Live Nation Entertainment Inc (LYV) — Q1 2015 Earnings Call Transcript

Thank you and welcome to our call. Live Nation has continued growing its business in 2015, with first quarter revenue up 4% on a constant currency basis, led by strong growth in our Ticketing business. More importantly, four months into the year, we now have enough data from leading indicators to be confident that we remain on track to deliver our 2015 plan, with continued top and bottom line growth, as we build global market share in our core Concerts, Advertising and Ticketing businesses. We have built the industry's most scalable and unparalleled live platform, bringing 400 million fans together to that magical two-hour event. Concerts remain a strong flywheel for our high-margin on-site, Advertising and Ticketing business. And this year, we expect to deliver record operating results by growing each of these businesses. Starting with our concerts business, we have now sold approximately half of our projected tickets for the year, and through April we are pacing 4% ahead of last year’s ticket sales. We continue to be the world’s leading promoter with approximately 20 of the top 25 global tours, including U2, Maroon 5, Luke Bryan and Ariana Grande. Along with attendance growth, we are also expecting to grow on-site revenue this year, as our sales initiatives focusing on the high-end fans continue to pay off. At the same time, we are expanding our global footprint, most recently, with the acquisition of the Bonnaroo Music Festival, which advances our position in the North American festival market. In 2012, we had none of the top five festivals, we now have four of the top five. Overall now, we have 68 festivals, with 5 million fans, making Live Nation the largest global festival producer. Given their strong appeal with fans and artists, we see festivals as an important high-margin growth channel on a global basis, providing the most cost-effective platform for monetizing fans across advertising, on-site and Ticketing. And our Artist Nation division continues to attract new clients and continues to be a strong feeder to our core Concerts business. In Sponsorship & Advertising business, we again grew at a double-digit pace, with over 20% growth in both revenue and AOI this quarter on a constant currency basis. Contracted net revenue is up 17% at the end of the first quarter, and we have now sold over 70% of our planned advertising for the year, putting us ahead of schedule. This gives us confidence that we will continue growing our AOI in advertising at double-digit rates. Through the first part of the year, we have made great progress building our advertising scale and for the first time, comScore has ranked us as the third largest music-focused advertiser network in the United States with over 60 million unique visitors a month. This firmly establishes Live Nation as one of the advertising platforms of choice in music, which we believe will now help accelerate our ad sales growth. Our content strategy is also advancing with the renewal of our Live Nation Channel on Yahoo! Live and also expanding into streaming of festivals on the channel. And we are on schedule to launch our Live Nation television channel with VICE later this summer. We also refer to building our base of major advertising clients with a 10% increase in the number of companies that pay us over $1 million a year and a corresponding 18% expected increase in revenue from these clients. With all these pieces coming together, Live Nation is better positioned than ever to continue building its advertising business. Ticketmaster continued to build on its global leadership as a ticket marketplace this quarter, benefiting from product improvements and increased conversion rates as we increased our global share with a 14% growth in site visits, driving an 8% increase in combined primary and secondary Gross Transaction Value. As a result, during the quarter we had three of the top ticket sales base in Ticketmaster's history. We have deployed a number of mobile product enhancements during the quarter, improving the mobile responsiveness of our websites, increasing the functionality to buy, transfer, and resell tickets and enter venues with our apps. As a result, we are rapidly growing our mobile business, with a 20% increase in mobile visits and a 35% increase in mobile ticket sales. We are seeing rapid adoption of our mobile apps, up 43% from the first quarter over 2014 to over 17 million installs at the end of the first quarter this year. Looking ahead, we are optimistic that these trends will continue and accelerate as we improve our online mobile and API products to continue increasing the inventory of Ticketmaster's marketplace. In summary, 2015 is shaping up to be another year of growth and record results for the company, and we remain confident we will deliver the final year of our three-year plan. With strong leading indicators in Concerts, Advertising, and Ticketing, operationally we expect revenue and AOI growth in each of these businesses and overall for Live Nation this year. And more fundamentally, we continue to see a wide set of both organic and acquisition opportunities to continue growing each of our businesses beyond 2015, directly building on the success we achieved to date. With that, I'll pass it over to my COO, Joe Berchtold, who will take you through some of the divisional details.

