Live Nation Entertainment Inc (LYV) — Q3 2019 Earnings Call Transcript

Good afternoon, and welcome to our third quarter 2019 conference call. Live Nation delivered its highest AOI quarter ever as we continue to scale our business globally and build on favorable supply and demand dynamics for live music. AOI grew 11% in the quarter and 13% year-to-date, outperforming a record Q3 last year and demonstrating the strength of our business model in today's experience-based economy. And in response to recent questions about consumer demand, we are seeing fan spending as strong as ever. In September, our amphitheater and arena shows actually closed stronger than shows in September of last year. And our fan spending on-site also showed ongoing growth. At the center of our flywheel, the demand for live events continues to grow as we have sold 92 million tickets through mid-October, up 6% or 5 million tickets, compared to this time last year. And we are on track to nearly 100 million fans attending the show this year. We have translated the fan growth into strong AOI gains on on-site spending, sponsorship, and ticketing. As a result, as we wrap up the successful 2019, we are confident that we will deliver double-digit AOI growth for the year. Looking at our concerts business, year-to-date we have had 73 million fans attend over 26,000 concerts, delivering $333 million in AOI, which is up 17% from last year. Our international business has been particularly robust this year, delivering much of the fan growth with a strong year for stadiums and theaters, while in the U.S. our arena and theater activity was also up. As we have grown our show volume and the breadth of artists we work with, we've also been more effective in pricing tickets closer to the market value, particularly with the platinum pricing tool. So far this year, we have had over 3,000 arena and amphitheater shows use platinum tickets with a 54% increase in the number of platinum tickets sold per show. Looking at our venue operations, we have furthered our focus on the fan experience, improving our hospitality across the board from our food and beverage offering to our lawn experience to VIP options. As a result, we have increased our average revenue per fan by $2.50 in our amphitheaters to over $29, while also increasing fan spending at festivals, theaters and clubs. As we continue building our expertise in on-site execution, we are finding more opportunities to build new venues or take over operations of existing venues. Since the start of this year, we have added 36 venues to our portfolio, ranging from the Brooklyn Bowls in New York and Las Vegas to the Danforth Music Hall in Toronto and Sportpaleis in Belgium. As a result, we are confident in the success of our concert flywheel for 2019. We will promote more shows, reach more fans, price more effectively, and provide a better fan experience at our venues, which will then drive double-digit AOI growth for the business this year. Turning to sponsorship. With the first days of Rock in Rio and strong growth across our entire sponsorship platform, our high-margin sponsorship business delivered 18% AOI growth for the quarter and 13% year-to-date. We are the global leader in music sponsorship, delivering the unique value proposition of nearly 100 million fans on-site for brands looking to make a more direct connection with their customers. As part of this, we continue to innovate new ways for brands to interact with fans on-site at our venues and festivals with new programs such as the Bud Light branded photo installation at our amphitheaters or the Revlon roller rink at Lollapalooza. As a result, sponsorship revenue has grown 11% year-to-date at our venues, while festival sponsorship has grown 31% year-to-date. More broadly, growth is driven by our strategic sponsors, all of whom utilize a range of assets and span multiple years. Revenue from this group, which collectively accounted for 70% of our total sponsorship revenue, has grown 15% year-to-date. With over 95% of our expected sponsorship revenue for 2019 now contracted, we are confident that we will deliver sponsorship AOI growth in the mid-teens for the full year. Ticketmaster generated the highest AOI quarter ever, up 20% from last year and 6% growth year-to-date as every quarter in 2019 is one of the top 10 GTV quarters ever. This growth continues to provide Ticketmaster the scale to invest in the evolution from paper tickets to digital, which is being demanded by venues and content that are seeking greater control of their tickets and looking to develop a more direct connection with fans. Our Presence rollout is pacing ahead of schedule, and we expect digital ticketing to be installed at over 700 venues, representing 120 million tickets by the end of this year. Over 60% of the fans at digital-enabled events now are entering with their mobile devices. Digital adoption is even greater in the NFL where 10 teams have now eliminated paper tickets, and over 90% of fans for those games are using their mobile phones to get in. Digital ticketing has expanded our engagement with fans, giving Ticketmaster a more direct connection, providing for more effective marketing and targeted offers. The Ticketmaster app is now regularly in the top 10 ranking for entertainment in the Apple App Store, driving a 30% increase in app downloads this year. This combined with continued improvements in our mobile web experience, has led to further growth in mobile transactions now accounting for 46% of ticket purchases globally, up 15% over last year. Digital ticketing is a strong demonstration of what Ticketmaster can be, providing the best ticketing platform for venues by delivering value well beyond the sale of the ticket, but at the same time giving fans an ever-improving mobile-led purchasing and management experience. With these pieces coming together and continued growth in our concerts activity, I expect we will deliver AOI growth at Ticketmaster in the mid-single digits for the full year. As we approach the end of 2019, we are confident that our strong performance will deliver another record year of top-line and AOI growth. All of our businesses, concerts, sponsorship, and ticketing have delivered growth year-to-date. Based on their key operating metrics, we expect each to deliver record revenue and AOI for the full year. With an early look to next year, our 2020 pipeline is up substantially with over 1500 stadium, arena, and amphitheater shows booked already, up double-digits from the same time last year. As we look forward, we continue seeing tremendous opportunity to expand our global concerts and festival business, drive further growth in on-site execution, sponsorship, and ticketing.

