Good morning. Thank you for standing by, and welcome to the Madison Square Garden Entertainment Corp. Fiscal 2023 first quarter earnings conference call. At this time, all participants are in a listen-only mode. 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 followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. I would now like to turn the call over to Ari Danes, Senior Vice President, Investor Relations, Financial Communications, and Treasury. Please go ahead.
Thank you. Good morning, and welcome to MSG Entertainment's fiscal 2023 first quarter earnings conference call. Dave Byrnes, our EVP and Chief Financial Officer, will begin today's call with an update on the company's proposed spin-off transaction, as well as a discussion on our entertainment and TAO Group segments. This will be followed by an update from Andrea Greenberg, President and CEO of MSG Networks. Dave will then 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 investor section of our corporate website. Please take note of the following. Today's discussion may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Please refer to the company's filings with the SEC for a discussion of risks and uncertainties. The company disclaims any obligation to update any forward-looking statements that may be discussed during this call. On pages 5 and 6 of today's earnings release, we provide consolidated statements of operations and a reconciliation of operating income to adjusted operating income or AOI, a non-GAAP financial measure. With that, I'll now turn the call over to Dave.
Thank you, Ari, and good morning, everyone. Since our last call, I'm pleased to share that we have made significant progress on the potential separation of our businesses into two publicly traded companies. As you know, in August, we announced that our Board of Directors authorized the exploration of a potential tax-free spin-off of our traditional live entertainment and media businesses. Last month, our company submitted an initial confidential Form 10 Registration Statement with the SEC regarding the proposed transaction. We are also continuing to make progress in evaluating a number of areas, including potential organizational structure and the division of corporate overhead between the two companies. Assuming we move forward with the spin-off, the live entertainment and media company would take on the name Madison Square Garden Entertainment Corp., while the remaining parent company, consisting of our MSG Sphere and TAO Group businesses, would be renamed MSG Sphere Corp.
At this time, we have not set a timetable for completion of this potential transaction, which would be subject to various conditions, including final board approval. We continue to be confident that this separation would create enhanced flexibility for both companies to pursue their own distinct business and capital allocation strategies while providing investors with greater visibility into each company's businesses and growth prospects. This includes the unique opportunity we have with MSG Sphere, where in Las Vegas, we remain on track to open MSG Sphere at The Venetian in the second half of 2023. Work continues on the exterior of the venue with the installation of the LED mega panels on the Exosphere, where crews have been progressing from the top of the venue down.
Inside, we are continuing to build out the interior spaces, including the atrium and hospitality areas as we prepare for the installation of some of the venue's signature immersive technology features. This includes the interior display plane, which will be the highest resolution LED screen in the world. At more than 160,000 sq ft or bigger than three football fields, this display will wrap up, over, and behind the audience, creating a fully immersive visual environment at an unparalleled scale and a powerful canvas for artists and partners to showcase captivating content and storytelling in new ways.
As we move forward through the final phases of construction, we have adjusted our project cost estimate to approximately $2.175 billion from our prior estimate of $2 billion, which primarily reflects the ongoing impact of inflation and global supply chain pressures as well as the overall complexity of the project. We continue to expect to fund the remaining construction costs from cash on hand and cash flow from operations. This includes the impact of our plans to implement a cost reduction program across our businesses and reduce and/or defer certain discretionary capital projects. We also continue to have revolver capacity available to us if needed. While the project's costs have increased, we are drawing closer to the completion of construction and remain as confident as ever in the revenue and AOI opportunity that we have in Las Vegas with MSG Sphere.
We will continue to update you on our progress. Now I'd like to review operational highlights from our first quarter, starting with the entertainment segment. Fiscal 2023 is expected to be the first full year of events at our venues since fiscal 2019, and we got off to a fast start in our first quarter, hosting over 150 events and more than 1 million guests across our performance venues. This included a number of multi-night runs in the quarter, highlighted by Harry Styles' 15-night sold-out residency, which helped contribute to a record number of first-quarter concerts at the Garden. Robust demand from artists and promoters to play our venues has been matched by eagerness from fans who want to see their favorite shows in person. Ticket sales remain strong, and the significant majority of concerts held at our venues in the first quarter were sold out.