Thanks, Michael. Looking at our business segments, first, Concerts. Revenue for the quarter was flat on a constant currency basis and AOI was down due to a decline in attendance, which was expected coming off a high level of Q1 arena activity last year. Given Q1 is traditionally our slowest quarter in Concerts, what matters most at this point of the year is our pipeline shows and ticket sold to date for shows occurring this year. Our show count for the full year is tracking towards mid-single-digit growth rate, led by double-digit growth in our arena shows. And as Michael said, ticket sales for shows occurring this year are up 4% through last Friday, setting us up for lower to mid-single-digit growth in attendance this year. And based on these indicators, we expect to deliver double-digit AOI growth in Concerts for the year. At Artist Nation AOI fell in Q1, but this swing reflects the fluctuations and timing inherent in the business and we continue to expect solid performance through the rest of the year, keeping us largely in line with last year's results. Turning to our Sponsorship & Advertising business, revenue at constant currency grew by 22% and AOI grew by 20% for the quarter. Online activity in North America was particularly strong, growing AOI 35% with major clients, including Pepsi, Hilton, Pennzoil, and Paramount Pictures. In our emerging markets, AOI more than doubled in the quarter, led by Thailand, Korea and Australia. And with this start to the year along with the growth in contracted net revenue, we are confident we will grow Sponsorship & Advertising AOI by double-digits this year. Finally, Ticketmaster, for the quarter Ticketmaster revenue at constant currency was up 11% and AOI was up 16%. Primary ticketing GTV was up 4% for the quarter led by strong concert ticket sales that drove double-digit growth in March. In secondary ticketing, we are now active in 13 countries. We increased the number of events activated on TM+ by 150% and as a result drove secondary GTV up by 75% for the quarter. Along with this ticketing growth, we continue to make progress on our cost reduction program and remain confident that our operating costs for North America ticket in 2015 will be at least $0.35 lower than it was in 2012. So based on ticket sales at this point in the year, we expect to have low single-digit growth in primary ticketing and double-digit growth in secondary ticketing in 2015. And with this ticketing volume, along with our cost reductions, we expect to deliver high single-digit AOI growth in Ticketing for the year. So, in summary, four months into the year, we feel very good about delivering 2015 on plan with regards to timing. Looking at Q2, we expect AOI performance as a percentage of full year AOI to be largely in line with 2014, which puts our overall AOI a bit more into the second half of this year relative to last year. And finally, on FX impact during the first quarter, we saw revenue impacted by about 5% and AOI impacted by roughly 6%. I will now turn the call over to Kathy Willard to go through more on our financial results.