Thanks, Michael. Getting into our business segments, first concerts. Over the combined past two quarters, which represent our core concert season, AOI was up 9% and revenue up 2% year-on-year, as we grew attendance to 73 million fans at over 26,000 shows, up 3% and 11% respectively. As we discussed on our second-quarter call, timing this year somewhat shifted to Q2 versus Q3. As a result for the third quarter, attendance was 2 million lower than last year, resulting in slightly lower revenue and AOI. Looking at the full season, though, every indicator we have is of a robust growing business. Our September results actually came in above our expectations, as our amphitheater and arena shows closed strongly and fan spending remained at high levels. This overperformance in ticket sales in the last two weeks before the shows resulted in over $5 million of incremental AOI in our amphitheaters relative to how the shows closed last year, demonstrating the continued strength of the concert business. As Michael said, much of our fan growth this year has come from our international markets, particularly with their stadium lineup. At the same time, we are seeing growing demands throughout our broad portfolio of venue types. Globally, theater shows are our highest growth venues this year as fans continue to find new up-and-coming artists they're excited about. Festivals remain the ultimate fan experience, and with the addition of Rock in Rio, the continued globalization of the Lollapalooza brand, and our over 100 other festivals, we expect attendance to be up double-digits to over 10 million fans this year. Arenas continue to be the top place to see the biggest shows, and we expect to add another 1 million fans this year, as fans come out to see such top acts as the Backstreet Boys, Ariana Grande, and John Mayer. For the fourth quarter, we see continued fan growth again driven by our theater shows, but with AOI growth impacted by the cost structure and a seasonally lower period for concert activity. So looking at the growth this year and an even bigger pipeline of shows for next year, combined with ongoing improvements in our on-site execution, we believe we are well set up for continued growth in concerts. Turning to our sponsorship and advertising business. In the third quarter, sponsorship AOI was up 18% and revenue was up 26%, primarily driven by on-site sponsorship as our brand partners continue to recognize the value of engaging with fans at our events. International markets drove the majority of our growth with the first weekend of Rock in Rio contributing to our performance this quarter. Given the 14% growth in sponsor committed net revenue for the year, I'm confident we will deliver mid-teens AOI growth in sponsorship for the full year. Finally, Ticketmaster. For the quarter, Ticketmaster AOI was up 20% and revenue was up 5%. Global GTV was up 4% for the quarter, driven by fee-bearing GTV which was up 5%. As with our concerts business, international drove our ticketing growth in the quarter with its fee-bearing GTV up 19%. Globally, primary GTV was up 6% for the quarter while secondary GTV was flat. And as in the past, concerts drove most of our primary GTV growth. As another sign of success for the Ticketmaster platform, our open distribution strategy continues selling more tickets for clients off-platform, up over 30% with 15 million tickets sold year-to-date. To save you the question on margin, yes, we're up a fair bit this quarter, due in part to continued improvements in operational areas such as search marketing and also because of some insurance recovery for the data breach issue last year. Our overall focus remains on growing the cash profitability of the ticketing business, not being margin-focused, which is how we have consistently grown the business over the past several years and expect to continue being successful going forward. In summary, we are confident that 2019 will be another year of record revenue and AOI results, overall and for each of our businesses. We are also making progress on completing our OCESA acquisition. In August, we submitted the necessary request for approval to the two key regulatory agencies in Mexico and are working through their process. In September, CIE received shareholder approval for the transaction. Pending the timing of the regulatory process, which is basically how many rounds of questions do they need to ask, we expect to complete the transaction between December and February and will provide updates as we have more information to share. I will now turn the call over to Kathy to go through more on our financial results.

