Live Nation Entertainment Inc (LYV) — Q4 2018 Earnings Call Transcript

Good afternoon and welcome to our fourth quarter and full year 2018 conference call. I will make my comments today excluding the 2017 impacts of the $110 million legal settlement to keep our year-over-year comparable. Live Nation delivered its eighth consecutive year of record results. Revenue was up 11%, AOI up 13%, and free cash flow up 8%. All our divisions - concert sponsors and ticketing - delivered their strongest AOI results in the history of the Company. Turning to our concert units, fans more than ever find the live experience from club shows and arenas to be a top entertainment choice and the best way to celebrate their favorite artist and share the experience with friends. In the U.S., over the past 10 years, consumer spending on live experiences has grown by $5 billion per year, and we believe this ongoing trend will structurally continue to drive increased demand for concerts globally. As a result of the strong demand growth in 2018, we delivered double-digit attendance growth across our arenas, amphitheaters, theaters, and clubs. Continuing to grow our global market share, we added nearly 7 million fans globally for a total of 93 million fans, driving concert revenue up 11% and AOI up 22%. Across all the artists we work with, we invested over $6 billion to promote 35,000 shows in 40 countries with Live Nation being by far the largest financial supporter of artists and music. In addition to growing our show count and attendance, our pricing and onsite initiatives continue to grow our AOI. Average ticket prices for our amphitheaters and arena shows increased by 13% in 2018, and house pricing was up over 20%. Overall, across all our shows, price increases delivered over $350 million to artists who effectively captured more value from shows. Once at the show, average per fan spend grew as well; our amphitheater spending grew by $3 to $27 per head as we added more high-end products, improved the quality of our food and beverage, and increased revenues from parking and service fees. The strength of our business is continuing into 2019 with ticket sales for shows this year up double-digits through mid-February, alongside similar increases in confirmed amphitheater, arena, and stadium show counts. With this growth and our plans to further monetize our fan relationship, I expect this to translate to continued strong growth in concerts with AOI in 2019. In our high-end sponsorship business, we grew both revenue and AOI by 13% in 2018. Our top strategic sponsors have been a key driver of this growth, with 75 sponsors collectively spending over $350 million to reach our fans, up 11% over 2017. Sponsorship at our festivals grew 13%. This growth was driven by new deals with brands including Heineken, Barclays, State Farm, and Frito-Lay. All of this reinforces the power of our platform of 93 million fans and the continued shift by brands to invest in reaching fans during the live experience. Research from our Power of Live white paper indicates that over 90% of fans believe that brands can enhance the live experience, and over 60% believe they are more likely to connect with brands at concerts. This reinforces that our shows offer brands a truly unique opportunity to connect with fans. With over 70% of our budgeted sponsorship net revenue for the year already committed and pacing double-digits ahead of this time last year, we are confident we will again deliver double-digit AOI growth in 2019. Ticketmaster continued growing its leadership position in ticketing in 2018, with fee-bearing GTV up 14% and total platform GTV up 33 billion. This drove a 14% increase in ticketing revenue and AOI of 7%. Our top priority at Ticketmaster in 2018 was deploying our TM presence product, which we see as key for effectively unlocking the value of our customer relationships across our ticketing, concerts, and sponsorship businesses. By the end of 2018, we deployed presence in over 200 venues, operating 20,000 events for 40 million fans, approximately half of whom used digital tickets. We see our deployment in 2019 further accelerating, and we expect to have presence in over 500 venues by the end of the year, with over 125 million fans attending events at these buildings. At that point, we will cover over 75% of major sports and Live Nation buildings, making Ticketmaster by far the global leader in digital ticketing. At the same time, we continue to build our marketplace, with the fourth quarter being our highest fee-bearing GTV quarter ever, selling over 60 million fee-bearing tickets in a quarter for the first time and delivering over $5 billion in fee-bearing GTV. Overall in 2018, Ticketmaster managed over 400,000 events, delivering almost 500 million tickets in 28 countries. We continue to add new clients to our marketplace, who collectively added over 10 million new tickets in 2018. I believe we have tremendous opportunity for growth on a global basis, particularly in the 13 markets where we promote concerts but do not yet have a substantial ticketing operation. In 2018, we furthered our international expansion, establishing ticketing operations in Italy, ramping up our German operations, and laying the groundwork for expansion in Latin America. Ticketmaster continues to exceed expectations, both operationally and in its leadership position in digital ticketing, along with its ability to expand that leadership position globally and deliver continued profitable growth. In summary, 2018 was another strong year for Live Nation, building our global concert business and thereby driving growth in our high-margin venues, sponsorship, and ticketing businesses. We continue to see the tremendous power of live events with strong consumer demand, a robust supply of new and established artists hitting the road and performing in clubs and stadiums. Live is truly a unique entertainment form; it cannot be duplicated and creates lifetime memories, with fans creating more than ever in this experience economy. We believe the live business will continue to have strong growth for years to come as fans globally drive demand for artists touring more and more, and onsite spending will ensure that sponsors and ticketing all benefit from the concert flywheel. In 2019, I expect us to further grow our global concert position while enhancing onsite hospitality and capturing more pricing opportunities. In sponsorship, we will continue to drive double-digit growth as more brands look for that direct connection with music fans. Ticketing will continue to transform into a truly digital ecosystem, benefiting from continued growth in concert ticket sales and further expansion of our global footprint. We believe that the combination of macro trends and our demonstrated ability to execute are strong indicators of our ability to continue to grow the business for many years to come. With that, I will turn the call over to Joe to take you through additional details.

