Good morning. My name is Christie, 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 4th Quarter and Year End 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. Thank you. I would now like to turn the call over to Ari Danes, Investor Relations. Please go ahead, sir.
Thank you. Good morning, and welcome to MSG Entertainment's fiscal 2021 Q4 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, 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 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 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 67 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. 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 TAO 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 MSG Sphere in Las Vegas And completing a $650,000,000 debt raise. These actions strengthened our balance sheet While projecting 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 destination shop, 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 Q4, 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 have begun to staff up in anticipation of what we envision to 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 our 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 2,030 8 with an option to renew for an additional 10 years. We are pleased to have worked with Tishman Speyer 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 TAO Group. 4th quarter results include the impact of the Hakkasan Group acquisition, which created a global leader in premium hospitality With over 60 venues across 5 continents. The acquisition expands TAO's U. S. Presence in major entertainment markets Such as Las Vegas, Southern California and Miami, while providing 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 Tal intends to utilize alongside its owned and managed venue models as it continues to pursue growth opportunities. The easing of capacity restrictions in the 4th quarter helped drive strong results for TAO with the 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 steel 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, Sure. 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, we'll 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, 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 TAO 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 ratings 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 post season with ratings for the Knicks and Islanders 1st round matchup 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 with new types of content, including alternative versions of our live game telecast and exploring 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 Stata 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
Thank you, Andrea. Let me start by reviewing our Q4 financial performance, Which as a reminder, does not include the results of MSG Networks as the acquisition was completed on July 9. That said, MSG Networks' standalone results can be found in our press release. Beginning next quarter, we will speak to this segment's results in detail. In the fiscal Q4, we generated revenues In terms of revenue, TAO Group generated $69,700,000 These results included the addition of Hawkathon at the end of April.
And as Andy noted, were driven by strong reopening in our key markets, especially Las Vegas. Revenue also included the impact of our various commercial arrangements with MSG Sports, Including $8,300,000 in arena license fees as the Knicks and Rangers 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 momentum at restaurants and nightclubs. 2nd, 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 or expect to return to more normalized levels for certain expenses such as rights fees and normalized advertising revenue. Now let's turn into capital expenditures. We had $130,500,000 of capital expenditures in the fiscal 4th quarter, which primarily related to the construction of MSG Sphere in Las Vegas. Through June 30, Project to date construction costs incurred were approximately $850,000,000 which includes $98,000,000 of accrued costs That were not paid as of June 30 and is net of $65,000,000 received from Las Vegas Sands. As a reminder, last quarter we announced that the cost estimate for the venue was announced Estimate of $1,660,000,000 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 opening in calendar 2023.
Finally, turning to our balance sheet. We had approximately $1,170,000,000 of cash as of June 30th $1,520,000,000 if you include MSG Networks, $348,000,000 of cash. In terms of debt, the combined company's debt balance was approximately $1,740,000,000 as of year end. As previously noted, we believe that capital structure, including the potential, optimistic refinancing of MSG Entertainment's $647,000,000 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?
And your first question is from Brandon Ross of Lightship 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 up open up competition And perhaps even additional ways to monetize betting. And then 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, there's going to be 4 skins, 4 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 gives us real confidence. 1 group, in their application talked about a 9 operator model with a 51% tax rate.
And now And with a 51% tax rate. In that one, they thought there'd be over $900,000,000 of gross tax revenues generated for the state. And that includes money for marketing. Another group, which only had 4 operators at a single consortium, Peg, the opportunity is $1,300,000,000 in tax revenue for the 4 or above It's going to be great and they're significant and 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 And that's us, right? We blended the market. We always had a great opportunity between our relationship with MSG Sports and the teams, our fixed asset here at the arena, How for hospitality, premium hospitality, but then with the addition of MSG Network, we're able to add linear and digital Online content, maybe 4 or more. We're looking at different deal structures, exclusive deals, non exclusive deals. We're talking
Thanks. And then just your stock's been down pretty significantly since the original press article surrounding Networks is a real cash flowing asset, I was wondering if you would ever consider using the cash flow from networks
Thanks, Brandon. It's Mark. I'd start by saying, as you saw during the pandemic, that meant preserving our liquidity to position the company to return to business. 2nd, which we continue to see as a unique opportunity growth opportunity for our company. Financing our term loan at MSG Entertainment, which we put in place in the pandemic as an insurance policy and carries a 7% interest rate.
Our near term focus areas, we regularly review our capital allocation priority and over time we will consider all options. Thank you.
Thanks.
Question is from John Genentes of Wolfe Research. Thank you, Steve.
And good morning everyone.
Just a quick follow-up on the Sphere. As the bill continues, can you give us more color And then just on the cost versus budget, given the $40,000,000 or so increase, can you give us the puts and takes beyond hitting that, call it, the revised target of the 1.8 6 And you plan to now update in that every quarter versus budget. And then separately, just on your direct to consumer offering, where are 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 spare 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. 2nd, 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 That's the design to identify opportunities to reduce costs by substituting 1 product with a comparable to 1.
With that, I'll turn it over to Andrea for the question on network.
