Good morning. Thank you for standing by and welcome to the Madison Square Garden Entertainment Corp. Fiscal 2023 Second Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers remarks there will be a question-and-answer session. I would now like to turn the call over to Ari Danes, Senior Vice President Investor Relations, Financial Communications and Treasury. Please go ahead.

Thank you. Good morning, and welcome to MSG Entertainment's fiscal 2023 second 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, as well as a discussion of 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 Investors section of our corporate website. Please take note of the following. Today's discussion may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Please refer to the company's filings with the SEC for a discussion of risks and uncertainties. The company disclaims any obligation to update any forward-looking statements that may be discussed during this call. On pages 5 and 6 of today's earnings release, we provide consolidated statements of operations and a reconciliation of operating income to adjusted operating income or AOI, a non-GAAP financial measure. And with that, I will now turn the call over to Dave.

Thank you, Ari, and good morning, everyone. I'd like to begin today's call with an update on the progress we have made toward our proposed spin-off. As you know in December we announced a revised plan for the separation of our businesses and are now pursuing a spin-off of our traditional live entertainment business from our MSG Sphere, MSG Networks and TAO Group businesses. We believe this revised structure is optimal for maximizing shareholder value as it creates two distinct companies each with enhanced strategic and financial flexibility to drive long-term growth. One would be a pure-play live entertainment company with a portfolio of assets that includes the Madison Square Garden Arena and the Christmas Spectacular production. The other would pursue global growth opportunities around MSG Sphere, state-of-the-art venues that will deliver the next generation of entertainment experiences. Last month, we confidentially submitted an amended Form 10 statement with the SEC for the revised spin structure and expect to file our first publicly available Form 10 later this month. We also plan to issue an investor presentation on the new live entertainment company, which will include certain financial projections that illustrate the profitability of our core entertainment business. We are moving swiftly and anticipate completing the spin-off by the end of March subject to various conditions including final Board approval. We are also continuing to make significant progress around MSG Sphere and expect to open the venue in September. In terms of construction, we are currently on track to finish installing LED on the Exosphere by the end of this month marking a significant project milestone. In total, the Exosphere will be 580,000 square feet of fully programmable LED lighting, creating the world's largest LED screen, that to be seen not only by the millions visiting Las Vegas, but also…

Thank you, Dave and good morning. At the halfway point of the NBA and NHL regular seasons, we are once again delivering a full slate of live games across our five professional sports teams along with comprehensive pre- and post-game coverage, behind-the-scenes footage and a host of other unique programming for our audiences. We have also recently completed renewals with several distributors including a multiyear agreement with one of our largest affiliates. As to our financial results, while we again experienced a decline in subscribers this quarter, we continue to build on our success in advertising delivering year-over-year growth in advertising and sponsorship revenue. This increase reflected both the timing of live game telecasts, as compared to the prior year, as well as continued growth in advertising revenue on a per game basis. We are benefiting from our strong core of returning advertisers including the full run rate impact of our five sports betting partners and increased demand from categories such as auto and insurance. We are also pleased to see increasing advertiser demand for our non-ratings-based initiatives with significant year-over-year increases in branded content and our MSG Go product, as our partners continue to recognize the platform's benefits in reaching additional viewers. And we have been executing on several new content and distribution opportunities. In December, we aired our first ever NHL bet cast presented by DraftKings one of 12 bet casts we have planned across Knicks and Rangers games over the course of the '22, '23 seasons. In addition, we recently launched nationally MSG Sports zone, a new free ad-supported streaming TV channel, which features a mix of original programming from our content library. MSG Sports zone is currently available on Flex with other distributors expected to launch shortly. The introduction of this fast channel provides us incremental…