Thanks, Joe and good afternoon, everyone. Let me begin by summarizing our key financial highlights for the quarter. Revenue at constant currency is up 4% to $1.2 billion and flat as recorded at $1.1 billion. AOI is $73.9 million at constant currency and $69.6 million as recorded and free cash flow is $24 million. One of our most important leading financial indicators is our Concerts related deferred revenue, which is the money we've received to date on tickets sold for events in the future at owned or operated venues. At the end of the first quarter, this deferred revenue was $919 million, an increase of 4% over the balance in March of last year of $885 million. Overall, revenue for the first quarter was driven by growth in Ticketing with both primary and secondary delivering strong results year-over-year. Concerts revenue was impacted in the quarter with the shift in arena activity as compared to last year as we discussed at year-end. The timing of concerts arena activity is also the main driver of our adjusted operating income results overall for the first quarter of 2015. As Concerts AOI for the quarter was a loss of $12 million compared to a $3 million loss for the same period last year. And as Joe noted, both our Ticketing and Sponsorship & Advertising businesses delivered higher AOI this quarter. During the first quarter of 2015, we reported an operating loss of $24 million compared to a $12 million loss last year from our AOI results including the $4 million impact to foreign exchange rates declined this year. Net loss for the quarter was $58 million versus loss of $32 million last year, driven by a $21 million non-cash adjustment to certain working capital accounts, based on changes in the exchange rate. Free cash flow was $24 million this quarter compared to $35 million in the first quarter of 2014. This is due to our AOI results along with the $7 million increase in maintenance capital expenditures associated with point-of-sale enhancements to our venues and the timing of other spend this year. Cash flow from operations was $343 million through March and was impacted by higher payments for event-related expenses for shows later in the year as compared to last year. As of March 31, we had total cash of $1.6 billion, this includes $608 million in Ticketing client cash and $638 million in net concert event-related cash, driven by our higher deferred revenue. Our free cash was $360 million. Our total capital expenditures for the first quarter were $26 million compared to $21 million last year. We spent $60 million on maintenance items and $10 million on revenue generating additions. We expect that our total capital expenditures for 2015 will be in line with the guidance we have previously given at approximately 2% of revenue. As of March 31st, our total current and long-term debt, including capital leases, was $2 billion. Our weighted average cost of debt is 4.3%. And our debt covenant currently requires a maximum leverage ratio of five times, and we're comfortably in compliance at below four times as of March. For the full year, we expect to drive growth operationally across each of our businesses in both revenue and AOI, while continuing to invest in our long-term growth strategies. In summary, we currently expect AOI for the second quarter to be consistent with last year as a percentage of full year AOI, with more growth in 2015 coming in the second half of the year as Joe noted. We expect to deliver double-digit growth in Concerts AOI. The growth trend in Sponsorship & Advertising AOI is expected to continue and to deliver double-digit growth again in 2015. In Ticketing, we expect high single-digit AOI growth overall for the year. And Artist Nation AOI is anticipated to be in line with last year. Thank you for joining us today, and we will now open the call for questions.

Thanks and congratulations. I have a quick question regarding the acquisitions you've made and how we should consider their impact going forward. Specifically, regarding C3 and Bonnaroo, what can you share about the synergies for both the top and bottom lines from these two acquisitions? Now that you hold four of the five leading brands in the U.S., should we anticipate further acquisitions internationally or in other sectors? Any insights on geographic expansion would be appreciated.

Thank you. This is Michael. In our investor presentations in Liberty during the fall, we have consistently showcased a global festival slide featuring the top 20 festivals in Europe and America for the past three years. We've emphasized that festivals represent a high-margin and excellent channel. We have always maintained a strong presence in Europe, leading in festivals such as T in the Park, Reading and Leeds, and Lowlands in Holland, among others. However, we are somewhat underdeveloped in America, likely due to our prolonged focus on amphitheaters. Over the past three years, we have aimed to fill the gap in our undeveloped market share. We have acquired Insomniac and C3, and initiated a number of organic festivals in the country, including Bonnaroo. From an acquisition standpoint, we view festivals as challenging businesses, particularly when trying to grow them from scratch to 80,000 attendees as seen with Bonnaroo, as it can lead to significant expenditures and failures before achieving success. There are about 25 to 30 festivals globally that have become iconic, such as Rock in Rio in Brazil and the Fuji Festival, which we've also acquired. We are always on the lookout for marquee global festivals. If we find that acquiring a festival offers a better return on capital, we have been working on launching two or three of them to reach that level. We recognize that purchasing established festivals typically yields quicker returns on capital than building them from the ground up. For instance, once we integrate assets like Bonnaroo or Electric Daisy into our Ticketing platform and into Yahoo! and Advertising, we've experienced rapid success in enhancing their contributions and increasing Adjusted Operating Income through scale, professional management, and advertising, achieving double-digit growth in the initial years. We believe our global portfolio is strong. We will seize opportunities for additional acquisitions if available and assess if we can effectively add synergies to make them immediately accretive. However, we are not as eager as we were three years ago when we had a significantly underdeveloped U.S. platform and pressures from sponsors and our Ticketmaster business to expand. We are currently pleased with our portfolio and view these accretive acquisitions as advantageous, especially as we scale them across our synergistic platforms.

Perfect. And then Joe, just thinking about Ticketmaster a little bit more, as you start gaining share on the secondary side and start reaping some of the cost savings, how do we think about longer-term margins for that business?

Amy, sure. I mean, as we talked structurally and fundamentally, the secondary business has economics that are pretty consistent with the primary business. Obviously, when it's been a lower scale, it's been working its way back up toward the primary. But in that same range, I would say is how you should think about the secondary business as it gets to a level of scale.

