Madison Square Garden Entertainment Corp
NYSE:MSGE
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Madison Square Garden Entertainment Corp
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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 speakers remarks there will be a question-and-answer session. [Operator Instructions].
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 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 five and six 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. 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 calendar ‘23. 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.
And 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 venues 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 square feet 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 dollars, 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 projects 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 ‘19, 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 remained 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 ‘23 continues to fill up and we are tracking towards 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 ‘22, ‘23 seasons at the Garden, while the Hulu Theater welcomed the League of Legends World Championship, which spanned 12 events across three weekends. And 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 18 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 that 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 ‘23, 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 ‘19, 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 restaurant in Los Angeles and San Diego, as well as the reopening of TAO Beach in Las Vegas after a multiyear 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, and 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 the 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 prime to be another HUB in TAO’s portfolio. We are also excited that today TAO Group in partnership with Unicorp National Developments, and now its 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 showcased its flagship brand in a whole new way. So 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 am 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 RSN’s and brings MSG Networks total to an impressive 299 Emmy in our history.
As to our financial results, we continue to experience a decline in subscribers this quarter, and 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 best casts across Knicks and Rangers games, the addition of Live Pickleball and over 30 local high school football games. And 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-to-consumer offering, and remain on track to launch in the second half of the current NBA and NHL seasons.
So 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 Mix 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 30 we had approximately $441 million of cash-on-hand and our debt balance was approximately $1.76 billion. And lastly, with respect to MSG Sphere at the Venetian, our project to-date construction costs through September 30 were approximately $1.78 billion, which includes approximately $226 million of accrued costs that were not paid as of September 30, 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?
[Operator Instructions]. And your first question comes from the 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? And 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 going to 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, and 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. And aside from cash-on-hand and cash generated from our businesses, we also if needed have availability under our revolvers.
And again as a reminder, post spin Sphere would have the one-third retained interest in SpinCo, SphereCo I should say or RemainCo would have the one-third 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, so 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, and other than that, it’s just premature to comment further at this time.
And then 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 going to keep moving the process forward. That’s where we are Spin wise.
Okay, thank you.
And your next question comes from the line of David Katz from Jefferies. Your line is open.
Hi! Good morning, everyone. Thanks for taking my questions. I wanted to delve a little deeper into the Sphere. The enthusiasm for it is obvious. I’ve been through it a few months ago and excited for it to open for two reasons. One, because it’s exciting; and two, 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 going 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 to 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.
And again, it’s an incredibly complex project, which has never been done before. So – and as we’ve made progress, there are instances where we’ve had to refine a third 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 and for some of the reasons I’ve just outlined, we’ve seen higher costs in areas, including the build-out of the venues interior spaces, the installation of the immersive technologies, including the interior display plane, as well as the install of the Exosphere. And again another reminder, we are building the largest LED screen in the world on the exterior. Its 580,000 square feet and the highest resolution LED screen in the world on the interior. It’s the size of three football fields. So 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 billion, and at this stage we have approximately eight to nine months to go on primary construction. And we’re within the end, it’s within our sites, and we’re going to continue to manage every aspect of the construction as aggressively as possible.
Thank you, that’s helpful. And 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, and this reflected the impact of increased staffing at the venue. Coming out at COVID and the pandemic last year, they’ve continued to ramp up their venues. So the increased staffing at the venue and the corporate level as the business has started to return to normal operations, as well as the continued impact of inflation on food and beverage costs. So 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, and as the year progresses, we expect that margin headwind to ease. And 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 the line of David Karnovsky from JP Morgan. Your line is open.
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? And then, 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 Tau branded hotel in Orlando will be a multifaceted property, including a TAO Asian Bistro restaurant, rooftop, pool experiences, various other hospitality spaces and it will serve as the anchor for Old 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 preopening expenses. TAO will operate its flagship restaurant with economics similar to the company’s typical managed deals where TAO will receive a share of venue revenue and profit. TAO will also manage the food and beverage at the hotel for a share of revenue and profit and TAO will receive a licensing fee in exchange for the use of the TAO brand and related IP.
So this particular hotel is expected to open in the calendar 2025, and then you know obviously, we’re really excited about looking forward to it come together over these next few years. And to your question, the 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, so that is a possibility.
Okay. And then 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 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 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. So clearly, companies recognize the value of event sponsorship for Sphere.
Similar to The Garden, The Sphere will have a variety of sponsorship tiers, ranging from lucrative founding partnerships to official partners all the way to transactional campaigns that will tend to be shorter in duration. And the inventory is meaningful. Just think about the brand inclusion opportunities for the largest LED screen in the world, and there are a lot more from traditional suites to our atrium, which is going to be incredible to the immersive gallery spaces.
And we keep saying, and I’ll say it again, the Exosphere, it will ultimately be covered with 580,000 square feet 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 will be a unique and powerful platform for brands, and we expect major sponsorship partner agreements to include Exosphere inventory for sure.
I realize some of this is hard to visualize without either having seen the Sphere in person and experiencing it. But we anticipate strong demand for all the sponsorship and inventory opportunities. And 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, especially in Vegas. It’s the Number 1 destination for entertainment and in our opinion, Sphere will be the Number 1 immersive experience that city offers, and companies and brands are going to want to be associated with this experience.
Your next question comes from the line of Devin Brisco with Wolfe Research. Your line 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 would be great to hear your thoughts on opportunities across revenue streams given the higher CapEx and any color on costs that are flowing through now and long-term margin potential would be helpful.
Sure, thanks. First, we remain confident in MSG Sphere in Vegas that it will generate substantial revenues and AOI and at attractive margins once we open. We’re focused on three key categories for content that will drive high venue utilization. First one being, original transactions, which will run multiple times a day and take full advantage of the venues 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, it will create additional revenue opportunities for us. And we remain energized and enthused by the ongoing discussions we’re having with potential partners, including leading filmmakers, global artists for the comps residencies and potential corporate partners.
We remain on track to open the venue in the second half of calendar ’23, and now that we’re within that time frame, 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 One, 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, but 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 the venues 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’re right. We’re looking forward to what really should be an outstanding bookings year throughout the course of fiscal ‘23, it’s been great so far. As we think about growing our bookings business, we’re focused on two areas: the increase 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.
So our performance value generally have a large slate of available dates to work from. We are 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 event types per day, while always – and of course we’re weighing, which events make the most strategic and financial sense for the company.
And then 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 drive improvements in per event profitability and continue repeat visitors to our venues. Hopefully, that’s helpful.
Yeah.
You’re welcome.
Operator, we have time for one last caller.
And your last question comes from the 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 are part of the business. It sounds like, at least from the TAO perspective there are marginal headwinds in the near term. So 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, and then I have a quick follow-up on Sphere.
Sure Paul. We talked to the TAO pieces as you mentioned. With respect to the core live entertainment business, we did have some staffing issues coming out of the pandemic, really like the rest of the industry, but 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! And then 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 Sears, it’s going to introduce an entirely new entertainment medium. It will be the first large-scale venue to deliver immersive experiences for up to 20,000 people at once with full of multisensory technologies, and this includes the original transactions, which -- attractions, I should say, which would be – we’re going to run multiple times a day and drive utilization of the venue, as well as concert residencies which will help drive our base of events.
And 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 and carrier screen. It’s a quarter of 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.
So we’re – not only are we energized by the possibilities, but these things are happening right now. There’s tourists constantly running through not only the studio, but the Sphere in Vegas, and we’re currently working with, obviously, artists and global performers on the development of what we feel is going to be amazing content for the Sphere in Vegas.
Great! Thanks.
You’re welcome.
And 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, and thank you all for joining us. We will speak 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.