Madison Square Garden Entertainment Corp.

Good morning. My name is Christy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Madison Square Garden Entertainment Corp. fiscal 2021 fourth quarter and year-end earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the call over to Ari Daines, investor relations. Please go ahead, sir.

Thank you. Good morning and welcome to MSG Entertainment's fiscal 2021 fourth quarter and year end earnings conference call. Our President, Andy Lustgarten, will begin today's call with a discussion on the company's entertainment and TAO Group segments. This will be followed by an update from Andrea Greenberg, President and CEO of MSG Networks. Our EVP and Chief Financial Officer, Mark Fitzpatrick, will then review our financial results. 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 investor section of our corporate website. Please take note of the following. Today's discussion may contain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties. and that actual results, developments, and events may differ materially from those in the forward-looking statements as a result of various factors. These include financial community perceptions of the company and its business, operations, financial condition, and the industry in which it operates, as well as the factors described in the company's filings with the Securities and Exchange Commission, including the sections entitled risk factors, and management's discussion and analysis of financial condition and results of operations contained therein. The company disclaims any obligation to update any forward-looking statements that may be discussed during this call. On pages 6 and 7 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 Andy. Thank you.

And good morning, everyone. While we're clearly operating in a very fluid environment, we successfully navigated through one of the most challenging times in our company's history and remain cautiously optimistic about the road ahead. Looking back at fiscal 2021, we saw a number of positives. And I'm proud of the role we played in helping to shepherd the return of live entertainment in New York as our venues hosted the city's first large-scale events since the start of pandemic. Cal Group did their part as well, helping to bring back the critically important hospitality industry while returning to profitability in the June quarter. And with the acquisition of Hakkasan Group in April, We believe Cal is well positioned to build on its track record of success. We also continued to make meaningful progress on our next chapter, MSG Sphere in Las Vegas, heading toward the venue's opening in calendar 2023. And in early July, our acquisition of MSG Networks created a company with greater scale and revenue diversity, as well as enhanced financial flexibility. This was all accomplished during a very difficult year when our performance venues and Tau Group properties were largely closed or operating with significant restrictions. And both the Christmas Spectacular and Boston Calling music festivals were canceled. We've talked throughout the year about the important steps we took during this uncertain period. including reductions in our spending, lengthening our construction timetable for Amnesty Sphere in Las Vegas, and completing a $650 million debt raise. These actions strengthened our balance sheet while protecting our core entertainment business. And while conditions have improved, we continue to monitor what's happening in our markets. This includes New York City's announcement earlier this month that while venues can continue to welcome people at 100% capacity, all guests who are dining indoors or attending indoor performances are required to show proof of at least one vaccination shot, which we think is beneficial for our businesses. We operate in the New York market, which already has one of the highest vaccination rates in the country. And our research indicates that our fans in this market prefer attending vaccinated events. We saw this firsthand during the fourth quarter, starting with the sold-out Knicks playoff games, where we hosted nearly 90% vaccinated crowds, as well as across a number of concerts, which were sold at 100% capacity to all vaccinated audiences. Looking forward, we've begun to staff up in anticipation of what we envision could be a busy year ahead. While we're mindful of what's happening with the Delta variant, including the cancellation of certain shows around the country, we think the vaccination policies that are increasingly being adopted by cities, including New York, as well as companies in our industry, will be helpful. We currently expect concert touring to begin ramping back up in late September. leading to a strong concert booking schedule on a full year basis. In fact, fiscal 2022 is currently pacing ahead of fiscal 2020, which, as you may recall, was slated to be a record bookings year for a company prior to the onset of the pandemic. In addition, we continue to see enthusiastic levels of consumer demand through strong sales as new shows get announced. And Christmas in New York is back. Last month, we announced that tickets are officially on sale for the 2021 season of the Christmas Spectacular production. We are pleased with the early sales for this season's 163-show run and are looking forward to the production's return. We also recently entered into a long-term lease renewal with favorable terms for Radio City Music Hall, which extends our lease until 2038. with an option to renew for an additional 10 years. We are pleased to have worked with Tishman Spire on this agreement, which is a win-win for all parties involved, as it ensures this landmark venue remains home of the Christmas Spectacular for many years to come. Turning to Tau Group. Fourth quarter results include the impact of the Hakkasan Group acquisition. which created a global leader in premium hospitality with over 60 venues across five continents. The acquisition expands Tao's U.S. presence in major entertainment markets such as Las Vegas, Southern California, and Miami, while providing an instant international foothold in destinations like London and the Middle East. This increased footprint also provides local expertise to support further expansion. Another area where Hakkasan will help drive the business is through its expertise in licensing, which TAO intends to utilize alongside its owned and managed venue models as it continues to pursue growth opportunities. The easing of capacity restrictions in the fourth quarter helped drive strong results for TAO, with a majority of its revenue and AOI generated in the month of June. In addition, the best performing market for the quarter was Las Vegas, where Tao's presence, which has significantly expanded with the Hakkasan acquisition, will be important to MSG Sphere at the Venetian. We made meaningful progress on MSG Sphere this past fiscal year, achieving a significant milestone in June when we completed the structural steal for the main venue. Over the next 12 months, We intend to complete the roof concrete and the venue's exterior facade as we continue to make progress on the interior build-out and pedestrian bridge. We also plan to move forward with building MSG Sphere's exosphere, the spherical structure that will surround the venue and eventually be covered with 580,000 square feet of fully programmable LED lighting. This impactful exterior display is just one of the ways customers will interact with MSG Sphere content. Inside the venue is where we will use state-of-the-art technologies to create first-of-their-kind immersive experiences. And this coming year will increase our focus on developing this content for Sphere. Before I turn things over to Andrea, I'd like to spend a moment on the emerging opportunity around mobile sports gaming. New York State's application process is expected to conclude by early January. Many of the leading online sports betting operators are participating in the process, which creates a competitive market that we believe bodes well for us. From entertainment and media assets that reach millions to potential fixed venue-based opportunities that include the Garden and Cal locations, We believe we're one of the best positioned companies to help partners succeed in connecting with consumers. We continue to be in active discussions with many of the potential market participants and are increasingly bullish about this opportunity for our company. In summary, while we know we're in a fluid environment, we're optimistic about the year ahead due to the strong pent-up demand we saw at our entertainment and town businesses in June. which has continued so far this summer, our progress with MSG Sphere in Las Vegas, and the powerful platform we've created with MSG Networks, which brings together our entertainment and media assets and positions us well for future opportunities. With that, I will now turn the call over to Andrea.

