Good morning. Thank you for standing by and welcome to the Sphere Entertainment Company Fiscal 2023 Fourth Quarter and Year-End 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 2023 fourth quarter earnings conference call. Today's earnings 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 Gautam Ranji, 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. And 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 will now turn the call over to Jim.

Thank you, Ari, and good morning, everyone. I am pleased to be here today as we embark on our next chapter as a leading live entertainment media and technology company. We've recently completed a number of important transactions, starting with the two-thirds spinoff of MSG Entertainment, which was finalized in April. This was followed in May by the sale of our majority interest in Tao Group Hospitality. And in June, we sold approximately 40% of our retained equity interest in MSG Entertainment. These transactions have supported our growth plans for Sphere, a next generation entertainment medium that we believe will disrupt the traditional venue model. We remain on track to open our first Sphere in Las Vegas at the end of September, and I'd like to share our progress towards that highly anticipated opening. In June, we finished primary construction of the venue and are currently putting the finishing touches on the interior spaces as well as the exterior grounds. And this month, we completed installation and testing of the majority of the technological systems inside the venue. That includes our next generation immersive technologies, such as our interior display plane, Sphere Immersive Sound, an advanced concert-grade audio system, and 4D multisensory technologies that enable effects such as vibration, wind, scent, and changing temperatures. Taken together, these technologies will engage the senses and enable a fully immersive experience. This is essentially a new medium, which we call experiential. While it takes some time to reach its full potential, we have designed Sphere to be busy 365 days a year with multiple events per day. On October 6, we will debut The Sphere Experience. The Sphere Experience will come in two parts. The first part consists of a series of exhibits that chronicle technology's impact on the development of view and…

Thank you, Jim, and good morning. As we look back at fiscal '23, we are proud to have delivered another year of exceptional sports and entertainment programming, highlighted by hundreds of live regular season telecasts across our five NBA and NHL teams, extensive postseason coverage for the Knicks, Rangers, Devils and Islanders, including 20 first-round games, a diverse slate of new and expanded content from Gotham FC soccer broadcasts to new sports betting programming on our digital platforms and bet casts across Knicks and Rangers games, the launch of our free ad supported streaming TV channel MSG SportsZone, and most recently, the debut of our direct-to-consumer and authenticated streaming offering MSG+. We were also pleased to have completed renewals with several distributors this past year, including with one of our largest affiliates. Turning to our financial performance for fiscal '23. While affiliate revenue reflected the impact of ongoing subscriber declines, we delivered strong growth in advertising. That included the impact of the playoffs, record aggregate advertising revenue for our NBA and NHL teams during the regular season, driven by higher per game advertising revenues, as well as growth in our non-ratings based initiatives, particularly branded content. We further benefited from the run rate impact of sports gaming, which once again was our single largest advertising category in fiscal '23, as well as the strong core of returning advertisers and increased demand from categories such as auto and financial services. With respect to adjusted operating income, our annual results also reflect the impact of the cost reduction program we implemented at beginning of the calendar year, which has resulted in meaningful cost savings. But this was just one of the ways in which we believe our business is now better positioned going forward. As I mentioned earlier, in June, we launched…

Thank you, Andrea. Now let's review our financial results. Since we completed the spinoff of MSG Entertainment and the sale of our majority interest in Tao Group Hospitality during the fiscal fourth quarter, both businesses are reflected as discontinued operations for all periods presented. In addition, results through the April 20th spinoff date includes 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. On a total company basis, we generated revenues of $129 million and an adjusted operating loss of $60 million for the fiscal '23 fourth quarter. This included $90 million of adjusted operating loss in the Sphere segment, which primarily reflects corporate overhead expenses related to Sphere Studios and associated content and technology development, as well as costs related to the Las Vegas venue as we prepare for the opening next month. We expect Sphere operating costs to increase in the fiscal '24 first quarter as we ramp up operations in Las Vegas. With the venue opening on September 29th, Sphere's impact on our financial results will really begin to show in our fiscal second quarter, including U2's multi-month run, the debut of The Sphere Experience featuring Postcard from Earth and Formula 1's multi-day takeover in November. Turning to MSG Networks, the segment generated $128 million in revenues and $31 million in AOI in the quarter, decreases of 8% and 22% respectively as compared to the prior year period. The decrease in AOI primarily reflected lower affiliate revenue and higher rights fees expenses, partially offset by lower advertising and marketing costs. As we look ahead to fiscal '24, we expect MSG Networks segment results to reflect continued declines across the traditional…