Thanks, Joe, and good afternoon everyone. Our key financial highlights for the third quarter of 2019: Our revenue was down 2% to $3.8 billion. AOI increased 11% to $427 million, and operating income increased 11% to $260 million. Our revenue decline in the quarter was primarily driven by a foreign exchange negative impact; without this, our revenue in the quarter was flat to last year. This FX impact largely affected concerts, which along with the timing shift in events from Q3 to Q2 drove a 4% decrease in revenue. Sponsorship revenue increased 26% from the addition of the first weekend of Rock in Rio in Brazil and overall growth in our on-site sponsorship program. Ticketing delivered a 5% increase in revenue as strong international activity drove a 4% increase in global GTV. AOI growth was 11% in the third quarter, driven mainly by sponsorship, which was up 18%, and ticketing, which was up 20%, as a result of the higher GTV along with an insurance recovery related to the third-party data breach incident last year that we had not expected to receive in the quarter. This insurance recovery, along with the strength in amphitheater show performance at the end of the quarter, as Joe noted previously, drove our outperformance relative to the AOI guidance we provided in July. Our operating income increased by 11% for the third quarter over last year, driven by the increase in AOI. For the quarter, accretion of redeemable non-controlling interest was $24 million, and our diluted earnings per share was $0.71. Turning to our balance sheet. As of September 30, we had total cash of $1.8 billion, including $747 million in ticketing client cash and $642 million in net concert event-related cash, leaving free cash of $406 million. Net cash provided by operating activities for the nine months was $33 million compared to $256 million last year, primarily due to the timing of when payment obligations were due. Free cash flow adjusted for the nine months was $531 million, in line with last year's $529 million. Our conversion of AOI to free cash flow this year was reduced by the timing of distribution to our non-controlling interest partners and an increase in maintenance CapEx. Our total capital expenditures were $225 million for the first nine months, with $120 million spent on revenue-generating items. We expect total capital expenditures for 2019 to be approximately $325 million, with half going toward revenue-generating CapEx projects. As of September 30, our total deferred revenue related to future events was $952 million, an increase of 26% over the $759 million at this point last year. As of September 30, our total debt was $2.8 billion, and our weighted average cost of debt was 4.2%. In October, we issued $950 million of 4.75% senior notes due 2027 and amended our senior secured credit facility including a new $950 million term loan B. In addition, we have an undrawn $500 million revolver and a $400 million delayed draw term loan A. The proceeds from these transactions were used to redeem our $250 million of 5.375% senior notes due 2022 and to repay the outstanding balance of our existing term loan. After these repayments and other fees and expenses, we will have $527 million of incremental cash on the balance sheet. This will allow us to meet the cash portion of our purchase price for the OCESA acquisition, along with funding other acquisition opportunities. After this refinancing, our weighted average cost of debt remains at 4.2%, and we estimate that our interest expense will initially increase by approximately $10 million in the fourth quarter as a result of this refinance. For the remainder of 2019, we expect negative FX impacts of approximately 2% for revenue and 7% for AOI in the fourth quarter based on current rates. This FX headwind to AOI is largely driven by higher sponsorship activity in Brazil, Australia, and New Zealand, which are all projected to be up 7% in the fourth quarter, and the Euro and British Pound which are projected to be up 4% to 5%. Revenue has less of an impact as that mix is more heavily weighted to the U.S. We have factored this FX impact into our full-year guidance that both Michael and Joe discussed which takes into consideration our reported year-to-date results and our expectations for the fourth quarter. Consistent with where we projected it last quarter, we currently expect that free cash flow adjusted for the full year as a percentage of our 2019 AOI will be in the mid-50s. Our accretion of redeemable non-controlling interest for the fourth quarter is projected to be approximately $26 million. And as a reminder as you look forward to 2020, our Rock in Rio Festival which spans Q3 and Q4 this year is a biannual festival and will therefore not take place next year. Thank you for joining us today. Operator, we will now open the call for questions.