Thanks, Michael. Looking at our business segments, first concerts, as Michael said, in 2018 we grew attendance by 8% to a record 93 million fans, promoting 19 of the top 25 global tours. As we have talked about over the past year, 2018 was a very strong year for arenas, theaters, and clubs, with all three building types seeing double-digit attendance. Globally, we also continue to grow our festival portfolio, adding seven festivals to give us a global portfolio of 104 festivals in 14 countries. As a result, we increased festival attendees by 6% to nearly 9 million fans, and now have 29 festivals that each attracted over 100,000 fans last year. Looking geographically, North America was the primary driver of our fan growth, while internationally, a decline in stadium attendance offset much of the strong arena and festival attendance growth. Looking specifically at the fourth quarter, attendance and show count were up; our AOI was lower, heavily driven by a $15 million year-on-year increase in advertising expense related to 2019 shows. This increased advertising spend is representative of a continued shift earlier on in sales and is also one of the reasons we are optimistic about 2019 concert activity. For 2019, as Michael said, we are already seeing strong growth in ticket sales for shows this year. Sales are particularly strong in our international markets, which we expect to continue through the year, with North America also expected to keep growing. We see growth across all building types in 2019, with arenas, globally, amphitheaters in North America, and stadiums internationally, all contributing to the increase. Along with our fan growth, we will also be continuing our focus on pricing optimization and onsite monetization in 2019. On pricing, with over 2000 arena and amphitheater shows already on sale, we are seeing high single-digit increases in front-of-house pricing, which I expect to continue to expand throughout the year. While onsite monetization won't start until the summer season, it remains a priority to continue our growth of the past few years with teams already working on specific amphitheater-by-amphitheater plans. Turning to our sponsorship and advertising business. In 2018, we again delivered double-digit AOI growth, up 13% this year. This performance was reflective of strength across the board. North America and international sponsorship businesses were both up double digits, and both sponsorship and online advertising also grew double digits. For the fourth quarter, revenue was up 20% and AOI was at 16%. We saw particularly strong growth in our festivals in the fourth quarter, including Austin City Limits and Voodoo, while also launching a number of major programs for sponsors including Google, Sony, Pepsi, Uber, and T-Mobile. As we get into 2019, we expect to again deliver double-digit AOI growth for the year. As Michael indicated, we are pacing double digits ahead of this time last year, and based on our current discussions with brands, we are expecting strong growth in our strategic sponsors as well as our on-site sponsorships, particularly at festivals. Finally, Ticketmaster: Global GTV was up 7% for the quarter and up 8% for the full year, driven by Fee-Bearing GTV, which was up 12% and 14% for the quarter and year respectively. Primary GTV, which accounts for almost 90% of overall Fee-Bearing GTV, was up 12% for the quarter and 14% for the full year. Secondary GTV was up 6% for the quarter and up 16% for the full year as we continue to take share in the North America secondary market. Throughout 2018, we continued to improve our mobile and app experiences, which are critical for our digital strategy. We grew our app install base by 40% year-over-year, giving us much greater reach for direct consumer relationships. Sales of tickets via mobile devices continue to grow rapidly, up 35% for the year and accounting for over 40% of overall ticket sales. For the fourth quarter, Ticketmaster AOI was down slightly, impacted by one-time costs associated with the third-party vendor data breach that affected our marketplace in certain international markets. Much of these costs were in the fourth quarter, and for the full year, these one-time costs totaled approximately $15 million. To preempt the question on margins, obviously, these data breach costs had a material impact on our 2018 margins. The majority of the remaining margin impact comes from two other factors. First, as Michael indicated, we are continuing to invest in expanding Ticketmaster's global footprint, and we expect that in any startup market, we will have below-average margins for a period of time as it scales. These markets are generally rapidly AOI positive, given our ability to get an allocation of concert tickets, but initially at below-average margins. Secondly, as we continue to become more effective through data-driven marketing, we're spending more to grow our GTV. To be clear, the GTV from free visits continued growing in 2018, and the paid marketing driven GTV grew even faster. As a result, margins were impacted despite the attractive profitability of the incremental GTV generated via this paid marketing. So in summary, 2018 was a great year across all of our businesses, and in 2019, we expect to continue growing all the businesses. From a stadium standpoint, we see our growth continuing to be delivered primarily in the second and third quarters, as most of our concert investments will be playing out in those quarters. The first and fourth quarters each account for less than 10% of our annual AOI, meaning that they will also have to absorb increased fixed costs associated with our overall growth against seasonally lower activity. On FX, we ended up with a negligible impact on AOI and revenue for 2018, and at this point, we see very little impact on 2019. I will now turn the call over to Kathy to go through more on our financial results.