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

Certainly. [Operator Instructions] And your first question comes from the line of Brandon Ross from LightShed Partners.

Jim, we haven't had you on an earnings call since you announced the Sphere. The project came in above the initial budget range and you've had to engage in a number of strategic transactions to keep it moving forward. Can you explain why you believe this investment makes sense and will generate an appropriate return, given that level of investment you put in? And then I guess going forward from here, today's results show a significant amount of overhead in the business. Is that overhead to support the additional Spheres you mentioned in the prepared remarks? And will those Spheres be CapEx-light for the company?

Okay. Let's see. That's a very complicated question. But I do believe that the investment is warranted. I will confess to you that we did not anticipate spending $2.3 billion. We also didn't anticipate COVID. But I think we're still in good shape. And look, the business is really built on the notion of changing the model that is currently used to operate entertainment venues. And that model right now is what I call -- basically it's a landlord model. You build your building, if you have a team, they're the first tenants in, but that generally only occupies 40 to 50 nights a year, and the rest of the time you're renting out and you have a limited revenue stream from it. The act comes in, they may make, for instance, regardless much as much as $5 million or $6 million in ticket revenue, right, but you only get your rental fee. And so therefore you're limited. On top of which the acts that come in generally want to play Wednesday, Thursday, Friday, Saturday, not many want to play Sunday or Monday. So therefore you're dark and your capital is also languishing. The Sphere completely changes that model. The Sphere is a venue that will be busy theoretically 365 days a year, because when we're not bringing in someone like a U2, et cetera, we're running our own content. And that business is a high margin business. As you've seen from the numbers already, there's already a great deal of investment into that product. And so now it's time to harvest and that's what we'll be doing. But all-in-all, although it is -- I agree with you that it's capital intensive, right, that the opportunity to return on the capital is significantly better than it is with your traditional venue model. Let's see, and what was the second question? Oh, the overhead, right?

Yes. Overhead and CapEx for additional…

Right. So, first off, we built this one all ourselves. Don't plan on doing that really again. We want partners that the -- and we're looking at more of a franchise type model, right, in terms of constructing the Spheres. Although I will tell you that we've designed the Sphere product for other marketplaces that goes as low as 2,500 seats and has a construction period of less than two years, we've done a lot of innovation in the construction area and we have architectural plans that allow us to go into multiple, multiple marketplaces. Really I have to say that this -- it's a great time to be having this conversation because we're just about to launch this product, right? And we're really going to -- the next call we ought to be able to really dig into some actual numbers, et cetera. But we're sitting on the precipice here. And we believe in the product. We believe in the formula and the business, et cetera. But the proof is in the pudding and the pudding is about to show up. So yes, so going forward, right, construction of additional Spheres will be for this company capital-light, because we'll be doing the franchise, plus the overall cost of building these venues is going to go significantly down. The first one is the most expensive. We learned a ton out of building the first one. And we plan on taking that experience and knowledge and putting it forth coming. As far as the overhead in terms of creating content, et cetera. Sort of the same thing, I mean that we learned a lot. Darren, we learned a lot, right, from when he started. He's a very talented director, but we have new cameras that are used for capture. He had to learn how to use those cameras. We had to learn how to use those cameras. We went all over the world with those cameras capturing content from all parts of the globe. I believe it's going to be a spectacular show. But yes, it was again capital-intensive because it was first time that the -- we're now shifting with the opening of the Sphere to starting to make some money on that capital invested. And I'm feeling pretty positive about it. And I've seen the product already, or at least a lot of parts of it, so I have that advantage over you. And I am very positive about it, but you'll see it soon too.