Hi, thanks for taking the questions. You highlighted getting questions around consumer demand. I think maybe some of this pertained to macro and possibly recession risk. And the last time there was a downturn, Live Nation was a pretty different company than it is today. So I'd be interested to know how you feel Live is positioned should we enter a softer economic period at some point?

Hey, David, this is Joe. I'll start that. First again as we gave with some of our numbers we have seen whatever periodic retail slowness in September or anything else that the market has looked at, we have not seen that impact us at all. In fact, September this year, as I gave the numbers, was stronger than September of last year. So we're feeling very good about how it's holding up in general. As you said, we think we're a very different company than we were 10 years ago. We think our understanding of the consumer, our level of sophistication associated with pricing, understanding different consumer segments, and our ability to execute on-site are all substantially higher. So we feel like our capabilities have certainly continued to develop and that the structural tailwinds we have and shifts in spend from goods to experiences, the globalization of our business are all trends that lead to a lot of demand support under any economic scenario.

And also, this is Michael. To add to that, we are seeing strong demand for festivals and shows already on sale for next summer, with no signs of weakness in consumer ticket purchasing. As Joe mentioned, our attendees in September are spending at the shows. Therefore, we haven't observed any resistance at all; it's business as usual from a sales perspective.

Okay. Very helpful. And then you highlighted an additional 36 venues year-to-date. I'm interested to know if you anticipate accelerating the strategy. Is there a specific type of venue that you're more focused on? And then finally, I've been interested to get your view on Groot hospitality and how that adds to the portfolio.

All right. I'll give it a try. Your voice seems a bit unclear, so I may need to adjust my listening. Our focus has always been on on-site operations, and our most profitable segments are our festivals, where we can tap into multiple revenue sources, and the 50 amphitheaters we operate in the U.S. These venues represent our highest-margin concert business. We have continually expanded by leasing and managing concert venues. We currently manage over 100 theaters and clubs worldwide, including House of Blues and Fillmores, and we've been doing this for about 15 years. We prioritize businesses with strong content, sponsorship, and ticketing. We are always looking for concert venues, from small spaces up to amphitheaters, particularly those that can enhance our ability to generate multiple revenue streams through management, leasing, or building music venues. Overall, we view these opportunities as significant for returns, as they are where our operational strengths in content, sponsorship, and ticketing truly flourish. Groot, yes. So part of we've been talking about in the last two years in our hospitality food and beverage business is we are a very large food and beverage business on our own. If you just spun off our food and beverage business, we would be a world-leading hospitality food and beverage in terms of our revenue and footprint. A big part of our revenue hospitality strategy is to continue to make sure we understand the high-end consumer and the hospitality around VIP and servicing that customer well. Our core DNA knows how to put a lot of people through buildings in an efficient manner and serve them. We want to get more skillset to understand how to take care of the VIP high-end customer, how best to set up the VIP, what does that VIP flow look like, how best to monetize the customers with a better and higher experience or unique experience. So Dave is an expert in the business in Miami. He's very successful in what he does. He's tested it at the Miami Dolphins stadium with his platform there. We look at him and other skill sets like that that if we bring those in-house, open our platform to them, they will help us design, build and expand our VIP hospitality business in our current portfolio.

Okay. Thank you.

Thank you, good morning. Just first on digital ticketing. You talked about Presence being ahead of schedule. Can you talk a little bit about what's driving that? Is that demand driven or your ability to deploy that technology faster? And clearly it's resonating with consumers. You can see it in the app download data. Can you help us think about the financial benefits to the company over the longer term as that scales to become a majority or vast majority of your ticketing business?

