Live Nation Entertainment Inc (LYV) — Q3 2015 Earnings Call Transcript

Good afternoon and welcome to our third quarter 2015 conference call. Live Nation had a record third quarter and remains on track to deliver its planned growth and record performance in 2015. Our key financial metrics are up for the quarter with revenue growing 10% and AOI up 8%, both at constant currency. Our operating metrics reinforce the strength of our business with a 10% increase in fans attending our concerts in the quarter, driving strong growth in our advertising and ticketing business. This demonstrates that Live Nation has created an unparalleled live platform, bringing over 500 million fans in nearly 40 countries to that magical live event. The live business continues to have a robust outlook as artists are now fully reliant on touring as a main earnings driver and the best means to engage and connect with their fan base. Fans, more than ever, rate live experiences from club shows to festivals as one of the top entertainment sources, and a majority of those attendees are sharing that event online, making it one of the most shared activities on social media. This results in growing awareness for our events. At Live Nation, we see a great runway still ahead given the fragmented global landscape in concert management and ticketing. As our scale continues to grow, we will drive increasing economics in our business model with higher profits per show, more advertising, and increased ticket conversion. In our concert division, concert fan demand remained strong globally, and we're continuing to grow by taking share promoting 20 of the top 25 global tours this year, including U2, One Direction, and Luke Bryan. We're also further growing our portfolio with over 24 million fans attending our shows in the third quarter, and as of October 26, we have sold 54 million tickets for shows this year, up 8% from last year. We continue to add more markets to our global footprint by adding Marek Lieberberg, the leading promoter in Germany, to our global network of over 40 markets. Equally important is our focus on improving the fan experience and driving onsite revenues with per fan revenue at our venues up 8%, or $30 million in constant currency, so far this year. With core visibility for the year, we are confident we will again grow our concert live world by delivering 25,000 shows to over 60 million fans. Our global reach and portfolio of artists, markets, and shows is unparalleled in the live event business, and continued success in concert is driving our overall business. Our sponsorship and advertisement business continues to deliver strong margins and growth to drive our AOI. For the first nine months, sponsorship is up 19% in both revenue and AOI at constant currency. This growth has been driven by online advertising and a 40% growth in our festival sponsorship business in the third quarter at constant currency. Our key leading indicator for advertising is contracted net revenue, which is up 16% on a constant currency basis as of the end of the third quarter, and we have sold over 90% of our planned sponsorship and advertising for the year. On the content side, we have launched Live Nation TV in beta and we are pleased with our overall portfolio of live-based content consisting of Yahoo! Live festival streaming and VICE original programming. They are all building and we have now delivered over 100 million streams to date. We plan on further building our content presence to maximize on-site content and brand demand. We believe we have added great growth opportunities as we improved the advertising experience with brands that want to reach that highly desirable music fan on-site and on all screens in a highly targeted fashion. Ticketmaster continues building its position as a global leader in the ticketing marketplace with an 8% growth in global site visits, driving an 18% increase in combined primary and secondary GTV during the third quarter. Our secondary business continued its strong performance with GTV up 22% in the quarter, and our platform continues to take global market share with a superior offering of both primary and secondary. At the same time, we continue to execute on our mobile core strategy, rolling out improved mobile web, web, and app experiences, including Apple Pay and integration into Apple Spotlight functionality. As a result of these improvements, 60% of our web traffic is on mobile devices, and our total app installed base grew 39% year-on-year. With this, mobile net ticket sales are now 23% through September, accounting for 21% of total ticket sales. While we are improving the fan experience and delivering future scale in our ticketing marketplace, we also continue to deploy new venue products and reduce our cost structure. We are on track to have our new TMOne platform available for all North American venue clients by the end of the year, and we expect to deliver the $0.35 per ticket cost reduction as planned. As a result, in 2015, we expect to deliver the fifth straight year of growth in our ticketing client base, global GTV, and ticketing AOI. In summary, we now have very clear visibility into our full 2015 performance, and we are confident that we'll deliver another year of record top line and bottom line results. Our scale businesses of concert, advertising, and ticketing are all showing growth in the key operating metrics, and we expect them to operationally deliver record revenue and AOI. As we look forward, we see tremendous opportunity to continue consolidating concerts and ticketing on a global basis and further growth in our advertising and ticketing businesses in the concert flywheel. With that, I will turn it over to Joe to take you through additional details on divisional performance.