As you're on that precipice and about to make money, you -- I know you said there's been a lot of inbound interest, but you haven't announced any additional residencies or sponsorships yet. Could you just give us a little more color on why and when you think we'll hear? And then I'll shut up.

Okay. From the artist community -- I have to say that we've had a real robust interest from the artist community and we will be making some announcements pretty soon about additional residencies. However, I mean, U2 has 25 shows to play. They're sold out, but we expect maybe not as high profile as U2, but close because those are the kinds of artists that have been coming to talk to us. It's about residencies. And that notion appeals to artists, the ability, instead of having to travel all around the world with 16 trucks, et cetera, to plant yourself in this case into Las Vegas and for them to LA marketplace, and just come in and do their shows, that has a lot of appeal to artists. So I'm not concerned at all about getting talent in. As far as sponsorship goes, it's pretty difficult for sponsors, right, to come in and make an investment in sponsorship in a product that they haven't really been able to see, and that they don't know what the public's reaction is to it. But when we lit up the Exosphere on July 4th, that sort of ignited their interest and we've been pursuing that and we have -- we are starting now to sign up advertisers and sponsors. And also honestly, a lot of interest from partners, people who want to join in the projects with us, that they see the potential. Understand that it's an experiential medium and that really is the new entertainment form of future. And they want to be a part of it.

And your next question comes from a line of David Karnovsky from JPMorgan.

Hi, this is Ted on for David. We had two questions. The first is on original content. What have early demand indicators been like for Postcard from Earth? And how should we be thinking about other types of original content over time beyond Postcard from Earth? And the second question…

Hang on. Repeat the first one.

Yes. So what have early demand indicators been like for Postcard from Earth, and how should we be thinking about other types of original content over time beyond Postcard from Earth?

Okay. Well, I mean, it's early for demand. We haven't even started actually doing any of our paid marketing. And we will start towards the end of this month. We feel we're kind of uniquely qualified to look at this part of the business because maybe one of the most similar kind of businesses that's out there is the Christmas Spectacular. It runs roughly 200 shows in eight weeks. So it has the same amount of volume that we are planning for Sphere. But with a product like that, you generally don't see the ticket demand until you get pretty close to the actual opening in the event itself. So for instance, with the Christmas Spectacular, we know that better than 50% of the tickets gets sold in the last three weeks prior to. I expect that the Sphere will follow the same kind of model in Las Vegas. So no, we don't have a lot of results yet, we haven't started marketing yet, et cetera. But we got a great product. Now what was the other part of your question?

Yes. And the second question is, how to be thinking about initial profitability in terms of AOI in the near-term, and how quickly that can ramp over time?

Well, let's see. Are we giving guidance on this, Gautam?

No.

No guidance. Look, without giving you any guidance, because we didn't intend to do that today. What we need you to understand with that is that it's a new product. It's a new medium, et cetera. It's not going to behave like other products, et cetera, that you see in this kind of space, and we're learning at the same time. So it's early to project that. But when you do something like this, the first thing that you look to, right, is to see if you have a product that you think is going to appeal to the public, right? We really, really believe we do. So once you start off with that, with a great product and you introduce it, right, you get people interested in it, you explain it to them, et cetera, and then you reap the benefits of. But we're at that point today. I told you this is an interesting time for this call because we're at the precipice. We're about to unveil the product to the public, and the next call that we have will have a lot more for you to sink your teeth into.

Thank you, Ted. Operator, we will take the next caller. Go ahead.

Certainly. Your next question comes from line of Daniel Duran from Morgan Stanley.

So given cord cutting, creating revenue pressures at MSG Networks, how do you weigh whether to refinance the Networks' term loan coming due next year versus separating Networks from Sphere and leaving Sphere as a live entertainment equity pure play?