Looking ahead, our bookings calendar for fiscal 2023 continues to fill up, and we are tracking toward meeting our robust targets for the year. This includes a busy schedule for our sports bookings business. Last month, the Knicks and Rangers kicked off their 2022-2023 seasons at the Garden, while the Hulu Theater welcomed the League of Legends World Championship, which spanned 12 events across three weekends. This coming Saturday, the UFC is set to return to the Garden for what's projected to be one of the top grossing events in the arena's history. Turning to productions. After the Christmas Spectacular was cut short last season due to operational challenges from the pandemic, we are excited for this time-honored holiday tradition to return on November 18th for its 89th year.
Advanced ticket sales for the 181 show run have been performing well and are pacing ahead of last year on a per-show basis, helped by improving tourism, which at this time last year was significantly impacted by the pandemic. This year's production will feature new immersive elements as we continue to explore unique ways to integrate technology to ensure the production remains a vibrant asset for our company. We also look for unique opportunities that showcase the Rockettes brand to a wider audience, which this year includes the Hallmark Channel's all-new movie, A Holiday Spectacular, set to premiere later this month. This film will feature the Rockettes in various performance numbers on stage at Radio City. We are pleased to be partnering with the Hallmark Channel to bring together these two iconic holiday brands. Turning to marketing partnerships.
Our first quarter was highlighted by significant renewals with signature partners Verizon and Spectrum. At the same time, we have expanded our partner roster into new categories, forming multi-year agreements with brands such as Hub International, a leading global insurance brokerage firm, as well as QVC, which is the new presenting partner for the Christmas Spectacular. Our premium hospitality business is also off to a strong start, helped by continued improvements in New York City office occupancy. Just a few months into fiscal 2023, we have already exceeded our annual goal for suite renewals and are closing in on our target for sales of new licenses. The success we have had in renewing and adding corporate partners in recent months has placed us firmly on a path for sponsorship and suites revenue to exceed results for fiscal 2019, our last full year before the pandemic.
Turning to TAO Group, where our first quarter results reflected strong performance in New York and Las Vegas. This is especially impressive considering the challenging comparison with the year-ago quarter, which benefited from enthusiasm around the reopening of live entertainment in our markets. In addition, this quarter's results included the impact of a number of new venues such as LAVO Italian Restaurant in Los Angeles and San Diego, as well as the reopening of TAO Beach Dayclub in Las Vegas after a multi-year renovation. TAO has also made progress on its pipeline of new projects, remaining on track to open over 10 new branded locations this fiscal year. In fact, last week, TAO debuted two new branded locations with two more to follow within the next month at the new Moxy Hotel on New York City's Lower East Side.
As we look towards the end of this calendar year and into the next, TAO will also be expanding its presence in places such as the Middle East, Las Vegas, and Miami. The Las Vegas and New York markets are models where TAO Group has strategically executed its hub strategy, leveraging a centralized infrastructure to optimize and expand operations across a network of venues. TAO remains focused on its growth plans, including projects already underway with this strategy in mind. For example, TAO's upcoming restaurant in Miami, planned to open during the second half of the fiscal year, will be their second of hopefully several locations in this market, which we think is primed to be another hub in TAO's portfolio. We're also excited that today, TAO Group, in partnership with Unicorp National Developments, announced plans to open the first ever TAO-branded hotel.
TAO has been a proven leader in the entertainment, dining, and nightlife space for more than 20 years, including operating more than 40 branded locations inside existing hotels across the world. This project, which is expected to open in calendar 2025, will complete TAO Group's 360-degree approach to full-service entertainment experiences and showcase its flagship brand in a whole new way. In summary, we are pleased with our strong start to the year and look to continue building off this momentum. With that, I will now turn the call over to Andrea.
Thank you, Dave, and good morning. With the recent start of the NBA and NHL regular season, we are again poised to deliver unparalleled coverage of the New York Knicks, Rangers and Islanders, New Jersey Devils, and Buffalo Sabres with hundreds of live games across MSG Networks and MSG GO this season. I'm proud that last month, our continued commitment to programming excellence was once again recognized with 10 New York Emmy Awards, which was top among New York area RSNs and brings MSG Networks' total to an impressive 299 Emmys in our history. As to our financial results, we continued to experience a decline in subscribers this quarter. As a reminder, this was the last quarter for which year-over-year comparability was impacted by our non-renewal with Comcast.