Thank you, Andy, and good morning. Looking back at the past year, Our regional sports and entertainment networks face their own challenges as a result of the pandemic. And we rose to the occasion, delivering our programming on all platforms without interruption, while exploring ways to be more nimble and efficient in producing our content. We will certainly apply our learnings going forward and expect our business to benefit. During fiscal 2021, we were also reminded, once again, of the power and popularity of live sports following the return of the NBA and NHL for their shortened 2021 regular seasons. We saw rating strength on our linear networks, including double-digit percentage increases in average household ratings for the Knicks, Rangers, and Islanders regular seasons. We also saw all-time highs for viewership and engagement on MSG Go, our authenticated live streaming app. This strong performance continued into the postseason, with ratings for the Nixon Islanders' first-round matchups well exceeding each team's regular season averages. We look forward to welcoming our teams back for the upcoming seasons, which we expect will include normal schedules for the regular seasons. And as we move forward in an evolving media landscape, we remain committed to building on our history of innovation to create value for our partners and viewers. We will continue to experiment with new types of content, including alternative versions of our live game telecasts, and explore new ways to monetize our media rights and content library through both new and complementary product offerings. We also will remain focused on interactivity, where we've seen firsthand with our MSG Go app the benefits of interactive games on engagement and frequency of tune. Furthermore, our ability to aggregate data across our linear networks, digital products, and entertainment venues will provide even richer insights into viewers and customers, which we intend to leverage to drive our overall business. This data also makes us an even more valuable marketing partner, including in the emerging world of mobile sports gaming, with a significant number of opportunities for MSG networks, including everything from branded content to integrations on our mobile apps. We're excited about the future and are confident in our ability to continue to innovate and effectively monetize our content. which we believe will ultimately help us drive robust, ongoing, adjusted operating income. With that, I will turn the call over to Mark.