Thank you, Andrea. Now let's review our fiscal 2023 2nd quarter financial results. On a total company basis, we generated revenues of $642.2 million and adjusted operating income of $124.1 million, an increase of 24% and 63% respectively as compared to the fiscal 2022 second quarter. As a reminder, the prior year quarter was impacted by the Omicron variant which resulted in a shortened run of the Christmas Spectacular, a number of canceled and postponed events in our bookings business and a temporary impact to both demand and operations at Tao. Starting with the Entertainment segment, we generated revenues of $356.5 million and AOI of $66.3 million, both up significantly on a year-over-year basis. These increases were primarily driven by a full run of the Christmas Spectacular, the start of the Knicks and Rangers seasons, and continued strength in our bookings calendar. AOI also reflected the impact of expenses related to MSG Sphere as well as costs related to the company's planned spin-off. We anticipate Sphere costs continuing to increase over the remainder of the fiscal year as we prepare for the planned opening. Turning to MSG Networks, the segment generated $158.9 million in revenue and $39.3 million in AOI decreases of 1% and 10% respectively as compared to the prior year period. The decrease in AOI primarily reflected lower affiliate revenue and higher rights fees expense as well as higher other programming and production costs. These were partially offset by growth in advertising revenue. Finally, Tao Group generated $136 million of revenue and $18.7 million of AOI, up 16% and 7% respectively as compared to the prior year period. The increase in revenues was driven by higher comparable venue revenues as well as the impact of new openings. AOI results also reflect higher venue level and corporate labor costs as well as higher entertainment costs. Turning to our balance sheet. As of December 31st, we had approximately $554 million of cash on hand and restricted cash and our debt balance was approximately $2.01 billion reflecting our recent MSG Sphere financing completed at the end of the quarter. Our construction cost estimate for MSG Sphere remains $2.175 billion, while project to-date construction costs through December 31st were approximately $2 billion which includes approximately $236 million of accrued costs that were not paid as of December 31st and is net of the $65 million received from the Venetian. And lastly, with respect to the cost reduction program, which we announced last quarter and Andrea touched on earlier, we have now completed a strategic review of our businesses and have identified a number of efficiencies across our entertainment and MSG Networks segments. This includes targeted headcount reductions, which have now been implemented and resulted in a restructuring charge of $13.7 million in the fiscal second quarter as well as other non-labor-related cost savings initiatives. With that I will now turn the call back over to Ari.

Thanks Dave. Operator, can we open up the call for questions?

Your first question comes from the line of Brandon Ross from LightShed Partners. Your line is open.

Hey good morning. Thanks for taking the questions. I wanted to start with Sphere and I think all of us and investors are certainly looking forward to the building opening in September. But what can you say to give them confidence that, the building will generate immediate and substantial revenue, when the door is open after this CapEx cycle?

Sure, Brandon. Thanks. Let me start by saying that, we're confident that MSG Sphere in Las Vegas will generate substantial revenues, and adjusted operating income once we open. We're making good progress on our plans and expect to have quite a bit of news to share with you as we make our way towards the opening. Look, we feel we have the best relationships and partners in the industry, whether it's with artists, promoters, sponsors and others, and are working to extend those relationships to Sphere, where it's appropriate. So we're not starting from square one in that regard. Let's touch on where we are with content plans. We're in active discussions regarding a wide variety of event types, including music residencies, and expect to have our first residency help us open the venue in September. I'd also add that, we're targeting between four and six residency headliners every year that could obviously vary depending on the length of the residency. We also see, the opportunity with major market events like Formula One, which is doing a multi-day takeover in November for their inaugural Las Vegas Grand Prix. We've talked about original attractions as being another key component of our plans to really drive the high utilization at the Sphere. And we continue to expect to run these originals multiple times a day year-round. And we believe, Vegas is the perfect market for these attractions given that the 40-plus million tourists that visit Vegas annually. And I briefly mentioned it earlier in the coming weeks, we will be announcing our first original attraction from a leading Hollywood director, which we expect to debut also around the time that we opened the venue. In terms of advertising, sponsorship and premium hospitality, the Sphere will have a variety of sponsorship tiers, ranging from lucrative founding partnerships, to official partners, all the way to transactional campaigns that tend to be shorter in duration. We'll also have 23 VIP suites and additional premium hospitality areas throughout the venue. Just in terms of the progress we're making on that front in November, we hosted 150 potential Las Vegas suites, and VIP partners for a first-look event. During CES in January, we hosted site tours on each of the days during CES for representatives from some of the world's leading brands. And we're now speaking with potential corporate partners across really every major industry and we feel very good about the opportunity we have to translate those conversations into partnerships. Las Vegas is the number one destination for entertainment and the Sphere will be the number one immersive experience that the city offers. And companies and brands are going to want to be associated with that experience. So with all of that, we remain confident about the opportunity we have in Las Vegas, and we look forward to sharing more positive news on all of this with you.

