Live Nation Entertainment Inc (LYV) — Q3 2020 Earnings Call Transcript

Good afternoon, and thank you for joining us. There have been no major changes in our business conditions or outlook since the last time we spoke. And while we see signs of promise around the world with some live events returning, most regions we operate in continue to have various restrictions in place. For now, we continue to maintain strong cash management discipline while planning for the ramp-up to resume live shows as soon as possible. Joe will have a further update on costs and cash management efforts later in the call. We also continue to see strong fan demand across the board. Our sales and survey data indicate that fan demand will be there when the time is right. Our refund rate on rescheduled shows remains consistently low with 83% of fans globally keeping their tickets. A recent global survey shows that 95% of fans are planning to return to live events when restrictions are lifted, the highest point of confidence since the start of the pandemic. Festival on-sales for next year have been strong, with EDC Las Vegas 2021 selling out in 24 hours at a higher capacity than last year. Ticket sales for Red and Greenfields and other White festivals are pacing ahead of last year. We are encouraged by the enthusiasm for recent events and gatherings that have started to take place, including our first sold-out tour with 20,000 fans in New Zealand, where business is headed back to normal. Meanwhile, we are working on a roadmap to return to live safely. We are encouraged by progress on testing technology, treatments, and vaccines that will support our plans. We expect shows at scale next summer, but recognize that the exact timeline for this return will vary by region, so we continue to focus on remaining flexible. In preparation, we are focusing on two areas. On the technology front, Ticketmaster is creating the tools we need to ensure live events can implement a variety of safety precautions upon returning. New products such as our social distancing seat mapping tool and timed entry technology have been developed to give venues the flexibility to manage everything from access to box office interactions. Existing products, including our safe text digital ticket technology, can fulfill new needs including being a key facilitator for contact tracing. The ability to integrate third-party applications with our digital ticketing platform enables a range of customizable features from contactless concessions to testing and health questionnaire tracking. On the content front, Live Nation is developing a set of standards for executing shows with our vendors. We are collaborating with health experts to develop show guidelines to implement procedures adaptable to various situations across all regions. From venue sanitation procedures to fan-friendly policies on ticket purchases and the latest testing options, we are setting standards that will provide peace of mind for fans, crews, and artists before, during, and after the show. Looking ahead, the path to live will not be a straight one. With that in mind, we will maintain flexibility and focus on innovation during these times. On November 19th, at our Investor event, we will outline more details about the opportunities we see emerging for our business. With that, I'll turn over to Joe.

Thanks, Michael. Good afternoon, everyone. We've added some additional tables to the back of our earnings release, so this quarter I will hit the key numbers instead of reconciling every number as I did last quarter. As Michael noted, we've continued to strengthen our financial position during the third quarter, and all key numbers are in line with or better than what we forecast last quarter. As a result, we are confident that the actions we've taken to cut costs and increase liquidity will provide us with the runway we need until the time is right to bring shows back. As part of this, we have further reduced all discretionary spending by approximately $100 million and have now lowered our cash usage for this year by over $900 million, reducing our cash burn by $1.5 billion relative to our pre-COVID plans. With these reductions, we have lowered the estimate on our operational cash burn rate to $110 million per month and our gross burn rate to $175 million per month on average for the last nine months of the year, prior to the benefit of contribution margin generated by the business. Included in our gross burn estimate is approximately $40 million in severance expense estimated through year-end, which we expect will generate over $200 million in annual run rate savings. Our free cash flow at the end of the third quarter is $951 million, and along with over $950 million of available debt capacity, we have $1.9 billion in readily available liquidity. At the same time, refund rates for Q3 remain low at 17% globally. As a result, deferred revenue is at $1.4 billion as of the end of Q3. We have increased our forecast for what we expect at the end of the year to now be $1.4 billion. Turning to our Q3 results, starting with AOI, our AOI loss for the quarter was $319 million, which consisted of $337 million in operational cash burn, $50 million in other non-cash fixed costs, and $68 million of contribution margin, which included $73 million from operations along with other one-time items. One point to note here is that this sum from operations includes our sponsorship business, where we've managed to maintain 90% of the commitments that were in place at the end of February. The bulk of this sponsorship will roll into 2021, but some has been rerouted into other assets, including streaming concerts. Looking at free cash, we ended the third quarter with $951 million in free cash compared to $1.8 billion at the end of Q2, in line with what we expected and consistent with what we told you last quarter. This translates to an $821 million reduction in our free cash metric for the quarter. Part of this reduction includes $333 million due to working capital timing, which is part of the $415 million flip we told you last quarter would occur in Q3 and Q4. We expect the remaining $80 million of this timing impact to affect free cash in Q4. This timing shift primarily resulted from shows scheduled for Q3 of 2021 moving from long-term deferred revenue to current deferred revenue. It is an accounting shift rather than an actual use of cash. Consequently, our total effective cash burn was $488 million for the quarter, approximately $160 million per month, which aligns with our gross cash burn net of the contribution margin generated in the quarter. As indicated, the global refund rate for Live Nation Concerts that are rescheduled and in or have gone through a refund window is 17% through the end of Q3. Festivals have generally canceled this year's events, but for festivals where fans can retain their tickets for next year's show, 63% of fans are doing so. A bit more detail on deferred revenue, which is tracking ahead of where we told you last quarter we would be. At the end of Q3, deferred revenue for events in the next 12 months was $1.4 billion. Of the $421 million increase, $383 million was due to a shift from long-term deferred revenue to current deferred revenue for concerts rescheduled for Q3 of 2021. At the end of Q3, we still had $103 million of long-term deferred revenue, most of which we expect will convert to short-term deferred revenue by the end of the year. Given this, along with the projected Q4 outflow of $74 million from additional ticket refunds, we now forecast deferred revenue of $1.4 billion at the end of the year before any additional ticket sales. Given the uncertainty in the market around the timing of shows returning, we cannot provide any more guidance beyond the burn rates and refund levels we've just shared. With that, let’s open the call for questions for Michael, Kathy, or me.