Thank you, Andrea. Let me start by reviewing our fourth quarter financial performance, which, as a reminder, does not include the results of MSG Networks, as the acquisition was completed on July 9th. That said, MSG Networks' standalone results can be found in our press release. And beginning next quarter, we will speak to this segment's results in detail. In the fiscal fourth quarter, we generated revenues of $99.8 million and had an operating, adjusted operating loss of $70 million. In terms of revenue, Tao Group generated $69.7 million. These results included the addition of Hakkasan at the end of April, and as Andy noted, were driven by a strong reopening in our key markets, especially Las Vegas. Revenue also included the impact of our various commercial arrangements with MSG Sports, including $8.3 million in arena license fees, as the Knicks and Rangers concluded the regular seasons at the Garden in May, followed by three sold out Knicks home playoff games. In addition, revenue was positively impacted by both live events and ad sales commissions from MSG Networks. Looking ahead to fiscal 2022, we'd like to highlight a few items. First, we've started to strategically hire across our entertainment segment to support the anticipated ramp up of live events starting in late September. We also are working to fully staff our town venues to match the reopening momentum at restaurants and nightclubs. Second, we plan to increase our content development and technology investments related to our sphere initiatives. And finally, at MSG Networks, we're anticipating full NBA and NHL seasons, and therefore expect to return to more normalized levels for certain expenses, such as rights fees, and normalized advertising revenue. Now let's turn to capital expenditures. We had $130.5 million of capital expenditures in the fiscal fourth quarter, which primarily related to the construction of MSG Sphere in Las Vegas. Through June 30th, project-to-date construction costs incurred were approximately $850 million, which includes $98 million of accrued costs that were not paid as of June 30th, and is net of $65 million received from Las Vegas fans. As a reminder, last quarter we announced that the cost estimate for the venue was approximately 10% higher than our previously announced estimate of $1.66 billion. As planned, during our recent annual budget process, We thoroughly reviewed the cost, scope, and timeline of the project and have refined our project cost estimate to be approximately $1.865 billion. As construction manager, we will continue to aggressively manage all aspects of the project and are excited for the venue's opening in calendar 2023. Finally, turning to our balance sheet, we had approximately $1.17 billion of cash as of June 30th, and $1.52 billion if you include MSG Network's $348 million of cash. In terms of debt, the combined company's debt balance was approximately $1.74 billion as of year end. As previously noted, we believe that the merger allows us to optimize our capital structure including the potential optimistic refinancing of MSG Entertainment's $647 million term loan, which was put in place during the pandemic last November and carries an interest rate of 7%. With that, I will turn the call back over to Ari.

Thank you, Mark. Can we open up the call for questions?

Certainly, and as a reminder, to ask a question, press star then the number one on your telephone keypad. And your first question is from Brandon Ross of LightShed Partners.

Hi, guys. Thanks for taking the question. Andy, you mentioned your optimism around sports betting in the near term. I was wondering what your thoughts are on the change in governor and if you believe that could further open up competition and perhaps even additional ways to monetize betting. And I have a follow-up. Great.

Thanks, Brandon. So look, I'm not going to pine on the politics of what's going on in Albany. What I can talk about is the mobile gaming legislation and how it impacts us. So at a minimum, you know, there's going to be four skins, four operators. This is a tremendous opportunity for us because that's competition. That said, that's the minimum. There can be more. So when we looked at some of the application processes that went in, it's just real confidence. One group in their application talked about a nine-operator model with a 51% tax rate. In that one, they thought there would be over $900 million of gross tax revenue generated for the state, and that includes money for marketing. Another group, which only had four operators as a single consortium, pegged the opportunity at $1.3 billion in tax revenue for the state by the third year. So for us, four or above is going to be great, and there's going to be companies. And it's clear there's a significant takeaway for these operators. to bring home. And the way they're going to do that is by driving their business. And there's one, we believe, one company best suited to help and work with them, and that's us, right? We blink at the market. We always had a great opportunity between our relationship with MSG Sports and the teams, our fixed asset here at the arena, Cal for hospitality, premium hospitality. But then with the addition of MSG Network, we're able to add linear and digital online content We could blanket the market in a way no other company can and be a partner for whoever wins, may it be four or more. We're looking at different deal structures, exclusive deals, non-exclusive deals. We're talking to everybody who's in the market, and we think this is a great opportunity for us and a great opportunity for New York State.

Thanks. And then just your stock's been down pretty significantly since the MSGN deal or the sort of the original press article surrounding the MSGN deal. And networks is a real cash-flowing asset. I was wondering if you would ever consider using the cash flow from networks for a stock buyback to be opportunistic with where the stock is.

Thanks, Brandon. It's Mark. I'd start by saying our number one priority is always to protect and invest in our core assets. As you saw during the pandemic, that meant preserving our liquidity to position the company to return to business. Second, we are focused on the MSG SCARE initiative, which we continue to see as a unique opportunity, growth opportunity for our company. Finally, we plan to explore refinancing our term loan at MSG Entertainment, which we put in place in the pandemic as an insurance policy and carries a 7% interest rate. So while those represent our near-term focus areas, We regularly review our capital allocation priority, and over time, we'll consider all options in determining the best use of capital. Thank you.

Thanks.

Thank you. Your next question is from John Genetis of Wolf Research.