That said, as the NBA and NHL seasons continue, we hope to build on successes we had last year, which included record advertising revenue for our teams and all-time high levels of viewership and engagement on our streaming app, MSG GO. We expect advertising results this year to be driven by a robust sports gaming category from all five of our sports betting partners, growth from other national brands, including Airbnb, Amazon, Disney+, Netflix, and Chipotle, and a strong core of returning advertisers. On the programming front, new and expanded initiatives this year include 12 BetCasts across Knicks and Rangers games, the addition of live pickleball, and over 30 local high school football games. We will continue to explore new ways to offer and monetize our content while working to reach new audiences.
In that regard, we are progressing in the design and development of our direct consumer offering and remain on track to launch in the second half of the current NBA and NHL seasons. While the media landscape is certainly evolving, we continue to believe in the value of our premium content and our ability to innovate to drive value for partners, advertisers, and viewers alike. With that, I'd like to turn the call back over to Dave.
Thank you, Andrea. Let's now review our financial results for the fiscal first quarter. On a total company basis, we generated revenues of $401.2 million and adjusted operating income of $2.8 million. The entertainment segment had $147.1 million in revenue, a significant improvement over last year's COVID-impacted quarter, primarily reflecting our busy schedule of events. Adjusted operating loss for the entertainment segment was $44.4 million. This result reflects the strength of our bookings calendar, the seasonality of our business as the Knicks and Rangers regular seasons didn't begin until October, and the impact of expenses related to MSG Sphere as we prepare for the opening of MSG Sphere at The Venetian.
Turning to MSG Networks, the segment generated $122.5 million in revenue and $32.9 million in AOI. AOI decreased on a year-over-year basis in the quarter, primarily reflecting lower affiliate revenue as well as higher rights fees expense, which reflects the absence of reductions in media rights fees related to the shortened 2020-2021 NHL season recorded in the prior year quarter and the impact of contractual rate increases in the current year period. These were partially offset by a decrease in SG&A, primarily due to lower advertising and marketing expenses. Finally, TAO Group generated revenues of $132.7 million and adjusted operating income of $14.6 million.
The increase in revenues versus the prior year quarter includes the impact of new openings and venues that had been closed in the prior year period due to COVID-19, as well as higher comparable venue revenues. The decrease in AOI also reflects the impact of increased staffing at the venue and corporate level as the business returns to normal operations, as well as higher food and beverage costs, including the impact of inflation, which the team has been working hard to mitigate. Turning to our balance sheet, as of September 30th, we had approximately $441 million in cash on hand, and our debt balance was approximately $1.76 billion.
Lastly, with respect to MSG Sphere at The Venetian, our project to date construction costs through September 30th were approximately $1.78 billion, which includes approximately $226 million of accrued costs that were not paid as of September 30th and is net of the $65 million received from The Venetian. With that, I will now turn the call back over to Ari.
Thanks, Dave. Operator, can we open up the call for questions, please?
At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Your first question comes from a line of Brandon Ross from LightShed Partners. Your line is open.
Hey, everyone. With the CapEx budget up again, can you walk us through your liquidity position and how you'll be able to financially get this project completed? Then maybe as part of that, can you speak to the magnitude and buckets of the cost reductions that you had mentioned, and whether or not this is gonna impact the spin timing, since presumably the MSGN cash flow is helping to fund this project?
Sure. Thanks, Brandon. Look, we're confident that we have sufficient liquidity from cash on hand and cash flow from operations to complete the construction of the Sphere at The Venetian in Vegas. A few items I'd highlight. First off, we're now in the midst of our seasonally strongest point of the fiscal year with the Christmas Spectacular, the best months coming up for our bookings business and the impact of the Knicks and Rangers seasons. We're anticipating that will generate substantial cash flow from our core operations, which we expect to continue to utilize for MSG Sphere. Second, while our plans are still being formulated, we do expect, as you mentioned, to implement a significant cost reduction program across our businesses and are planning to reduce or defer certain discretionary capital projects as well, so.
