Live Nation Entertainment Inc (LYV) 2006 Q3 法說會逐字稿

Good afternoon. My name is Mary and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Live Nation third-quarter 2006 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS)

Before we begin, Live Nation has asked me to remind you that this afternoon's call will contain certain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ. Please refer to Live Nation's SEC filings for a description of risks and uncertainties that could impact the actual results.

It is now my pleasure to turn the floor over to your host, Michael Rapino, President and CEO.

Thank you and good afternoon, everyone. Welcome to our third-quarter conference call. I'm joined today by Alan Ridgeway, our CFO. As we have stated since January, the mission for Live Nation is to transform its business model and asset base to maximize long-term growth. In January, we inherited a fragmented live entertainment company which had non-complementary businesses, the business model was primarily driven by ticket sales at the door and venue ancillaries all within a two-hour period, and had no relationship with the fan or buyer.

We have been moving to create a branded live music company, maximizing and expanding and capturing all of the dollars in the total live chain from the fan to the artist, from the door, tickets, venue, parking, merchandise, ticket fees, fan clubs, web advertising, repackaged live content distribution. We were looking to extend the two-hour experience with our fans and maximize all revenue in between.

Being a stand-alone company has provided us with the flexibility to focus on our core business and what generates the bulk of our profit in music, and to move aggressively to rationalize our business to maximize long-term growth potential.

We are making these changes in the face of a very competitive and with many industry challenges. On the negative side, increasing competition for shows at our U.S. amphitheaters from arenas and casinos has been escalating; the declining number of artists that can fill 10,000 seat venues.

In the counterbalance, there are trends that are positive that we feel we can capitalize on. Tours are becoming more and more profitable for artists as their primary revenue source and the traditional barriers on the value chain are coming down.

I'm going to take you through our five key strategies and how we believe we will transform this Company into a branded music company with higher margin potential.

First is to transform venue portfolio. We need to create the right music venue portfolio, increasing in our concentration on small- and mid-sized venues in the U.S. So far by doing the House of Blues acquisition, a new venue in New York, and a new venue in Miami, we have made great progress on continuing our mid-sized venue diversification. And we will continue to successfully roll out our festivals globally.

We are also continuing to divest noncore venues. This process is already underway, and we have announced we plan to sell a small number of venues that are either small in noncore markets or have real estate value that is greater than the value to us as a music venue. We can't say much more about this for business purposes, but we are looking hard at transforming our venue portfolio into much more diversity.

Our second strategy is to continue our expansion internationally. We've had great success at growing our business internationally, and believe we have still a lot of markets that are untapped that provide great revenue potential. And we are looking continually right now at all of the markets in Asia and Eastern and Central Europe to expand on our already strong international business.

Three, we're going to continue to vertically integrate all live music products and services under the Live Nation umbrella. In an attempt to gain all of the revenue in the value chain, we will continue to look at expanding our Musictoday business, our Trunk business, and other options in between the artist and fan.

Four, we've put a great effort around establishing and driving business to our website this year. We are looking to provide a web search that provides a great concert, ticket and live music portal for artists and fans to participate in. We have been very successful at generating already a database of 24 million avid fans through this new contact with our end buyer. And five, we're continuing to look at maximizing value from renegotiating replacement of our Ticketmaster, Aramark contracts at the end of 2008.

We have accomplished a lot in our first nine months as a public company. We have a lot of positive momentum behind us for the first time in years. In just nine months, we have achieved six key milestones.

First, we established Live Nation as a public independent company, a huge accomplishment given we started with nothing, and established and created a brand-new head office in Los Angeles, the music capital of the world, and hired a promoter [and] relocated 49 executives.

Two, we have developed a brand name. We have already generated over 11 billion advertising impressions with the Live Nation name. Three, we have created a centralized venue management team which never existed before. We have already seen success from the summer by increasing our food and beverage by 7% over the first nine months, by having now intense focus around our venue, food and beverage business. And we have improved our fan experience satisfaction at Live Nation venues. In exit surveys, fans showed they were more impressed with our venues by 21% than last year in the overall fan experience.

Four, we have invested in and created an Internet division and became the number two ticketing site in just a few months. Five, we have successfully divested a number of noncore businesses that do not fit our music mold, $37 million of net proceeds from sports representation and Las Vegas productions.

And six, we have continued to reinvest in our core business with the acquisitions of House of Blues, CPI, Musictoday, and Trunk, all businesses that added to our existing core music model.

I'm very proud of the results we have achieved so far. In the quarter and the year-to-date, the story was basically more shows and reinvestment in the business for long-term growth. We set a goal of 200 more shows in our venues and we delivered on this. The ability to do this was created by some of the unique, best-performing shows of the season, such as Def Leppard and Journey.

We substantially beat the industry in attendance so far. Our North American concert attendance was up 15%, while Pollstar says the industry was down by 8%. We are not seeing issues with ticket prices; people are willing to pay for good shows. It is just a matter of getting the right acts out. The issue was, however, to get more shows, we had to pay more for them. You'll see this in the adjusted EBITDA of our events segment, which Alan will discuss in a minute.

As we have discussed with many investors over the nine months, there is no scale in talent buying. The scale and advantage we have comes from our 60 million fan base and how do we sell them more products and have a longer tail? Artist talent fees are higher and are going to stay that way. Our great advantage, as I said, is our fan base and how do we sell them more products.

The attendance improvement overall helped our other divisions drive growth on the whole. More attendance and more shows should really drive our online business also.