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 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 that 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 customers throughout our market. We could offer a pure DTC product ourselves. We could offer a DTC product for a third
party
Where we could license certain of our content to other market participants. So let me say we And we're actively engaged in evaluating it. As far as rights, Previous earnings calls that we could offer direct to consumer products And now we're just in the process of renewing our agreements with the NBA and the NHL, which 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 Hawkeson. Is there any color you could give around the pre pandemic performance of that business, what a run rate could look like as it's integrated and it's how Under more normal operations?
And I have a follow-up. Thanks.
Sure. Thanks, Paul. This is Andy. So 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 TAO. In terms of size, rough order, it nearly doubled TAO's revenue base based on 2019 results and it expands And key internationals, specifically Middle East, and it's just this is a transformative for CAL. I will add, Historically, Hakkasan has had a lower standalone margin opportunity we see here. We think TAO's management team is the best in the industry and they can do both. Both of those that we expect to achieve here at Hawkeson.
This will be buoyed or added to by the economies still As we see across both businesses working together, marketing efforts, procurement should drive this business. And in addition, Hockasan and Cowal are very similar in terms of operating. There were some nuances in how they deal in deal structure. But in addition, Cavill really has more of an expertise in managed venues, Yes, higher a little bit lower revenue, but a big piece of profit in the higher margin. So we will look And vice versa, Hakkasan is very Strong licensing.
And so we will look for tau into markets that we may never would have entered We think this is a great opportunity for both businesses to come together. We've seen it's been a great Included in the results. The headline is the robust demand so far. It's been across all of our markets, Particularly in Las Vegas. I'll add that the momentum hasn't stopped.
The current the most recent performance has been helped by a few factors. 1, As we ramped up pretty quickly, some of our competitors have not opened nor just First and Tencent staff, we've been rolling slowly As we reopen, so as we transition, we expect margins to come back more towards historical normal. Well, that said, we feel really good about this business and its
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, Hakathon contributed approximately $28,000,000 of revenue, which represented 40% of TAO's total revenue of approximately $70,000,000 So clearly, it was a significant contributor for the quarter. I'd also point out that we completed the acquisition on April 27, So that's about 2 months of contribution in the quarter, forming above the historical run rate for AOI. At We also see a lot of opportunity now that Hakkasan is under the TAO umbrella.
Thanks, Paul. We'll take the next caller.
Your next question is from David Katz of Jefferies.
Hi, good morning, everyone. Thanks. I appreciate all of the questions you've given. If we What can you share with us about up, down or sideways as we go out just a little bit longer term And the recovery.
Pete, this is Andy. Thank you. So as we I think we should start I think we got to start in the beginning, right. And so as we talked about our booking calendar for 2022 is we think very strong It could be very strong. Now this is driven by 2 factors as we've discussed before, right.
First is we've had all the shows that were Supposed to be played off or scheduled, 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 So while historically we would have been making it 6 months, 9 months, maybe be a year to start seeing holes, we're Seeing a 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, today's live nation's recent public comments for the years to come. Live makes it a lot more difficult to get to the market because they're buying global tours And mapping them out at the right time.
So while we speak directly 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 we're seeing next year.
Thank you.
Perfect. And if I can just follow-up vetting or the mobile gaming opportunity. And I just want to be clear about where you are or how you're I mean, it's obvious what assets you bring to it, but it sounds as though you're sort of having discussions with Rather than sort of joining a group and formally submitting a bid, Is that a fair characterization?
So it's twofold. 1, 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 about, We're talking to everybody. We think we're the best way to any for any operator or operators to reach the market. We've got great relationships with the current Market leaders through our current partnerships as well as ones that we the new entrants that are coming in. So we think we're in the best position Once that we know who's been selected to help drive those businesses. We've 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 Short term as well, the state works through the application process.
Got it. I agree. Thanks.
Karnovsky of JPMorgan.
Hi. This is Anna Wiesel on for David Karnovsky. Thank you for the question. First, I was wondering if you could please quantify any cost synergies post merger and what the time line to realize this would be?
Sure. Thanks for the question. As we've talked about before, we expect to realize savings in 3 categories: taxes, operating expenses and interest payments. 1st, in terms of taxes, the merger allows for more efficient use of MSG's Entertainment Tax Attribute with MSG Networks near term cash flow. As of June 30, MSG Entertainment had an NOL of approximately $505,000,000 and the company expects in calendar 2023 To accelerate the depreciation of approximately 35% of the CapEx related to the MSG Sphere in Las Vegas.
2nd, we anticipate realizing approximately $10,000,000 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 callable in May. As of June 30, there was approximately $647,000,000 outstanding on the loan and it carries an interest rate of 7%. So we think there are some really attractive financial aspects of the transaction.
Thank you. And for the Las Vegas beer, 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, right. We've talked about it before, but I think it's really important to lay the groundwork. This year is an entirely new medium. It will be the first of its kind large scale venue to be fully immersive For 17,500 people all at the same time.
It's then using these multi sensory technologies, a high resolution display point, Larger than the size of 3 football fields will come up, wrap around and engulf the whole audience. It'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 4 d 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 this year, there'll be multiple different types of events. It 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 Danes for any additional or closing remarks. Thank you. This does conclude today's conference call. You may now disconnect.