Thanks. I have two. First, on the sphere, as the bill continues, can you give us more color on how inflation is impacting your cost versus budget? Given the $40 million or so increase, can you give us the puts and takes beyond hitting that, call it that revised target of the 1-865, and you're planning on updating that every quarter versus budget? And then separately, just on the network side, can you give us an update on the direct-to-consumer offering? Where are you in the process on timing? Will there be a gaming component with it at launch? And are there any more rights that you need or have? They've all been negotiated. Thanks.

Thanks, John. It's Mark. I'll take the sphere cost estimate. As I mentioned earlier, we recently reviewed the cost, scope, and timeline of the project as part of our annual budget process. This included looking at current inflation trends and the impact to our cost estimate. We've also taken certain actions to manage our costs. First, we secured the majority of the main structural steel for the project, with approximately 90% now fabricated. In addition, we've poured approximately 95% of the concrete. Second, we're also watching our supply chain and accelerating the purchase of high-risk items and, where possible, identifying alternative manufacturers for certain components, such as semiconductors, to minimize any potential delays. And finally, we continue to evaluate all aspects of design to identify opportunities to reduce costs by substituting one product with a comparable one. With that, I'll turn it over to Andrea for the question on networks.

Hi, John. Well, direct-to-consumer is certainly a developing market opportunity for us. And as you know, for the RSN industry in general, we believe that BTC will be incremental to our business and not a replacement for distribution through our current partnerships. And while we all acknowledge that drivers to MVPDs have declined, We at MSG Network still serve approximately five and a half million subscribers throughout our region, and that's a substantial business. However, when we think about direct-to-consumer, we do recognize that there are millions of homes throughout our region that do not receive our networks. So for us, the question has been, how can we best serve this portion of the market? And we believe there are a number of ways we can do this, all of which we're currently and actively exploring. We could potentially cooperate with our existing distributors to serve our customers throughout our market. You know, we could offer a pure DTC product ourselves. We could offer a DTC product to a third party, or we could license certain of our content to other market participants. So let me say we recognize the market opportunity, and we're actively engaged in evaluating it. You know, as far as rights, We've indicated in our previous earnings calls that we could offer a direct-to-consumer product, and now we're just in the process of renewing our agreements with the NBA and the NHL, which, you know, we've renewed so many times in the past in the ordinary course.

Thank you.

Thank you. Your next question is from Paul Golding of Macquarie Capital.

Great. Thanks so much. A couple of questions. First one around Hakkasan. Is there any call you could give around the pre-pandemic performance of that business, just to understand what a run rate could look like as it's integrated into the Tau under more normal operations? And then I have a follow-up. Thanks.

Sure. Thanks, Paul. This is Andy. This is actually the first earnings call that we've had to discuss this acquisition with you. I'll say that we're really excited about it. It's pretty transformative for cow or cow hawk's home business. In terms of size, rough order, it nearly doubles cow's revenue base based on 2019 results. And it expands cow's footprint, both here in the U.S., specifically Middle East. And it's just, this is a transformative for cow. I will add, historically, Hakkasan has had a lower stand-alone margin than the opportunity we see here.

We think Tao's management team is the best in the industry, and they both. Both of those agencies that we expect to achieve here at Hakkasan.

This will be buoyed or added to by the economy's scale, as we see across both businesses working together. whether marketing efforts, procurement should drive this business. And in addition, Hawkinson and Cal, while very similar in terms of operating, there was some nuances in how they do in deal structure.

Both have leased venues, but in addition, Cal really has more of an expertise in managed venues, which means managed for somebody else, higher Hawkinson brands. And vice versa, Hakkasan is very strong in licensing. And so we will look for TAO to enter markets that we may never would have entered on. So we think this is a great opportunity for both businesses to come together. As we've seen, it's been a great opportunity to put in the results. Headline. the robust demand so far. It's been across all of our markets, particularly in Las Vegas. It hasn't stopped in July and August. We're feeling really good. The most recent performance has been helped by a few factors.

One, As we ramped up pretty quickly, some of our competitors have not opened or just first staff.

We've been rolling slowly into it as we reopen. So as a competition, we expect margins to come back more towards historical normal. But that said, we feel really good about this business and its future and its opportunities. Hey, Andy, it's Mark. I thought I'd just jump in and add a little bit more color on Hakkasan's results in the quarter.

During the quarter, Hakkasan contributed approximately $28 million of revenue, which represented 40% of Tao's total revenue of approximately $70 million. So clearly, it was a significant contributor for the quarter. I'd also point out that we completed the acquisition on April 27th, so that's about two months of contribution in the quarter, performing above the historical run rate for AOI. And over time, we also see a lot of opportunity now that Hakkasan is under the TAL umbrella.

In areas such as expansion and brand development, as well as potential Thanks, Paul. We'll take the next caller.