Sure, this is Joe. I'll start. Firstly, regarding the faster pace of deployment, we attribute our success to the effective implementation both with the NFL and our own venues. There is significant demand from other venues eager to adopt digital solutions to capture consumer data and enhance ticket control. Our processes for deploying the systems have improved, allowing us to quickly change access control systems. As a result, we have increased our installation target this year from 500 to 600, and now to 700 installations. In terms of the long-term impact, Ticketmaster is now offering a fundamentally different value proposition through its venues. This goes beyond merely selling tickets; we are delivering essential data services. The data we collect will greatly benefit Ticketmaster and our concert business by improving marketing effectiveness and enabling much more targeted communication to fans based on their interests. This will also be crucial for our venue strategy, allowing us to tailor offers to customers based on their previous behaviors. Moreover, it will be vital for sponsors to connect with specific customer segments, as we can reach around 100 million people on-site. Therefore, the ability to leverage these opportunities over the coming years will be important for the entire company.

Got it. That's helpful. And just maybe one follow-up. The show pipeline for next year, as you highlighted, is up double digits. I know it's too early to talk about 2020 in a lot of detail, but does that suggest that events will be up double digits next year? Because you also have fairly sizable acquisition, which should close as well. I don't know if I'm over-extrapolating but I just wanted to ask?

Of course. First, we haven't incorporated OCESA into our figures yet due to uncertainty over the timing, which could vary by a few months. Anything we share regarding sales does not include this data since we aren't changing it yet. However, what I can say is that we're expecting to see an increase in volume next year, and as Michael mentioned, the initial demand for items currently on sale is also very promising. Additionally, there's a noticeable trend of some sales shifting into the fourth quarter. While we aren't prepared to specify the exact increase we're anticipating, we're feeling optimistic as we begin to focus on the 2020 events.

Thank you. A couple of questions. First, on the deferred revenue being up 26%, what would that look like excluding the one week of Rock in Rio that falls in this quarter? And could you discuss other comparable planning events that would be impacting the concert performance for the fourth quarter? And then secondly, on CapEx, if you could talk about some of the components of the revenue-generating CapEx. What have you been doing on the real estate side?

So on the deferred revenue, yes Rock in Rio would be in there. But remember Rock in Rio as most festivals are is largely sponsorship-driven. We haven't given any specific breakdowns. But the second weekend would be in Q4. What we said on the other comments is that Q4 is largely going to be theaters and clubs-driven. So that will be part of it. You will also be seeing some of the impacts of the onsales for next year in there as well. As far as CapEx, rev gen is going to be highly around. We said we added 36 venues. Part of that is going to be running through that continued enhancement along the Ticketmaster technology as well.

It's probably hospitality, right? Michael talked to hospitality. We talked a lot about the growth in forecast. We gave specific numbers at the end, but also around our festivals and our theaters as well. So, all of that is fairly a priority on our rev gen CapEx.

Hello.

Go ahead, Brandon.

Sorry, we're experiencing some phone issues here. As a startup, I noticed that you revised your sponsorship guidance for the year from the mid-teens down from mid to high. You mentioned the consumer is doing well, but I wanted to check if you're observing the same trend with advertisers and sponsors. Should we interpret this in relation to the demand for Rock in Rio? Regarding ticketing, it seems your Q4 ticketing guidance suggests flat AOI compared to last year. How can we understand that in light of your increased show pipeline for next year and the ongoing shift in timing for Q4 onsales from Q1?

There is no change in our overall outlook on sponsorship. The only adjustment made to our previous guidance was related to constant currency. We encountered several modeling issues as people tried to differentiate between constant and reported currencies, so we revised our guidance to reported currency. We indicated clearly that you are seeing a 7% increase in Brazil, Australia, and New Zealand, and a 4% to 5% increase in Great Britain and Europe. The numbers are affected by these calculations, but there is no change in our expectations regarding constant versus reported currency. The demand remains strong, with no signs of deterioration. Regarding ticketing, we still need to resolve some timing aspects related to the exact sale dates. We anticipate facing some similar foreign exchange impacts in ticketing. However, we have a solid pipeline of shows and strong consumer demand when we launch ticket sales. The timing of when all the shows will go on sale is still being determined. We have confirmed many shows with artists and are in the process of scheduling them, but we have not announced whether those tours will go on sale in Q4 or Q1.

And we're comping up a large Q4 last year on ticketing. So just keep that in mind in your whole comparison.