Thanks, Joe, and good afternoon everyone. I will start with our key highlights for the fourth quarter. Revenue increased by 12% to $2.6 billion, AOI was $69 million compared to $87 million in 2017, after adding back in the $110 million legal accrual recorded in 2017. As of December 31, our deferred revenue related to future shows was $1.1 billion, up 35% from the $816 million last year. Concerts, with a 12% increase, contributed the majority of the revenue growth in the quarter from increased arena and theater and club activity. Sponsorship and advertising revenue was up 20% from higher sponsor and online activity in North America, and ticketing revenue increased 15% from higher primary ticket volume. Fourth quarter AOI was lower in concerts due to the $15 million increase in advertising expense for 2019 shows that Joe mentioned. Sponsorship and advertising delivered 16% growth in AOI with higher online advertising in North America and growth in sponsorships internationally. Our operating loss was $90 million in the quarter, essentially flat to last year after adjusting for the legal accrual. The net loss for the quarter was $148 million compared to a loss of $137 million in the prior year before the legal accrual, and $56 million tax benefits related to tax reform changes in 2017. For the 2018 full year, revenue was $10.8 billion, an 11% increase over 2017. AOI was $829 million for the full year, and up 13% over our 2017 AOI of $735 million before the legal accrual. Free cash flow was $481 million, up 8% over last year without the legal accrual, or 58% of AOI for the year. Other segments delivered double-digit growth in revenue for 2018. The majority of the increase was driven by concerts, which were up 11% from increased show count and attendance across arenas, amphitheaters, theaters, and clubs. Sponsorship and advertising revenue was up 13% from growth in online advertising and sponsorship programs globally. Ticketing revenue increased by 14% from higher primary ticket volume driven by concerts along with increased secondary sales. Concerts AOI was up 22% as a result of more events and fans across arenas, amphitheaters, festivals, theaters, and clubs, and higher ancillary revenue per fan. Sponsorship and advertising AOI grew by 13% in line with this higher revenue, while ticketing AOI grew 7% without the 2017 legal accrual, delivering growth in both primary and secondary ticket sales, though impacted by the cyber investigation costs incurred this year that Joe noted. Operating income was $273 million, up 35% over last year before the legal accrual, driven by our strong AOI growth. Our net income for the year was $60 million, as compared to $48 million in 2017, before the legal accrual and the 2017 tax reform related tax benefit. We recorded $78 million of accretion of redeemable non-controlling interest in 2018. We currently expect this accretion to be approximately $45 million for 2019, which will be consistently spread across the quarters. We expect amortization of non-repayable ticketing contract advances in 2019 to be in line with the last few years of expense. Turning to our balance sheet, as of December, we had total cash of $2.4 billion, including $859 million in ticketing client cash, and $903 million in net concert event-related cash. Leading free cash balances of $610 million. Net cash provided by operating activities was $942 million as compared to $624 million last year, with the increase driven by our higher event-related deferred revenue. For the full year, total capital expenditures were $251 million, roughly half of which were spent on revenue-generating items. For 2019, we currently expect our total capital expenditures to be approximately $300 million, with a similar split to this year for revenue-generating expenditures. Our total net debt as of December 2018 was $2.8 billion with a weighted average cost of 4.2%. Thank you for joining us today and we will now open the call for questions.