Aside from cash on hand and cash generated from our businesses, we also, if needed, have availability under our revolvers. Again, as a reminder, post-spin, Sphere would have the 1/3 retained interest in SpinCo, SphereCo, I should say, or RemainCo, would have the 1/3 retained interest in SpinCo, which would be available in a tax-free exchange offer, but also to raise capital for general corporate purposes if needed. That's the first part of the question, Brandon. As far as our cost reduction efforts, we're still in the middle of this now and I can't get into details on this call specifically, but what I'll say is we're going to look holistically across all of our businesses to ensure all areas continue to be positioned for success in the future.
Other than that, it's just premature to comment further at this time. Lastly, the third part of your question was on, with regard to the spin. What I can say is we're hard at work on it at this time. We're making great progress. As I just mentioned, we've made our initial Form 10 submission at the end of last month, and we're gonna keep moving the process forward. That's where we are spin-wise.
Okay. Thank you.
Your next question comes from the line of David Katz from Jefferies. Your line is open.
Hi. Good morning, everyone. Thanks for taking my question. I wanted to delve a little deeper into the Sphere. You know, the enthusiasm for it is obvious. I, you know, been through it a few months ago, and excited for it to open, for two reasons. One, because it's exciting, and two, you know, once it's open, the budget can stop going up. Can you just give us a little greater detail around how much of that is spent or contracted at this point versus how much of that budget may still remain in some variable state?
Sure, David. Just regarding the construction project in general, and given the recent announcement, we're continuing to deal with the impacts of inflation as well as global supply chain pressures across many areas of the project. As a reminder, we've talked about this before. We have numerous packages of work that were competitively bid to contractors many months ago with all of the actual costs being determined on a time and materials basis on the back end, and that's how the project is being managed on a time and materials basis. As those materials are delivered and as the work gets completed, we're continuing to see certain costs go up across certain work streams. Again, it's an incredibly complex project which has never been done before.
As we've made progress, there are instances where we've had to refine certain of our design plans or adjust our overall approach to certain aspects of the construction given its complexity, which also adds cost to it. In the recent weeks and months, for some of the reasons I've just outlined, we've seen higher costs in areas including the build-out of the venue's interior spaces, the installation of the immersive technologies, including the interior display plane, as well as the install of the Exosphere. Another reminder, we are building the largest LED screen in the world on the exterior. It's 580,000 sq ft, and the highest resolution LED screen in the world on the interior. It's the size of three football fields.
In a lot of these first of their kind construction areas, we are learning and adjusting as we go. What I can say on your question regarding where we are and where we're headed, after a detailed review of our project cost to date and what we estimate through completion, we adjusted our construction estimates of the $2.175. At this stage, we have approximately 8-9 months to go on primary construction. You know, it's within our sights, and we're gonna continue to manage every aspect of the construction as aggressively as possible.
Thank you. That's helpful. As my follow-up, if I may, with respect to TAO margins, I think those came in just a bit different from what we were looking for. Can you just talk about some of the puts and takes with TAO profitability and sort of what went on in the quarter and what we can expect, please?
Sure. Yes, margins for this quarter were down year-over-year. This reflected the impact of increased staffing at the venue coming out of COVID and the pandemic last year. They've continued to ramp up their venues. The increased staffing at the venue and the corporate level, you know, as the business has started to return to normal operations, as well as the continued impact of inflation on food and beverage costs. Our team is proactively managing the business to mitigate the impact of inflation in a number of ways, including menu engineering. Looking forward, our current expectation is that from a margin standpoint for TAO, our first quarter will be the toughest year-over-year comparison.
As the year progresses, we expect that margin headwind to ease. I guess I'll just add, as we've mentioned before, we expect TAO's average long-term margins to settle in the mid-teens on a percentage basis, with some potential fluctuation within the quarters.
Perfect. Thank you.
You're welcome.
Your next question comes from a line of David Karnovsky from JPMorgan. Your line is open.
Oh, hey, thank you. I wanted to ask about the TAO Hotel in Orlando. Is this a licensing deal, or are you taking a more active management role? You know, what other opportunities do you see to extend the brand to kind of these adjacent hospitality areas?