Thanks, Michael. Looking at our business segments, first concerts. Live Nation concerts revenue in the third quarter was up 9%, and AOI was up 6% on a constant currency basis. The revenue growth was driven by a 10% increase in attendance at our shows for the quarter. Specifically, our amphitheaters had over 10 million fans attend 1,100 shows, which is an all-time high, up over 1 million fans from Q3 last year. Arena attendance was up 30% to over 4 million fans for the quarter, and festival attendance for Q3 was a record of 3.5 million fans. This translated into a record summer, looking to Q2 and Q3 for concerts with 40 million fans attending 12,000 shows globally, 9% higher attendance than last year. For the full year, we expect to deliver record attendance, increasing by about 3 million fans with 25,000 shows. As a result, we expect to deliver strong double-digit AOI growth in our concerts business for the full year. At Artist Nation, revenue was up 6% for the quarter and 9% year-to-date at constant currency as we have been successful in growing our artist management and related businesses. AOI for the quarter is up 39% as we continue investing in new business lines, notably in sports management. For the full year, we expect to deliver high single-digit revenue growth with Q4 largely in line with last year. Turning to our sponsorship and advertising business, our sponsorship and advertising revenue for the third quarter grew by 17%, and AOI was up 16% at constant currency. 62% of our revenue growth this quarter came from festival sponsorship, which increased 39% year-on-year at constant currency, and festival sponsorship growth this year came primarily from increased monetization of our fans as we grew revenue per fan by 33% globally at constant currency. With over 95% of our sponsorship and advertising net revenue contracted for the year, we continue to expect full-year AOI growth in the low teens at constant currency. Finally, Ticketmaster. For the quarter, Ticketmaster revenue was up 16%, and AOI was up 18% as global GTV increased 18%, all at constant currency. Primary GTV for the quarter was up 18% with a 12% increase in fee-bearing tickets sold. We continue to expect low to mid single-digit growth in primary fee-bearing ticket volume and high single-digit growth in primary GTV for the year. Secondary GTV was up 22% for the quarter and it is up 40% year-to-date. Given the seasonal timing of sports, most of our secondary growth in the third quarter came from the concert segment, which was up 42%. Q4 will again be our biggest quarter for secondary GTV, especially in the NFL, NBA, and NHL exchanges, and we expect continued momentum in the quarter with ongoing double-digit growth rates in secondary GTV. We also continue to see strong fan response to our integrated primary and secondary offering on Ticketmaster, with conversion rates 30% higher than primary only offering. The combination of primary and secondary GTV growth along with improved cost structure now gives us confidence our ticketing business will deliver high single-digit AOI growth for the year. In summary, now nine months into the year, we have good visibility into delivering our 2015 plan. At this point of the year, we have most of our shows booked, concert tickets sold, sponsors signed up, and visibility to sporting events and concerts on sales to be confident on our performance for the year. With regards to FX in the quarter, we saw similar results in Q3 as we did in the first and second quarters with revenues and AOI both impacted by about 5%. Looking ahead, as we discussed, we see a strong runway for continued growth across our business lines. Our concert show pipeline for 2016, the earliest indicator we have, looks very strong and is up double digits from this time last year. I'll now turn the call over to Kathy to go through more on our financial results.