So I guess two questions. One for Joe first: when you talk about ticketing and expanding into international markets, how quickly do you think the margins on those fronts can match that on the U.S. side? And I guess, Michael, a lot of us remember from the Liberty Analysts Day, when Live Nation hit 125 million attendees. What does that assume in terms of M&A and organic growth? Thanks.

Amy, thanks. So here with regard to the international market: remember that currently the fee structure is quite different. On average, in the U.S., the typical service fee is around 20%, while internationally, it's around 10%. We've said in the past that one of the factors going on as we review our international markets is that they are currently at lower margins compared to the U.S. market. While we see some level of convergence over time, don't expect that to shift quickly. Each market, in terms of its maturation, is different; it's hard to give you a one-size-fits-all answer. But, as I said, they do become AOI positive pretty quickly with our concert allocations, and then we grow from there.

Amy, it's Michael. I'll jump in on Ticketmaster. The one thing to consider about ticketing outside of North America is that it is probably 15 years behind the U.S. model. The U.S. model is so advanced on a closed platform and has been increasing service fees for 20 years. Internationally, we see great growth, as some of those markets may have only $2 service fees today, but they all have great pricing potential over the next 10 years. So a lot of these markets today are structurally behind the U.S. model, and we have a retail strategy to convert them to online ticketing. We also see international markets as a great opportunity; we believe we have great pricing power, and each year, we're seeing the service fees go up to reflect a closer similarity to the U.S. model over time. It's a significant profit pool that we can grow internationally outside of the U.S. and Canada. Regarding your second question about growing 125 million fans from our current 93 million, that involves both M&A and organic growth. The complexity here is that we often use M&A to enter a market by acquiring a local, well-established promoter. Then we use our engine of 80 tours that we're bringing into that area to grow organically. So, we see about 70-80% organic growth as a result, but we do use M&A to establish an initial entry point. Historically, we’ve maintained a balanced model, with over 30% of our business focusing on acquiring more tours globally while growing organically by showing more tickets to the current tours. Selectively, we continue to look at global opportunities in a fragmented industry.

A quick question on the secondary ticketing market. You mentioned you're gaining share. Do you mind just giving us a quick snapshot of sort of how big that market is and who the major players are? And how do you think you're being successful in taking share so far?