Sure. First off, we're excited by today's announcement, and we think this is a natural evolution for TAO's growth strategy. The TAO branded hotel in Orlando, it will be a multifaceted property including, you know, a TAO Asian Bistro restaurant, a rooftop pool experiences, various other hospitality spaces. It'll serve as the anchor for O-Town West, which is a $1 billion, 350-acre mixed-use community development in Orlando. With regard to the terms of the deal, some things to note, TAO will not be responsible for any of the capital funding, including pre-opening expenses. TAO will operate its flagship restaurant with economics similar to the company's typical managed deals, where TAO will receive a share of revenue, venue revenue and profit.
TAO will also manage the food and beverage at the hotel, for a share of revenue and profit. TAO will receive a licensing fee in exchange for the use of the TAO brand and related IP. This particular hotel is expected to open in the calendar of 2025. You know, obviously, we're really excited about looking forward to it come together over these next few years. To your question, second part of your question, while the hotel in Orlando is our only planned hotel concept at this time, we are in, I'd say, very early stage conversations with other developers for additional TAO branded hotels, in other markets. That is a possibility.
Just separately, on the Sphere, wondering if at this point you can maybe talk through how you see the sponsorship model for the venue. I would assume with the LED display, there's no kind of shortage of inventory to sell. Maybe you could speak to kind of early demand trends and what interest looks like at this point. Thanks.
Sure. Thanks. You're right. The Sphere will have a tremendous amount of sponsorship opportunities, and inventory capacity, just given its physical size, scale, and the digital Exosphere. We are already speaking with potential corporate partners across, you know, all major industries and seeing healthy interest for suites and sponsorship opportunities. What's even more encouraging is that several of these Sphere sponsorship conversations, it's probably not a surprise, are with existing major sponsors at MSG Entertainment venues. Clearly, companies, you know, recognize the value of event sponsorship for Sphere. Similar to The Garden, the Sphere will have a variety of sponsorship tiers, you know, ranging from lucrative founding partnerships to official partners, all the way to transactional campaigns that'll tend to be shorter in duration. The inventory is meaningful.
You know, just think about the brand inclusion opportunities for the largest LED screen in the world. You know, there are a lot more, from traditional suites to our atrium, which is gonna be incredible, to the immersive gallery spaces. You know, we keep saying, and I'll say it again, the Exosphere, it will ultimately be covered with 580,000 sq ft of fully programmable LED panels, which will be seen by, you know, not only the millions of people who visit Las Vegas or come to our events, but really as an iconic landmark that offers tremendous opportunities for social content that reaches far beyond Las Vegas.
It'll be a unique and powerful platform for brands, and we expect major sponsorship partner agreements to include Exosphere inventory for sure. I realize, you know, some of this is hard to visualize without either having seen the Sphere in person, or, you know, experiencing it. We anticipate strong demand for all the sponsorship and inventory opportunities. Just like our other venues, we will be creative in finding new and impactful inventory to utilize. We do feel very good about the sponsorship opportunities, you know, especially in Vegas. It's the number one destination for entertainment and, you know, in our opinion, Sphere will be the number one immersive experience in that city offers. Companies and brands are gonna wanna be associated with this experience.
Thank you.
Your next question comes from the line of Devin Brisco, Wolfe Research. Your line is open.
Thanks for the question. Could you update us on how you're thinking about the long-term return on capital for the Sphere based on the higher budget? It'd be great to hear your thoughts on opportunities across revenue streams, given the higher CapEx and any color and costs that are flowing through now, and long-term margin potential would be helpful.
Sure. Thanks. First, you know, we remain confident in the Sphere in Vegas that it'll generate substantial revenues and AOI and at attractive margins once we open. We're focused on three key categories for content that'll drive high venue utilization. First one being original attractions, which will run multiple times a day and take full advantage of the venue's technologies, performances such as concerts and residencies, marquee sporting events, corporate events, expos. We already just talked about the opportunities that Sphere will provide for companies to showcase their brands, the Exosphere, premium hospitality spaces and club spaces obviously will create additional revenue opportunities for us.