Thanks, Joe. And good afternoon, everyone. Starting with our results for the third quarter, revenue is $2.8 billion, up 10% from the same period in 2014, and AOI is $279 million, up 8% over last year, both at constant currency. As reported, revenue is $2.6 billion, and AOI is $266 million. Free cash flow is $205 million. Revenue growth for the quarter was driven by higher concert revenue from increased shows in North America amphitheaters and arenas along with acquisition activity. Ticketing revenue growth also drove the increase with higher primary and resale revenue. Reported AOI for the third quarter was $266 million, 3% higher than last year. FX impact for the third quarter reduced AOI by $13 million or 5%. The majority of the AOI growth came from our ticketing and sponsorship and advertising segment. Ticketing AOI was driven by the higher primary and resale activity. Sponsorship and advertising AOI increased with higher festival sales along with other new sponsors. Concerts AOI was at 6% to last year at constant currency, while Artist Nation AOI was impacted by our continued investment in new service lines. Our operating income for the quarter was $154 million compared to $151 million last year. The FX impact to operating for the third quarter was a decrease of $10 million. Net income was $89 million compared to $105 million last year, with an increase in taxes driven by the growth in profitability internationally. Free cash flow in the third quarter was $205 million, in line with last year. Now for the nine months results, revenue is up 9% from last year to $5.8 billion and AOI is $504 million, up 4% over 2014, both at constant currency. As reported, revenue is $5.5 billion and AOI is $477 million. Our free cash flow for the nine months is $320 million or 67% of AOI. Revenue for the nine months was driven by growth in concerts from higher show activity in North American arenas and amphitheaters and acquisitions. The other main driver of the increase was ticketing, with its higher revenue in both primary and resale tickets. All of our other business segments also delivered revenue growth over last year. AOI for the nine months was $477 million, as reported. FX impact for the nine months reduced AOI by $27 million or 5%. Sponsorship and advertising AOI grew 19% at constant currency, driven by increased festival sponsorship and higher online advertising. Ticketing AOI was up 11% at constant currency with higher primary and resale ticket sales. Concerts AOI was essentially flat, and Artist Nation's AOI was impacted by the investments in new service lines. Operating income was $172 million for the nine months compared to $194 million last year, with an $18 million reduction due to FX changes. Our net income for the nine months was $46 million versus $96 million last year, which was impacted by $9 million in additional acquisition-related tax benefits recognized in 2014, and a $31 million loss from non-cash adjustments to certain working capital accounts due to changes in foreign exchange rates. Free cash flow for the nine months is $320 million, in line with last year. During the first nine months of 2015, our cash flow was used primarily for acquisitions, artist advances for future tours, and revenue-generating CapEx. Moving to our key balance sheet items, as of September 30, we had total cash of $1.1 billion, including $547 million in ticketing client cash and $262 million in net concert event-related cash, with a free cash balance of $252 million. Our cash used in operating activities was $23 million for the nine months, an increase of $16 million over last year because of higher receivables in 2015 driven by the increased third-quarter show activity. At the end of September, our concerts-related deferred revenue for tickets sold for future events at our owned or operated venues was $441 million, a 38% increase over September last year. Our total capital expenditures for the nine months were $94 million, and we expect that our capital expenditures for the full year will be approximately $155 million, around 2% of revenue, in line with our previous guidance. As of September 30, our total debt was $2 billion, and our weighted average cost of debt was 4.3%. Our debt covenant currently requires a maximum leverage ratio of 5 times, and we are comfortably in compliance with this. Thank you for joining us today. And we will now open up the call for questions.

Thank you, and congratulations on another great quarter. So, I have a bigger picture question. As you are wrapping up your three-year plan, it seems like a lot of the large-scale acquisition spending is over. Where do you think are the largest buckets of organic growth over the next few years?

Hi, Amy. It's Michael. First of all, I would say we still believe that there are some great acquisition opportunities available across the globe that we think we can grow our business at a very accretive rate. But aside from that, regardless of acquisitions, if you look at the historic business, we have been delivering most of our growth on an organic basis, and we think we can continue to do more of that. We're going to do three things that are going to drive organic growth ongoing. Number one is what we talked about always is our advertising business. We think that has great runway because we believe Madison Avenue is going to continue to shift more dollars to kind of event-based engaged business. We got a great platform. So we think the tide will rise on more dollars being spent in the events business, and we'll continue to capture more of that as well as we grow our digital content business, and on the mobile front, we'll be able to attract that. So we believe advertising will organically probably be our highest margin largest growth engine for our business. Ticketing, we believe, will just keep getting better and better because all of the features and functions and products of our new mobile app coming out in 2016 to our expanded product offering. We just got a very robust roadmap ahead of us, and we think all of those features and functions that we roll out across the globe at TM just help drive that conversion and incremental ticket. So that again is a high-margin business because it's an incremental ticket against the cost base that's been spent. And three, we mentioned the onsite business. We just hired a Chief Revenue Officer who has a history at both Disney and Universal Theme Parks, who has been analyzing our onsite business. We beta tested this summer with six amphitheaters and a new food and beverage supplier, our new Live Nation at the venue app, where it has everything from weekend entry to upgrade your seat to have your beer delivered to your seat, the cashless F&B, and we saw some great results this summer when we provided a Wi-Fi connected environment, gave that customer, let's call it the magic band, but it's built into the app, giving that customer an easier, frictionless experience onsite both at the festival or at amps or House of Blues, and we think that will be a big driver of our per-head spend. So we think those three areas alone executing better and increased products in all three of those areas would be a big piece of our ongoing forward growth that will continue to drive us to record years.

Perfect. Thank you.

Thank you. One of my questions, I was just wondering about the phasing of the event timing with what you really experienced for the third quarter versus what you thought would be comparably shifting into the fourth. I was just wondering, there is still a lot of deferred revenue and prepaid expenses I think that is reflected in free cash indicating that there is a lot of volume in the fourth quarter. But was there anything that timing-wise got accelerated into the third, or is everything still as planned from the last call?