Hi. Thanks for taking the question. Just recognizing that 2021 may be a fairly unique year in terms of how concerts and festivals are structured. But when you look at 2022, which is the long-term general, are you confident that the general economics that drove the concerts industry will return or should investors expect some sort of change as it pertains to relationships with artists, the venues, or really on any front?

I think the baseline economics for the promoter, the artist, and the venue will not materially change structurally going forward. I think what you'll see, and we've touched on a few points, is that as we've spent this time reflecting on our business, we've identified ways to reduce costs. I provided some numbers about over $200 million in reduced run rate. We’ve also thought about how each piece of the flywheel can operate a bit more efficiently moving forward. However, I don’t foresee any changes in the core historical dynamics among the key players.

Okay. And then just following up on the $200 million savings, should we consider that as permanent cost savings or some of that may come back when the industry begins to scale up again?

As we look at 2021, we expect to see those savings largely intact, and in 2022, we’ll have to wait and see what the scale looks like. If 2022 is as robust as we believe it could be, then we’ll see what costs are necessary. However, we believe that the bulk of these savings will flow through the business and represent structural savings.

And then maybe just to ask one question that's a little more long-term in nature. You know, an area that has gotten a bit more attention lately is virtual concerts. I was just wondering if you could update your views on the opportunities for Live Nation, whether it pertains to selling incremental virtual access to your shows or just staging your own productions like you've done recently with Live From Home. Thanks.

Thank you. It's Michael. We believe that virtual concerts are a fantastic complement to the core business. There will always be global superstars like BTS and Billie Eilish who can likely do pay-per-view events, but generally, this is a business that complements and promotes core concerts. We see great opportunity here. We've been experimenting with virtual for years, whether through streaming on social media platforms or our own channels for sponsors. We’ve streamed our festivals on YouTube for quite some time and can now view that as a continuation. We intend to stream many more of our concerts in 2021 and 2022, catering to fans who either cannot attend events or prefer to stream from wherever they are for added value. So we view this as a strong complement that helps us drive incremental revenue per show and has always been a useful tool for sponsorship fulfillment.

Hey guys. What I really want to know is who won Georgia. But short of that, I wanted to take a step back on Ticketmaster. With Jerd's departure, you promoted your head of international, who is based abroad. Is there anything to read into that? Is international now a bigger focus? More broadly, could you discuss the strategic priorities that Ticketmaster has under this new leadership?

Thanks, Brandon. There’s nothing to read into this—COVID accelerated any strategy we had. While we've been sitting tight, we've managed to do a lot of restructuring and thoughtful business planning. We had planned over the next three years to implement changes we managed to achieve in the last three months. Going global with Ticketmaster has always been a top priority. We recognized our biggest opportunity for Ticketmaster's total addressable market is going to be outside of the U.S. It's a powerful brand, and as our concert businesses grow, so too will our ticketing business. However, we haven’t been able to roll out a global technology architecture as quickly as we wanted. The U.S. has always been a significant drain on resources. This has allowed us to fast track our strategy with a unified global technical stack, a more efficient architecture, and common global products that can be rolled out more swiftly. I believe that appointing someone from the global side to drive the product will expedite Ticketmaster's growth into a global brand. The strategic priorities will remain unchanged when we return to business. We hold two incredible businesses at our core with Ticketmaster—we are an enterprise platform, providing white-label services to teams and venues worldwide, whether it's the NFL, the Phoenix Suns, or artists. Our aim will be to enhance our software platform to empower ticketing needs. This transition toward virtual ticketing has been a great testing platform for us. We have rapidly shifted to a virtual ticketing model on a global scale. Furthermore, we want to be a better marketplace, ensuring we have full inventory available. Our strategy is to increase inventory on our platforms, even incorporating additional content from third-party partners.