Got it. Thanks for the question.

Hi. Good afternoon everyone. Thanks for taking my question.

Yeah.

So first question is just around, you mentioned the strength of the consumer and you're not seeing any slowdown there. Can you maybe just frame up how much headroom you have on your ability to price the shows as we look forward? And then the second question is around the digital ticketing. Are there any gating factors to you increasing the venue rollout above 700 as we think about maybe 1,000 or 1,200? And as we move forward, are there any gating factors for that?

So, first on consumer strength. The pricing headroom I think the most recent number we've given is, we think there's still probably about $1 billion of price arbitrage if we look at the secondary market as a guide for market value of ticket prices relative to how we price tickets. We absolutely believe that one of the factors during any economic slowdown is that it provides the buffer. That arbitrage gets eaten away before some of the fundamental demand hits our ticket. So that absolutely is a piece that gives us some greater comfort as we think about different economic cycles. In terms of digital ticketing, the rollout, I think by the end of this year we'll have 80% of the major building. One gating factor is just you're not going to have your NBA and NHL teams yet mid-season. So if they didn't shift before the start of the season, they won't shift between now and the end of the year. It would be when they take a break again during their next cycle. And then it's just a matter of getting to a lot of the smaller buildings.

Yes. It's Michael. Regarding pricing, the media often focuses on the ticket prices for major shows, but overall, concerts remain very affordable. The average ticket price is around $60, and fans typically attend two or three shows a year. This expense is still a valuable investment in memories compared to the costs of vacations. During economic downturns, consumers may cut back on large purchases like travel or new cars, but attending a concert with family or friends remains a more affordable choice. People will still prioritize going to local shows at arenas or stadiums because it's accessible, even if they're tightening their budgets. That said, we believe tickets are still undervalued, as there's a significant secondary market worth $8 billion to $10 billion. We anticipate making progress with artists to adjust pricing, allowing for better earnings for them while also ensuring more affordable ticket options aren't lost. Ultimately, concerts are less expensive than a nice dinner or other entertainment options like NBA games or theater performances. We see plenty of room for ticket price increases, making them still affordable regardless of individual financial situations, and the secondary market indicates potential for growth.

Thanks very much.

Yeah. I just had a question on CapEx. I know you guys have always talked about 2% CapEx to revs. It seems like with the ticket move up in CapEx we're approaching sort of 3%. Do you see enough sort of good revenue opportunities that we should be thinking sort of 3% of revs as sort of a more reasonable number in the interim in the next few years as opposed to 2%? Or is 2019 sort of an aberration? Thanks.

So, part of that just to restate. Those 2% were back before rev rec changes. So, it made a little bit of an increase in it. But I think around 2.5% is probably the right rule. Some years may cross a little bit above that. But just, yes, there are a lot of what we think are good investment opportunities in our business in hospitality, in our technology that we think are the right way to continue to invest in the business.

Perfect. Thank you.

Yeah. Hi. It's Doug Arthur. Joe, I'm wondering if you could delve into the mix in the concert business a little bit more in the third quarter. Obviously, you had cited some timing issues going into the quarter. The number of events in North America was up 15%. It looks like attendance for event was down close to 20%. So that's a pretty unusual mix for the third quarter. Does that reflect the lack of stadium shows basically? Or is there something else going on?

You have it exactly right. It's the mix shift. If you look at Q2 and Q3 together, we had more weight in Q2 this year. Those two quarters represent the core concert segment. The concert business is up about 4% on a constant currency basis. The revenue side is affected by currency fluctuations, but what's really happening, as we've mentioned over the past nine months, is that we have fewer stadium shows this year—about 30 fewer compared to last year. We've seen significant growth in our theater shows, particularly in North America and internationally. The absence of stadium shows, which are the highest-volume events with the highest average ticket prices, is impacting overall performance. Theater shows, on the other hand, have much lower average attendance and ticket prices. So, what you're seeing is a mix shift. Across all venue types, there is still very strong sell-through demand, and we talked about platinum tickets and all the components. The performance remains robust across the board. Looking ahead to next year, we're anticipating a big increase in our stadium volume, which is a good indicator for the business. There's nothing to read into this besides timing.

Great, thank you.

Thank you everybody.