You know, we remain energized and enthused by the ongoing discussions we're having with potential partners, including leading filmmakers, global artists for the concert residencies and potential corporate partners. We remain on track to open the venue in the second half of calendar 2023. Now that we're within that timeframe, we do expect to start sharing more directly positive news on items like original content, sponsorships, corporate partnerships, like the one we announced with Formula 1, and announcing music residencies at MSG Sphere in the near term. With regard to specific financial guidance, that is something that the management team and I continue to think through and evaluate. At this time, we don't have anything more to share for this call.
Great. My second question is related to the busy calendar of events that you're seeing. From here, is there still capacity to host more events at The Garden and your other venues, or is the growth opportunity primarily going to be driven by pricing power and mix of events going forward?
Sure. You know, you're right. We're looking forward to what really should be an outstanding bookings year. You know, throughout the course of fiscal 2023, it's been great so far. As we think about growing our bookings business, we're focused on two areas, increasing utilization and growing per event profitability. So first on utilization, as a reminder, The Garden is obviously home to the Knicks and the Rangers. Radio City Music Hall is our only other venue with an anchor tenant, which is a Christmas Spectacular and which occupies that space for only a couple of months of the year. Our performance venues generally have a large slate of available dates to work from. We're increasing utilization in several ways.
This includes more recurring programming, such as longer residencies and multi-night runs like you saw recently with Harry Styles. We're also exploring new events and additional event categories like shows and expos, theatrical opportunities and so on. We're also creative in the ways that we look to maximize utilization, particularly at The Garden, including hosting multiple events, event types per day, and of course, we're weighing which events make the most, you know, strategic and financial sense for the company. When it comes to event profitability, we're focused on continuing to maximize the guest experience at our venues from the way customers buy food, beverage, merchandise, to how we market and process tickets, which helps drive increases in our already high sell-through levels.
We strive to give our customers the best experience in the industry, and we believe this approach will help, you know, drive improvements in per event profitability and continue repeat visitors to our venues. Hopefully, that's helpful.
Yep.
You're welcome. Operator, we have time for one last caller.
Your last question comes from a line of Paul Golding from Macquarie. Your line is open.
Thanks so much. I wanted to ask maybe not TAO specific, but TAO and the live events part of the business. It sounds like, at least from the TAO perspective, there are marginal headwinds in the near term. I wanted to ask maybe more holistically for the business, how you see labor and F&B inflationary pressure at this point. Is it transitory in the near to medium term, or do you see this now as more structural going forward? I have a quick follow-up on Sphere.
Sure, Paul. We talked to the TAO pieces, as you mentioned. You know, with respect to the core live entertainment business, we did have some staffing issues coming out of the pandemic, like really like the rest of the industry. Those have largely subsided at this point in time. I wouldn't say we are seeing anything structural across our core entertainment business. You know, TAO we already talked to, so I don't have a whole lot to add to the TAO answer and really nothing specific or alarming that we're seeing in our live entertainment space at all.
Great. Looking at Sphere, any info you can give around how you plan to market the studio or the uniqueness of this format to potential promoters and tours, given how specific it is to your venue, given the state-of-the-art design? Thanks.
Sure. You know, we've talked about that the Sphere is. It's gonna introduce an entirely new entertainment medium. It'll be the first large scale venue to deliver immersive experiences for up to 20,000 people at once with you know with full of multi-sensory technologies. This includes the original attractions, I should say, which we're gonna run multiple times a day and drive utilization of the venue, as well as concert residencies which will help drive our base of events. To your point, to create and produce this content, we are hard at work at our studio in Burbank with creators and artists currently to bring these immersive experiences to life at Sphere. The studio itself features an ultra-high resolution LED interior screen.
It's a quarter the scale of the full resolution type that's at the Sphere in Vegas. As well as it demonstrates the Sphere Immersive Sound and so on at the studio. We're not only energized by the possibilities, but these things are happening right now. There's tours constantly running through not only the studio, but the Sphere in Vegas. We're currently working with obviously artists and global performers on the development of what we feel is gonna be amazing content for the Sphere in Vegas.
Great. Thanks.
You're welcome.
This ends our question and answer session. I will now turn the call back over to Ari Danes for some final closing remarks.
Thank you. Thank you all for joining us. We'll speak with you on our next earnings call. Have a good day.
Goodbye.
This concludes today's conference call. Thank you for your participation. You may now disconnect.