I'm going to let Gautam answer that question. But before he does, I want to point something out to all of you who are watching this sector. There's been no lack of interest in sports. Sports continues to grow and it has great, great appeal, right, to the consumer in the marketplace, particularly in New York. What's going on with this business, when you take a look at things like Diamond Sports, et cetera, is that the monetization mechanisms that harvest that interest are basically broken. I think I've said this before in other calls, et cetera, and it remains true, right? I think we have a plan that addresses that. But underlying all this, right, is the public's thirst and interest for live sports, and that has not diminished at all. The mechanism -- monetizing might not be in such great shape, but the public's interest is. And so we can regain, I think, the business. Yes, you want to -- go ahead, Andrea.

Yes. I was just going to add to what Jim is saying is that we are the first and only regional sports network going to our direct consumer market with a per game offering. I think that particularly in this market, and particularly with our premier teams, opens up a funnel that brings people into our ecosystem, allows us to super serve them and market and speak directly to them, upsell to them. So when Jim says that we believe we have a very, very strong and viable plan, that's a key piece of it.

Thanks, Andrea. And just in terms of the refinancing, I think it is important to note, it's still early in the process. The loan matures in October of 2024, and we have great relationships with our bank group. And as we move forward with this process, all of our options are on the table.

And just my second question. Now that Sphere's retained interest in MSGE has been roughly cut in half and the Sphere is set to open next month, how, if at all, does the operational performance of Sphere impact what you do with Sphere's remaining MSGE shares? Thank you.

Well, let's see. Look, the operational performance affects everything. So, before we get to what we do with the retained interest, right, that's obviously going to be our focus and we will adjust the business depending upon how that operational performance turns out, right? We won't be making our decisions on the first show that we sell, right? But I think that over a fairly short period of time, we'll get a good sense of where the right balances are for the business. We will adjust say to make sure that we have a profitable business and that it builds value for our shareholders. You want to take the second part?

Sure. No final decisions have been made with regard to what we're going to do with the retained stake. We continue to have the three options for the retained stake: monetization, exchange offer and a follow on spinoff. And to the extent we sell some or all of the retained stake, we're going to be deliberate in our approach around that.

Operator, we have time for one last caller.

And our final question comes from a line of David Joyce from Seaport Research Partners.

Two questions, kind of building on some other discussions here. But first, could you please walk us through the different event types and their respective or relative margin profiles, be it the proprietary content versus residencies versus corporate branding events versus other things you might do? And then secondly, kind of further on that MSG Networks, that question. Could you kind of explain how the ramp up in Sphere cash flows can offset the challenges that MSGN is facing as they look to bring to refinance? Thank you.

All right. Let me take the first part of that one. So, let's start with our own original content, which really is sort of the backbone of the business. That is basically a high margin business because you've already invested your capital. You've made your show, you've built your attraction, and now your running costs are basically things like ushers, security, merch, those kinds of things. So the return on that is pretty strong. Residencies are basically the traditional model, right, that you're following with the acts. At the same time to say, they come in, you rent the building to them, right, and it has less risk on the sale of tickets but less upside too. And residencies really should be looked at as also a bit of a -- it's not a loss leader but it does improve the profile of products and of the building, that gets a lot of people in and those turn into customers for your own content. The final piece is basically like what we call sort of corporate rentals and F1 is a good example of this. That is extremely low risk, right? And there's really not a lot of -- I don't even know if a margin discussion is appropriate for that. Basically you have a rental fee and then everything -- all the other expenses that are incurred with the operating of the building or building content, become the responsibility of the renter. So there's a guaranteed top-line to it, for the business. And those are basically the three streams of usage, other than of course then there's sponsorship and advertisement sales, which…

Which is not insignificant.

And then with regard to your second question. There are a number of important factors related to the refinancing. Obviously Sphere's performance and ramp up in year one is a large one and important to that. And as we think about it going forward, we're going to monitor the situation, as Jim mentioned, and all options are on the table as we move forward.

And this concludes our question-and-answer session. Mr. Ari Danes, I turn the call back over to you for some final closing remarks.

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

This concludes today's conference call. Thank you for your participation. You may now disconnect.