Got it. And on the cost savings side?

Sure. The cost savings are primarily linked to our main ticketing platform. So, it specifically pertains to the operating costs associated with those tickets.

Great. Thank you.

Thank you. Can you guys talk a little bit more about sponsorships? Is the driver of growth digital, or is it much broader? And are you anywhere near having any kind of capacity issues?

Thanks, John. Our business has evolved into a strong advertising platform as we continue to enhance our ad offerings. Initially, we focused on on-site sponsorships, becoming a prime option for major advertisers wishing to engage consumers directly. As we expanded beyond amphitheaters and into a more global market, we developed a commerce and digital business. Currently, when engaging with advertisers, we emphasize our status as an effective digital network for reaching our target demographic with our substantial scale. We still have ample advertising inventory available, and we are actively assessing our assets to identify opportunities for monetizing unused ad spaces. Many of our advertising solutions are a mix of on-site and digital components, often integrated into comprehensive campaigns designed for advertisers looking for a wide-reaching presence. For example, American Express effectively provides direct value through concert access for their customers. We offer local, regional, and digital sales, and like many others in the industry, we are excited about our shift to mobile advertising. We are retaining our audience while exploring new mobile ad opportunities. With over 60 million on-site customers and a similar digital reach, we are well-positioned to provide local sponsorships, national access, and digital advertising programs with significant capacity still available.

Thanks. And maybe separately, you touched on mobile. I was hoping to dig a little deeper in terms of the mobile app. How many more shows do app users attend compared to non-app users? And over time, can we see much of a margin benefit as a result?

So, John, this is Joe. We haven’t provided any details on the specific segments regarding how our customers make their purchases, so I can’t discuss that right now. Our economics remain consistent whether a purchase is made online or through the app, as both methods are clearly lower in cost compared to more direct sales. However, our economics, service fees, and margins remain unchanged.

Okay. Thank you.

Thanks. Two brief questions. One, could you just touch on Artist Nation and the increase in SG&A? So that was the negative comp, and talk about that a little. And, secondly, in the fast-moving world of music streaming, can you just give us your views on where that’s going and how you’re involved because you still have a relationship with Jay Z, but he’s buying Tidal, and exactly how you fit into that?

You’re good, Tinker. Yeah, we will stick to our knitting right now. We support Jay and all of our artists and any of their endeavors. And we will do everything we can to help Jay succeed and those artists. But we think we have a great runway ahead of us just doing exactly what our core business is. On a global basis, we have lots of opportunities to scale and continue to grow our concert business, new ticket markets, new ticket products, and then later on the advertising on top of that. So we think that our best strategy is to use our resources to keep right down the fairway, continue to consolidate and organically grow our core business. And we will leave the streaming hardware to others right now, and we'll worry about selling concert tickets. One of the advantages of Ticketmaster and our new platform we've been working on, obviously, Ticketmaster Plus was the first new product that we were able to introduce having a more robust platform. But we do also look at a lot of these opportunities with Apple and others that we now have a platform with an API and an ability to distribute a buy button. So we look at some of these streaming sites just as great distribution outlets that we currently will either have an affiliate or a buy button strategy to increase our reach and increase our conversion, but not a core business that we would be looking to tackle at this point.

John, regarding your first question about Artist Nation SG&A, it's primarily influenced by our recent addition of key managers to the business. This means that the timing of these costs aligns with when we see activity from the artists in terms of commission.

Thank you.

Thank you. I was wondering on the sponsorship front, what portion is strategic at this point, meaning revenue that’s likely straight line versus event correlated, and how should we think about that trending as you expand your platform globally?

So, David, this is Joe. We talked at the end of year that roughly $200 million in revenue was coming from our largest relationships, which meant over $1 million per year in revenue from those relationships. Those relationships generally now withstand the gamut. As Michael was talking, as we take the combination of the 60 million fans that go to our shows and the 60 million unique, so most of those folks are doing a combination of digital and traditional sponsorship. I think you can take from the magnitude of those relationships. There is some steadiness to them, but certainly, it's not all contracted revenue with those folks.