Your next question is from David Katz of Jefferies.

Hi. Good morning, everyone.

I appreciate all, you know, you've given. If we take a qualitative longer-term look, you know, beyond, you know, fiscal 22,

What can you share with us about up, down, or sideways, you know, as we go out just a little bit longer term on the recovery?

Thank you. So I think we should start, I think we've got to start in the beginning, right? And so as we talked about, our booking calendar for 22 is, we think, very strong. or could be very strong. Now, this is driven by two factors that we've discussed before. First is we've had all the shows that were supposed to be played off or rescheduled into this year, as well as all the new acts coming online. So starting September, we're going to see a pretty big ramp up in our shows. What that's done is the rest of the artists who wanted to be on the road this year are now going to have to look for dates further out. We would have been making six months, nine months, We're seeing them much longer than we've ever seen historically.

This is across all of our venues, but particularly at the arena, where our holds are up 50% versus the last pre-pandemic year. So this tells us there's real demand for artists to be on the road.

We feel even further confidence in this by after listening to Live Nation's recent presence for the years to come.

You know, Live Nation has a different purview than we do because they're buying glory.

Together, between what we're seeing and what we're hearing from artists and what we're hearing from Live Nation, we feel really good about not only this fiscal year, but what's next for you.

Thank you. Perfect.

Perfect. And if I can just follow up on the mobile gaming opportunity, and I just want to be clear about where you are or how you're positioned. I mean, it's obvious what assets you bring to it, but it sounds as though you're sort of having discussions with of, you know, irons in a

as many irons in the fire as possible, rather than sort of joining a group and formally submitting a bid.

Is that a fair characterization?

So, well, it's twofold. One, we didn't submit an application to be an operator, right? So, and that's for a few reasons on it. One of them is just simply certain league rules restrict your ability, if you're a direct operator, to put up Knicks and Rangers games on your platform. So we didn't think that made sense. In addition, as you've talked, we've reached the market. We've got great relationships with the current market leaders through our current partnerships, as well as the new entrants that are coming in. So we think we're in the best position once we know who's been We talked about the assets we have. We're going to be able to blanket the market, and we'll be able to do it better than any other partner could. So we think that that's the right position for us to be in over the next short term as well as the state works through the application process.

I agree. Thanks. Chris, do we have time for one last caller?

This is Karnofsky of J.P. Morgan. This is Anna Wiesel on for David Karnofsky. Thank you for the question. First, I was wondering if you could please quantify any cost energies post-merger and what the timeline to realize this would be.

Sure. Thanks for the question. As we've talked about before, we expect to realize savings in three categories. taxes, operating expenses, and interest payments. First, in terms of taxes, the merger allows for more efficient use of MSG Entertainment's tax attributes with MSG Network's near-term cash flow. As of June 30th, MSG Entertainment had an NOL of approximately $505 million, and the company expects, in calendar 23, to accelerate the depreciation of approximately 35% of the CapEx related to the MSC sphere in Las Vegas. Second, we anticipate realizing approximately $10 million in annual savings primarily related to public company costs. And finally, we believe that the merger enhances our ability to optimize our capital structure and lower interest payments. For example, we plan to explore refinancing MSG Entertainment's term loan, which is called Born May. As of June 30th, there was approximately $647 million outstanding on the loan, and it carries an interest rate of 7%. So we think there are some really attractive financial aspects of the transactions.

Thank you. And for the Las Vegas Sphere, is there any update you can provide in terms of how you're thinking about original content for the venue?

Sure. Sandy, let me start at the top. We've talked about it before, but I think it's really important to lay the groundwork. The Sphere can be an entirely new medium. It'll be the first of its kind large-scale venue to be fully immersive for 17,500 people all at the same time. This venue is going to use multi-sensory technologies. A high-resolution display plane, larger than the size of three football fields, will come up, wrap around, and engulf the whole audience. They'll use the world's largest beamforming audio system that will utilize more than 180,000 speakers to deliver a truly unique listening experience for our guests. In addition, haptic seating, which will enable the audience to feel what's happening. There'll be other 4D technologies to really complete the immersive experience. And as you know, we lengthened our construction timeline. We've taken that time to really work on developing both our technologies as well as our original content. So in terms of the content that will be played at the Sphere, there'll be multiple different types of events. will be our original attractions, as we just mentioned, concerts, corporate events, and select sporting events. And right now, we're taking the time to speak with key creatives as we think about what our first show will look like. So we look forward to sharing more as we get closer to our opening date in 2023. Thank you.

Thank you. I will now turn the call back over to Ari Daines for any additional or 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. Thank you. This does conclude today's conference call. You may now disconnect.