Great. I know, what residency I'm hoping for. But on Tao, can you maybe help us think out the valuation and what you expect get in return for that asset? I know, you don't know the exact sale price at this point, but maybe if you could just kind of frame-up in broad strokes what you're thinking on valuation and how much interest there has been so far?

Sure. I'll try to help the best I can with the valuation question. Just as a reminder, we originally paid $181 million for a 62.5% majority interest in TAO in 2017. And at that time that equated to an enterprise value of approximately $400 million. Our interest is now approximately 67% and that's for a combined TAO Pakistan business and since 2017 TAO has transformed into the global powerhouse that it is today. The business has grown over 70 branded locations across four continents, and this scale is reflected in its financial results. In fiscal 2022, TAO had revenue of $485 million and AOI of nearly $70 million. It's TAO's phenomenal employees. We believe their management team is the best in the business. And they have just have an enviable portfolio of brands and venues. The business also has a long way to continue to grow its venue portfolio both domestically and internationally. And as a result of all of this, the bidding process is extremely robust with significant interest from multiple bidders. And at this point, we're moving forward through the process and we'll keep you updated as we have additional news.

Cool. Thanks so much.

Thanks, Brandon

Your next question comes from the line of David Karnovsky from JPMorgan. Your line is open.

Hi. Thanks. Andrea, on the D2C product, can you remind us if you have rights to package the games anyway you want. So for instance, could you sell half or a quarter of again? And then how should investors think about the financial model for this product? Would it be EBITDA accretive in Season One, or does this need to reach a certain scale?

Hi, David. Well, as we said in our prepared remarks at the outset at launch, we'll be offering per game monthly and annual subscriptions. Will certainly evaluate other types of consumer offerings if they make sense, but likely after launch. Yes, we've talked about the rights before. As to rights, we've reviewed our plans and depth with the leagues and they're entirely supportive of what we're doing. As to your second question in terms of opportunities for MSG+, we certainly believe it will be value accretive. And without getting into the specifics, we do know that there are millions of homes in the region that don't today receive our networks. We've conducted extensive consumer research. It's shown that among fans that don't today receive us in the bundle there's definitely interest in subscribing to a D2C offering. We also believe that we'll benefit from the combination of MSG GO with MSG+ into a single offering that will allow for greater utilization by our authenticated subscribers on additional platforms because we'll be fulsome in the number of platforms on which MSG+ will be available, that provides us with increased potential combined monetization opportunities. We also have many efficiencies in place today with our existing business with our programming, our staffing, our technology and our learnings from MSG GO. So in short without getting into specifics we certainly believe that MSG+ will be value accretive.

And then separately, David, just wanted to see if you could update on the live events pipeline, concert, residency demand generally. And I'm curious, just given economic headwinds, do you see any difference in demand for, sort of, mega acts that we know were selling really well at places like the Garden versus smaller acts that you service at Radio City or the theater.

Sure, David. Thanks. Let me just start by saying we're really pleased to say that the demand from artists and fans remains robust. A majority of concerts held at our venues during the quarter were sold out. And that was the case at both the Garden and across all of our theaters. Average show attendance at each of our venues, through the second quarter, has been in line with last year, which, obviously, benefited from pent-up demand coming out of the pandemic. So we haven't seen anything other than that enthusiasm being sustained. As we look ahead to the second half of this calendar year or this fiscal year 2023, our calendar continues to fill up. And our theaters continue to attract a wide range of genres, repeat act, new acts and multi-night shows. We've also continued to see strong on-sale activity over the last few months, including some of the recent multi-night sellouts from certain on-sales like Madonna, Janet Jackson, RBD at the arena, Bono at the Beacon and several others. So we feel really good about the remainder of the year and beyond at this point.