Great. A few weeks ago, Marc Geiger announced his Save Live Club initiative. I'm curious about the impact he may have on the industry.

The same impact he had at William Morris. There’s a lot of discussion around independent venues and saving our stages. Many live service providers are indeed experiencing tough times. Our focus has been on supporting the 12 million employees from hairdressers to lighting crews, ensuring they receive stimulation and assistance, as they are in dire need. With respect to independent venues, there’s a notion that due to distress, they may sell at steep discounts. However, the thesis is flawed. Any reputable live club will not simply give away their venue for cheap, as there’s too much capital available. For iconic venues like the Troubadour in Los Angeles, there are many options to sustain operations, from capital access to government aid. We don’t believe there will be significant fire sales in that segment, and our view is that while clubs are part of our ecosystem, they don't generate enough synergy on their own.

Thanks. Good afternoon. First, Michael, what are you hearing from artists and artist management regarding getting back on the road? Specifically, what's your best guess about timing when we start to see major tours announced and tickets put on sale at scale? I’d like to know what your latest predictions suggest.

The critical factor is that both demand and supply exist. Fans want to attend shows, and artists are eager to return to the road as soon as it's safe. Different artists will likely have varying timelines depending on their age and risk factors. Many are waiting to evaluate a week-by-week basis to sense when plans may be fully operational. We encourage artists with shows in 2022 to hold on to their plans as we monitor developments with testing, vaccines, and broader plans. We're advising any artist considering a new tour to think about the fall but to hold off on moving any logistics until January or February, as we don’t want unnecessary costs incurred yet. The general consensus is to reset and see how 2021 unfolds with the rescheduled events from 2020, then gradually introduce new content into 2022 as we gain more visibility come January.

That sounds reasonable. Are there any insurance-related issues that you’re having to navigate regarding festivals or large events, or do you think that area is adequately managed at this point?

As we're discussing plans for summer, we remain optimistic that the government in the U.S., like many nationally, will find a way to clarify liability issues surrounding all the necessary precautions taken. We’re collaborating with public health officials in each market to determine what steps we need to implement to bring fans back safely for next summer, and we expect that to place us in a strong position.

Understood. Lastly, Joe, could you help us think through the fourth quarter cash usage? Are there any expectations regarding contribution margins for Q4 compared to what you experienced in Q3?

I would say that Q2 and Q3 were not vastly different, although there were varying elements. I have provided details about cash burn operations and growth for the past nine months, so you can easily calculate what that leaves for Q4.

Okay, thanks a lot. Joe, you touched on sponsorship earlier.

Yes, 90% of our sponsorship commitments that were active at the end of February have remained intact. They have stayed in 2020 where possible, contributing to some of the contribution margin we reported in this quarter, with most of the remainder rolling into next year.

Very good. Thank you. Given the considerable financial endurance and limited visibility around this recovery trajectory, could you share your thoughts on any potential sources of capital or capital raising at this point?

At this point, we don’t see the need. As I provided detailed numbers on burn, our current capacity in cash seems sufficient to sustain us prior to ramping back up. Keep in mind that cash will start flowing back into the business prior to shows due to ticket sales generating revenue, contributing cash back into Ticketmaster and sponsorship. As we see it, there is ample liquidity available in the market should the need arise, but it’s not a concern for us right now.

Hi. Has the pandemic accelerated event organizers' utilization of your digital ticketing technology? Referring back to the previous questions about Ticketmaster's transition to a global tech stack, do you anticipate these changes will push ticketing structural margins above the 29% or 30% threshold once business conditions normalize?

Regarding digital ticketing, I think Michael addressed the streaming opportunities, and we see that as a substantial complement moving forward. The capability to offer digital tickets alongside traditional ones is paramount, and we’re actively pursuing that. On TM's globalized agenda, as mentioned, we’ve presented some numbers on cost reductions, a component of which relates to Ticketmaster. We anticipate overall reductions in the cost structure but won't provide specific figures today.

I appreciate that. Additionally, with most people retaining their tickets for postponed events, how many times can you reschedule before you expect to see ticket holders giving up and requesting refunds, or will you simply cancel altogether if it happens a few times?

As Michael stated, the fundamental dynamics of supply and demand have not shifted. Artists want to tour, they need to for their income. Fans are eager for those tickets. Six months ago, many folks projected massive refunds due to panic. The actual situation has shown that 83% of fans are retaining their tickets, a stark contrast to what was anticipated. While there’s no precise formula regarding how many times a show can be rescheduled, fans eager to attend a valuable concert will continue to wait for the opportunity.