Yes. We have referenced some specific numbers during our last Liberty presentation, but I’ll do my best to summarize it. The secondary industry has been growing at a fairly good clip, frankly, faster than we have been growing our ticket prices. We think there continues to be over $1 billion price arbitrage that exists in our concert tickets alone. If you look at the marketplace, we have a two-headed strategy. One strategy is to create a compelling product on Ticketmaster that offers both primary and secondary tickets. The other strategy, which is equally important, is to become more effective at the initial primary ticket pricing and transfer as much of the economics as possible into the artists' pockets, which can then lead to more tours and generate more sales for our overall strategy. Moving forward, we expect to see continued growth certainly in the secondary market as we focus on primary pricing. The major competitors in the space are quite well-known, such as StubHub in the United States. For us, it's really about how we continue to best serve fans and deliver the right products.

Maybe following up on Amy, you did a number of international acquisitions since Q4 started, I think 9. You mentioned strengths next year being driven by international. Are we now at a point where you see international becoming the real growth engine of the Company? And could you talk about what markets you're investing in internationally and why? I have a follow-up.

I'll start and Joe can fill in some points. I don't think we've done anything we haven't actually said we would for a while. We believe that the U.S. and Canadian markets still have growth ahead. We are still under-serving in many markets, and we see numerous opportunities to build out our business further. Overall, the U.S. still has great potential; we continue to believe that the sponsorship sector will see double-digit growth in America as well. We see the concert business providing opportunities for expansion in onsite hospitality, real estate, and overall growth potential. However, we absolutely have always said it's a global business, and as we build out in 40 countries, we look at all the cities where we currently have no market share. We bring the best promoters and ticketing platforms to these cities and follow with concert promotion, sponsorships, and ticketing. We have identified major markets where we can grow from existing platforms. We believe we can build substantial businesses in those spaces over the coming years.

I was wondering if you could take us through your current real estate strategy. You have seen per capita revenues significantly increase over the past few years, and given the Company has gotten bigger, do you expect to accelerate the growth of your venues over the coming years?

Yes, I think I would frame it slightly differently. We absolutely see huge opportunities. If you look at our core business model, we have a flywheel of concerts, and we are constantly looking for adjacent businesses we can monetize thanks to this flywheel. Nobody else in the world has 30,000 shows and 100 million people walking in the door. The more we control our content, the more we see enhanced revenue streams. In the past, we were grateful to put our content in someone else's venue, but now we want equity in those venues. We are having discussions on new developments, stating we want to be part of the venue construction, focusing on a position of equity to maximize value. We see more chances where we can capture not just content and service revenue but also the real estate equity over time. We will explore this further as it aligns closely with our concert operations.

Okay, just for you. I’m going to have to ask a quick short-term one. As far as the movie division, should we expect this to contribute in 2019 as you recognize downstream revenues from that sale?

This will be our first time with movie accounting; we’ll see how the audits look like. But in general, we're thrilled with this division. It's another avenue for us to build on our scale, and we have a number of projects in the pipeline from artists who want to tell live stories. We believe that while it may have a small overall contribution to our agenda in AOI for 2019, over time, it is a high-margin ancillary business that will positively impact our core mission. Ultimately, we aim for these projects to drive one more tour, one more sponsor, or one more ticketing contract and contribute positively to AOI over time.

Just on ticketing, in the release, you mentioned growth drivers as concert sales and expansion of a global footprint. I was wondering if you could provide any commentary on the sports side and how that will contribute in 2019?

Sure, I mean, the sports side historically has been foundational to the ticketing business. As we’ve discussed, sports has become more static; there aren’t lots of growth opportunities in the number of teams or games played. The concert business has driven great growth over the past several years. We often say that 80% of fee-bearing GTV growth comes from concerts. The arenas and stadiums continue to look for additional events when there aren’t games, which allows for more shows. So, while sports do play a role, it’s primarily in serving the backend for ticketing growth.

Then just on the leading indicators, I think in event deferred revenue was up 35%. You did mention early on sales this year. Just wondering how to think about that number in a like-for-like basis assuming more consistent on-sale periods?

That's the challenge. You can't assume consistent on-sale because there's no exactness to that. We said that we're up double digits in terms of concert events and tickets sold through mid-February. So that, to us, is the key leading indicator that we're off to a good start for this year.

I want to ask about Ticketmaster presence. Would you be willing to put some parameters around what type of contribution to AOI could come from presence over 2019? Or maybe even, what kind of contribution it provided in the fourth quarter as you scale that business?