Thank you.

You’re welcome.

And your next question comes from the line of Devin Brisco from Wolfe Research. Your line is open.

Thanks for the question. Could you talk a bit more about the decision to explore sale of Tao Group. Why is now the right time to undergo this process? Is part of the rationale to use proceeds to fund construction of the Sphere or other Sphere initiatives? And if not, what are your capital allocation plans with proceeds assuming a sale is completed?

Sure. Thanks, Devin. As I just mentioned, since we bought the majority interest in Tao in 2017, it's transformed into the global powerhouse that it is today and it's clearly reflected in its financial results. And as you know, this company, our Board, our management team, have a track record of regularly exploring ways to maximize shareholder value. We believe that now is the appropriate time to explore a potential sale of our interest in Tao. And in terms of the use of the proceeds from the potential sale, let me start by saying that we are comfortable with the fact that we have the appropriate liquidity to complete construction of MSG Sphere in Las Vegas. We have substantial cash on the balance sheet. Our business is generating positive operating cash flow and we have revolver capacity, if needed. And with the recent cost reduction program that we just completed, including at MSG Networks, our business is even on stronger ground today. So, typically, we move forward with the sale. The sale would provide -- the sale of Tao would provide SphereCo with enhanced financial flexibility, period. We can see those proceeds benefiting all businesses at SphereCo, as that entity, really, after the spin-off evaluates opportunities to appropriately allocate capital.

Thanks. And I have a second question on MSG Networks. As you move closer to a D2C launch, how are your discussions with linear distributors progressing? Will the D2C launch cannibalize affiliate rates at all, or is there a way to protect linear streams, while also reaching incremental consumers outside the bundle?

Thanks for the question. Well, as to our current distribution partners and we've indicated before, that we have the flexibility in our existing agreements to offer this D2C product in the way we contemplate. However, we remain very, very mindful of our traditional linear business, and those important partnerships, including the value that we derive from those very important partnerships. We've indicated that we'll have more to say about the product including the pricing of the product in the very near future. That said, we believe there remains continued value in the bundle. And our D2C offering, including our pricing for that offering, we'll most certainly take that into consideration.

Thank you.

Thanks, Devin. Operator, we'll take one last caller.

Your final question comes from the line of Paul Golding from Macquarie Capital. Your line is open.

Thanks, so much. I wanted to ask first off, if we could get a little more color on the cost reduction program, the headcount reductions? I know you mentioned it's across entertainment and networks. I guess, where did you see the opportunity to cut costs? And in each of those, maybe more specifically on what drove that? And then a follow-up around the spin. More or less, what kind of sort of background could you give on the SpinCo capital allocation strategy going forward, post spin, we'll have the legacy entertainment business. But -- just trying to understand, where you go from capital allocation from there. Thanks.

Sure, Paul. First on your cost reduction question, while we're not providing specifics, I'll say that we identified a number of efficiencies across, both entertainment and MSG Networks. That included targeted headcount reductions, which resulted in the $13.7 million of restructuring charges that you see in the second quarter. We also identified and implemented a number of nonlabor-related cost reductions. And as Andrea has mentioned that we expect these initiatives will result in meaningful cost savings going forward, particularly at MSG Networks. On your capital allocation question for SpinCo. Yes, as we think about our capital allocation priorities for that business the first is always to maintain adequate liquidity to fund operations. Second is to ensure that we have a strong balance sheet. And as you know the live entertainment business took on debt during the pandemic. There's currently a little less than $680 million outstanding under that facility. So in the nearer term, we expect our priority would be debt pay down for SpinCo. And then third over time, we would certainly explore other uses of cash flow including return of capital. Just a note on that. We expect SpinCo will be well-positioned to generate cash, which will allow for rapid deleveraging and this starts with our expectation for strong AOI on an annual basis for SpinCo. And just on that point, again, note that we plan to issue an investor presentation on SpinCo with certain financial projections that will illustrate this profitability. So again, we think this will position SpinCo well to quickly delever, which will then open the door for other potential uses of cash flow for SpinCo.

Great. Thank you so much.

You’re welcome, Paul. Thanks.

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

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