen before when we debut the second attraction. I know I'm teasing you on it. We're just going to continue to tease you on it. We'll probably announce I suppose this summer what we're actually up to. But I can tell you that we're employing a great deal of tech, including a significant component of AI in this. And we're following along the same themes that we followed before, which is basically experience and immersion but with an additional technology component in there that should blow your socks off. Going to the RSN model, it's an interesting question. Let me just talk about RSNs in general. When it comes to things like NFL and sports like that, the national model works very well. But when it comes to sports like basketball and hockey that have 82 games a season, that national model tends to not do everything that we need it to do. We need RSN. We need local markets. And so -- and the product, honestly, is still is very, very, very much in demand. The people want to see their home team sports, especially the Knicks and the Rangers. And so we have to have our RSNs. We have to have regional components to our marketing and to our television. But right now, those markets are in disarray primarily because of the shift from linear to…

Thank you.

Your next question comes from the line of Ben Swinburne with Morgan Stanley. Please go ahead.

Thank you. Good morning. Jim, just sticking with the Networks theme. I know in the prepared remarks, there was the comment that you're in discussions with lenders. What do you think -- or what should we be thinking as the likely outcome of those discussions? What are you guys trying to accomplish as you get closer to that October maturity? And then I had 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, consumer same thing. I'm just wondering if you think, as you look out over the next couple of years, if 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, et cetera, 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.

Absolutely. Thanks a lot.

Your next question will come from the line of David Karnovsky with JPMorgan. Please go ahead.

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 to 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 onetime items in there?

Okay. Well, let me take the first one. So do you like country? We are cognizant that we want to have a varied number of -- varied kinds of acts, not just legacy rock acts, and I'm not sure that those acts would like being called legacy. No, I'm just -- they think they're still --

Pretty well.

Pretty vibrant. But no, we are -- I'm talking basically almost in every category. And we're looking for the acts that have the biggest draws, right, that have demonstrated the biggest draws. And we are in discussions with a whole bunch of those, right? Remember, every time an act books the Sphere, right, they have to create content around it, right? We will never have an act play the Sphere that doesn't have something compelling up on the screen. So it takes a while to do that. So we're being too judicious about it. But the more than an act to play the Sphere, like U2, right, they more they can monetize the content across multiple shows and therefore invest more on the content and create an even better show. That's what we're seeing now. I think that the Dead premiers on Thursday, right? And I think you're going to find that they're -- even if you're not a Deadhead, right, you're going to love that show. And I think the same will be true for The Eagles and for the next acts that we bring on.

And then, David, you had a question on SG&A. I'll just -- we're not going to provide specifics. What I'll say is, in the quarter, a significant portion of the SG&A increases in the March quarter compared to the December quarter, were due to nonrecurring expenses. There were some employee comp matters, as well as some professional fees mixed in that number.

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, et cetera, 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.

Our next question will come from the line of Logan Angress with Wolfe Research. Please go ahead.

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.

It sounded like it was a good question, just don't really know what it was.

Yes. Sorry about that. I hope you can hear me better now. I was just wondering if you can talk about the main priorities for Sphere in fiscal '25 and how we should think about the main levers to pull for growth in the next fiscal year? And I hope you heard the second question on the Sphere Experiences.

Hang on to your second question.

Main priorities for Sphere in fiscal '25 and levers for growth, Logan, that's what I got. Yes, main priorities.

Oh, main priorities.

In fiscal '25 and potential levers for growth next fiscal year.

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. And then the next question was just around that part of the [Technical Difficulty] of the Vegas Sphere that it's in Vegas, which seems like an optimal city to host multiple Sphere Experiences per day. How do you think about the extent to which the three or four Sphere Experience per day business model might work in other markets that are different than Vegas?

Okay. I think I got it, right? So every market is different, right, and Las Vegas is a particularly peculiar market because of the transient nature of the people that come through here, right? New York is obviously a much bigger market. There are other markets that are smaller. We also have smaller Spheres, right, that we can adjust to the size of the marketplace. But it is a question of can we -- how many people are available, right, to come and see your product in a year, right, assuming that they're not coming there specifically to see Sphere, right? I mean I do think that, that will happen. That people will do that. But I also think that, for instance, in New York, people come to New York and they catch a show. They catch a Broadway show. And you want to be in the Broadway show that they catch. And so if you look at each market, if you look at what its potential is, how you're going to market to that market and you adjust from that. I do think that internationally, there are quite a few markets, right, that can sustain a full-sized Sphere, particularly looking at their home population and the visiting population. There's plenty enough market, right, to follow the same model that we built in Las Vegas.

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

Our next question will come from the line of David Joyce with Seaport Global. Please go ahead.

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, right, 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, et cetera. 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.

Great. Thank you.

Operator, we'll take one last caller.

Our final question will come from the line of Paul Golding with Macquarie Capital. Please go ahead.

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 opportunity. 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.

Okay. What was the first part? Oh, the construction cost themselves. So first pancake, right, always rarely is the best pancake. So I do think -- I mean, if we were to restart from the beginning, which would be a nightmare for me, in Las Vegas, I think that we could significantly reduce the construction costs. Things like supply chain, COVID, et cetera, those kinds of issues, right, you can't predict. They're sort of like injuries with sports teams. But I do think that we can build the same size for less money. I do think we put together a portfolio of Spheres of different sizes going all the way down to 5,000 seats, so we can adjust the project by the size of the marketplace. And it's really -- it's not a cost thing that we're seeing with the people that we talk to, right? It's what they're going to do with it. It's -- the marketplaces we're talking to are looking for -- if they build a Sphere, to have a significant impact on the marketplace itself, a lot like back to that sports analogy. If all of a sudden you landed a major sports franchise in your marketplace, what does that do for the marketplace. I think they're looking at it that same kind of way that that's what a Sphere would do for the marketplace. And so it's not really so much a question of price -- and by the way, I think that the Sphere is -- even at the price that we paid to build Las Vegas, if you take a look at, I won't name names, certain marketplaces that built their own arenas, right, you'll find that those arenas which cost -- have a similar cost to Sphere, and they obviously can't do anything like what Sphere does.

Thanks for that, Jim.

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

Before we close, right, nobody asked the question about technology. We should -- I do want to talk for a minute about a development that happened just this last two weeks. We were able to acquire the controlling interest on basically all of the equity in a company called HOLOPLOT this last two weeks. HOLOPLOT, right, you might know, is the sound system that operates inside of the Sphere. And the technology is unique. It's patented. And we think that it's called Beamforming sound. We think that there's going to be a lot of legs to that company. And you really can't build a Sphere without a Beamforming component to it. The sound does not work unless you have that technology. And so we're very happy that we were able to acquire this technology, acquire the company, and we see doing great things for us.

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.