I think things are still largely as planned. Q4 is a very big quarter for us this year in terms of show count, heavily driven on the theaters and club side. So that show count number is high. I think what you saw this summer, as we've talked about in the past, is just a seasonal, temporal, fewer stadiums this year, more amphitheaters, more arenas, more festivals. We think we disproportionately grew and took share during the summer season, but largely what we expected in terms of show count and attendance.

So sponsorship and advertising will be later in the fourth quarter due to the size of the venue of the events that are on the slate?

Well, again, it's not so much the size of the venue. It is just – again, we talked about festival sponsorship in the past. We've talked about that's far and away our highest sponsorship per fan. Those are predominantly Q2 and Q3 events. But just when you rollout the map that tends to be where you see your growth.

Yeah, two questions. First sort of a technical issue. You had, looks like you had about a 40% increase in international events year-over-year in the third quarter. How much of that is acquisition related and how much of it is just timing? And then the second question, Michael on the TMOne platform, what would you sort of characterize as sort of the five main benefits from it to the venues? Thank you.

International, we've had no real acquisitions that would be driving activity. Most of those acquisitions in the last year would have been in the U.S. festival space. So, Europe just had a strong year as did North America, all organic. As far as ticketing, we've been very, very honest and clear with everyone that we bought a – Ticketmaster has a very old platform. Part of the challenge with the platform was it just wasn't technically sufficient for a modern web-based platform that lets us be innovative, flexible, and fast. So, obviously, the biggest part about having a new platform is we get to build an ongoing new mobile business that's much more flexible and can move with the times, meaning today, historically, when you wanted to get a new iPad or new iOS update or Android, everything was very expensive and hard on our old platform to move and build. So, the biggest fundamental advantage is our new platform has a much more robust, flexible base to it. For the venues, we have an open API platform strategy there, so we can plug-and-play with a lot of their needs, whether it's CRM or security or any partners they need us to partner with for the venue. Our app will come to life in real terms next year, and will be much more robust and convert much higher than our current one. At the core of a venue, what the venue really is looking for is a Salesforce.com-type strategy. They want a very robust, but simple user interface to manage their event, to staff their event, to sell their event, to market it, and to change the ticket prices. Our new platform TMOne is very user-friendly. Every venue will have a host of great tools available from pricing, data analytics, search, marketing, and publishing. It's a world-class platform that no one in the world would have the robust amount of data and analytical tools to help venue operators build their show, put it out, market it, and distribute it if they want to sell tickets to other partners. It's a very robust platform. It's going to put all the tools now in the hands of every box office and every general manager in a venue.

Great. Thank you very much.

Hi, thank you. This is actually Kevin Lee for Ben. Just a quick question on the secondary ticketing market. Of the growth you're seeing in GTV, how much is that from share shift from competitors and how much do you think is coming from Ticketmaster growing the actual secondary market? Thank you.

Kevin, this is Joe Berchtold. There is not great industry information out there in terms of getting specific on that, but we absolutely believe that we are taking share on a global basis with the quality of product that we're delivering, starting with the joint primary and secondary inventory we're putting on Ticketmaster and then getting into our league exchanges. So we don't have exactness of those numbers, but we absolutely believe with the high growth that we have in that business that we are taking share.

Thank you.

Hey, guys. Congratulations on a great quarter. Little factoid, you grew Ticketmaster, your growth is as big as the whole Ticketfly. And they have a $550 million valuation, so that's, I don't know what's Ticketmaster worth $20 billion? Over the last couple of days, you've seen Adele and Rihanna seeking to pitch sponsorship deals ahead of their concerts. Are you in that mix? How does that help you, and how does that influence your business? I suspect it's generally favorable. But I'm just curious to see how it works.

Tullo, I'm still digesting your $20 billion valuation. That's the question of the day, but.

So it was just off the top of my head, I was just using like Reed Hastings and Ted Sarandos' numbers.

We certainly believe we have a very valuable asset that has lots of expansion ahead of it. Joe will dig in on the second part.

Yes. At its heart, Rich, our job as a concert promoter and ticketing company is to sell tickets and make sure all the tickets for our artist shows get sold. We've got a host of services to do that, ranging from our own fan club services to Ticketmaster, and other specialty ticketing services. So we support the concept of making sure all the tickets are sold. A lot of the technology development that Michael was just talking about at Ticketmaster is focused on creating more of an open platform and enabling the use of APIs on distributed commerce platforms to more effectively sell those tickets. So, we think that we will see and we support the notion going forward, whether it's the artists or the teams, they are looking to retail and use other distribution channels as well to make sure that we're selling tickets in every corner possible.

Excellent. Thank you very much.