The economics for us of presence versus other systems, digital tickets versus paper tickets, are the same for us. So, it won't be a direct impact on AOI. Ultimately, by increasing the volume of data and understanding fan behavior, we'll be better positioned to reach out and interact with fans while they're on site. This connection will unlock sponsorship potential and allow us to market more effectively and create additional products.

I noticed in a recent announcement that SMG, a big venue operator, formed a joint venture with AEG. I was wondering if you could just talk about whether that impacts your business at all, considering that SMG is a customer of Ticketmaster.

Yes, it has no impact on our day-to-day business. We're not competing in the conference center management space; that's not what we do. Between the two of them, we have successful partnerships, and they rely on us to fill their venues. They have all experienced other partnerships but returned to Ticketmaster because we sell the most tickets. So, no effect from us; we'll continue to grow our business evenly with both of them.

A question on the venue types and the volume of shows. There was an impact on the fourth quarter due to having fewer stadium events. How should we think about this year in terms of the size of venues and what that should do for margins on the concert side, and if you have any visibility on that impact quarterly? Secondarily, on Rock in Rio, how will that impact you financially this year? I know it bridges two quarters later in the year—what are your thoughts on expanding that event again as it's been done in the past?

Regarding growth this year, we expect to see it in amphitheaters in North America, arenas globally, and international stadiums. Last year, we specifically grew our amphitheater segment, which significantly benefited our concert margins because of the ancillary revenue from food and beverage as we can monetize those directly. As we’ve mentioned before, we don't obsess over margins but rather focus on growing AOI overall. That said, I expect positive impacts on margins from our amphitheater business. While I can't predict exact margin implications per quarter, I'd expect notable benefits from continued growth in the second and third quarters. Regarding Rock in Rio, we do not consolidate those earnings at this point; we report them as equity earnings when the event actually occurs. The plans for Rock in Rio have been outlined, but no new announcements have occurred at this time.

Michael, you talk about adding more stores to international markets. In the 13 markets where you promote shows but don't have ticketing operations yet, is there a common barrier that exists that keeps you out of those?

No, it's simply been about our resources, time, and execution. We have a prioritized list, and during the first several years after acquiring Ticketmaster, we had 14 platforms to integrate. Much of our focus has been on rebuilding our backend enterprise platform so we can move into new markets. There’s no inherent barrier; we have a large enough market share globally to enter these competitive markets. They are usually local operators or ticketing companies that might have a leading position, but our concert content generally allows us to come in with a strong presence across each market. So over the next few years, we will add these markets and expand our ticketing platform incrementally.

How micro can you go with Ticketmaster presence? Is 500 venues and 75% major sports in five buildings a big chunk of it? Are you pushing this down to the club level over a couple of years?

Absolutely. We foresee this becoming the standard for access control and ticket distribution and management. The focus is on getting larger venues first, which will drive Ticketmaster's adoption, but we will also extend our presence into amphitheaters, clubs, and theaters. The strategy is also to engage major sports teams, expanding as rapidly as possible from there.

I just want to understand the fourth quarter a little better. Kathy, you had a $15 million step up in marketing, which you highlighted in the third quarter. The bulk of the $15 million for the data breach was in the fourth quarter. Is that a fair way to look at it? And are we done on these or is the marketing going to continue for a while?

Yes, it’s a fair way to look at it for the fourth quarter. However, we market every show. The normal accounting for show expenses recognizes that the advertising expense is tied to the show’s actual occurrence, but at year-end, we must expense anything that's on the balance sheet for future shows. Thus, we’ll see that effect every fourth quarter. We prioritize our advertising expenses based on show schedules to generate maximum revenue. The investigation costs will still exist, and we expect to incur some level of those expenses in 2019, but we haven't provided specifics on that yet.

That’s a good point, Doug. You want that number to be high for advertising, as it indicates significant shows are coming on sale that will bring in 2019 revenue. We will see the true up at the end of the year.

Thank you everybody. We'll talk to you soon.