Thank you. Regarding Ticketing, could you explain how much of the better-than-expected margins this quarter are due to the re-platforming expense savings happening earlier than planned compared to the increase in your volumes and the resulting operational leverage?

Yes, it was exactly both of those things, David. As I alluded to, we had a very good March, a little better than we were sitting here talking to you at the end of February than we knew it was going to be. So there was some volume pick up there relative to expectation, and, yes, we are doing great on getting the cost savings and that's in part why we are confident that we'll have it fully in place this year.

Great. Thank you very much.

Hi, good afternoon. Thanks for taking my question. I want to follow up on Amy's question, and Michael, you were talking about the festival business, and your comment that you can burn through a lot of money trying to get a festival started, and we've certainly seen that. When you look at festivals you've bought and when you look at festival business, in general, there's been some high-profile expansions where people went to a second weekend and that didn't work out or people took a festival that was in city A and moved it to city B and that didn't work out. Generally speaking, are you finding that people are too ambitious about their festival expansion? Are you finding that some festivals are one weekend is good enough? Curious your views on how scalable some festivals are?

There is no one right answer here. I mean, Festivals range small city one up to big ones and they may look easy to replicate and grow, but it's not that simple. We look at Festivals at the end of the day, there are hundreds of little Festivals happening at all times that are generally a labor of love, not generally much of a real business. Our business at the end of the day on a global basis is we like those Festivals with scale, 30,000 plus. Obviously, because then they become truly advertising units and also most of where the talent leverage we have is on that end. So, you know, I think if anything, lots of people out there as Festival producers, very few make it to the top of the Bonnaroo, C3, Coachella, Insomniac level. And we think those are the ones that we want to be participating in and provide us the best return on our capital. And we generally don't look to launch and take a lot of risk every year on launching a lot of them. We organically launched three or four every year in a very structured risk-averse manner. Seeing if we can self-brew some of them. But at this point, it's an expensive game to scale from scratch. And given we already own 60 for many years in our European platform, adding on a few quality high-profile ones in our U.S. platform was just kind of a continuation of a long strategy we started in Europe. I would not want to be sitting here today trying to figure out how to buy and/or build 60 festivals with over 5 million customers. That would be a very expensive proposition.

And going through the C3 deal and the Bonnaroo deal, do you see the M&A environment, because of the changes with AEG and what SFX is going through, its privatization, do you see the environment as a buyer better, if you will?

You know, I think we've built a fairly unique global business at this point. We tend not to chase deals. We tend whether it's a management company or in the case of Superfly and I think their comments they mentioned this week to the press. We tend to believe we are a place where an entrepreneur who maybe has already had some success. When looking at the scale that we can bring to their resources can take Bonnaroo, C3 or Insomniac to new levels, we kind of think we're in a unique class at that point. So whether it was Insomniac or C-3 or Bonnaroo, I would I don’t think in any case if there was much of a bidding war. I think others were interested, but I think those founders believe that we probably could provide the best opportunity to grow their businesses and using our assets.

That's great, Michael. Thanks for the color.

Hey, guys. Thank you for taking my question. Nice quarter. My question is, what percentage or if you could provide a little color on the ads and sponsorships, is derived from the website and content deals versus what we would call traditional, if that exists, sponsorship in the concert business? And just a little follow-up on the VICE TV, is that a YouTube channel or a traditional cable TV channel?

So, Rich, this is Joe. Regarding the sponsorship compared to online, we mentioned at the end of last year that it was approximately two-thirds from sponsorship and traditional delivery, with the remaining one-third from online. As for the VICE Channel, we have not disclosed the exact distribution method yet, but those details will be announced in the coming month, and the launch is planned for this summer.

And is there any way to provide a little color on the growth of the online product versus anything else, because I would suspect that, that is growing, excluding the lift from sponsorships, is growing quite fast?

Yeah. No, I gave you my numbers that North America online was up about 35% AOI. So, yes, online is growing strongly. As Michael said, we've also built a network of over 60 million unique, and that brings us into a whole another class with Madison Avenue and top three music-related sites. So we absolutely expect some good portion of our growth will be driven by the online this year.

Thank you.