In order to accomplish our business strategy objectives as a stand-alone company, we need to reinvest this year. We have over the last few years neglected to reinvest in the long-term opportunities to maximize the long tail of the live business. We effectively took the money we saved from initially cutting 10% of our workforce and reinvested in areas of our business we believe will be the growth areas of the future, such as venue management, online, and corporate functions to build a stand-alone, great public company.

I will now turn it over to Alan to discuss the quarterly results and I will come back to discuss House of Blues.

Thanks, Michael. Good afternoon, everybody. To start with, let me point out that we will refer to some non-GAAP measures in this presentation, and in accordance to SEC Regulation G, we provided a full reconciliation to the most comparable GAAP measure in the earnings release. This release can also be found on livenation.com under the About Us section.

In addition, you will notice we made a few changes to our financial presentation in order to better address some of the questions we have been getting from investors and to better describe our business. I will walk you through these changes as we go forward.

As Michael mentioned before, the story this quarter was really about all more shows and the dollars we have reinvested in the business for future growth. Overall, the number of events we produced increased by 16% to 5005. This excludes the exhibition business, which we exited, and the sports business, which we are in the process of exiting.

This increase in events had the impact of increasing overall attendance, again, excluding the exhibition business, by 15%. I should note that our U.S. amphitheaters were an important driver during the quarter, as we added 123 events, which had the impact of increasing attendance by 1.1 million.

As a result, our third-quarter revenues were $1.4 billion, up $356 million, or 36% versus last year. However, because it cost us more in artist talent and event costs to put on more shows and we spent money to reinvest in the business, adjusted EBITDA only increased by $1 million to $92 million.

If you recall, when we spun off from Clear Channel at the end of 2005, we reduced our nonessential workforce by about 10%. This generated an estimated $20 million of annualized cost savings. We took these cost savings and reinvested about $17 million of them into our (indiscernible) more critical growth areas of the business, some of which are just getting off the ground. We also invested in additional corporate costs required to become a stand-alone company.

You will notice that our operating income actually decreased by $34 million for the quarter. This is due primarily to a $42 million impairment charge we took on our venues. As you can see in our press release, we decided to exit a small number of venues in the U.S. in noncore markets. These venues have an expected value of $23 million less than their book value and required a write-down. Because of this, we decided to complete the evaluation of our venues that we typically do at the year-end in Quarter 3 instead. This review resulted in an additional write-down of $19 million. The other venues that we wrote down were also primarily in small noncore markets. We currently expect that the venues we sell in total will generate a substantial gain over book value.

Turning to the segments. Our Events segment is the engine for the rest of our business. The promotion and/or production of the events in this segment enables us to generate revenue and EBITDA in our Venues and Sponsorship and Digital Distribution segments.

During the quarter, Events' revenue increased by $328 million to $1.1 billion, or a 45% increase over the prior year. This growth is due primarily to the higher number of events, as I described earlier, and stronger 2006 global tours, including Madonna, Crosby, Stills, Nash and Young, and the Rolling Stones.

Events' adjusted EBITDA declined by $18 million to a loss of $39 million as we paid the artists higher talent fees and experienced higher event-related costs in order to book the higher number of shows. We see this increased loss as an investment to drive revenue and EBITDA in our Venues and Sponsorship and Digital Distribution segments.

Moving to our Venues and Sponsorship segment, this generates revenues from food and beverage sales, facility management and box office fees, parking fees, premium and box seating, and venue sponsorships. I will remind you that we split these food and beverage revenues 50-50 pursuant to our agreement with Aramark, with no associated cost.

Because most of these revenue streams are generated on an (indiscernible) or per-fan basis, this segment benefited from the increased attendance generated by the activities in our Events segment. During the quarter, segment revenue increased by $29 million to $244 million, or a 13% increase over the prior year. Segment-adjusted EBITDA increased by $13 million to $98 million, a 15% increase over the same period for the prior year.

In addition to the positive impact from increased attendance, Venues and Sponsorship also benefited from improved food and beverage sales to the fans of 5%. The 7% figure we mentioned in our press release is the year-to-date number, as opposed to quarterly. This growth was the result of increased focus by the centralized Venue Management Group we established at the beginning of 2006, which implemented new programs at the majority of our venues this summer.

These food and beverage programs included value and simplified pricing, increased food and beverage selections, improved signage, and other things that have worked in ballparks since 1934, including forking. This revenue growth, however, was offset in part by increased costs from the new Venue Management Group and new incentive programs for our Venues staff.

Our Digital Distribution segment manages our ticketing operations and relationships, as well as our online and wireless distribution activities. In the third quarter, the Digital Distribution segment benefited from the increased attendance generated by the activities in our Events segment, as the additional ticket sales resulted in additional service charge rebates.

To clarify, we receive service charge rebates from Ticketmaster on only about one-third of our total attendance, as the other two-thirds are either tickets sold at our box office, for which the box office fee resides our Venue segment, or are tickets sold outside the Ticketmaster system.

During the quarter, revenues increased by $11 million to $40 million, a 37% increase over the same period for the prior year. Segment-adjusted EBITDA increased by $6 million to $34 million, a 23% increase over the same period for the prior year. The EBITDA growth was lower than revenue growth due to increases in salaries for new staff and consulting expenses related to our website and Internet management.

Turning to some other financial metrics, capital expenditures were $51 million for the nine months ended September 30, a decrease of $21 million from the prior year, and $19 million for the quarter, a decrease of $3 million from the prior year. The nine-month decrease was primarily due to the timing in capital expenditures associated with the development and renovation of five venues, three of which were completed in 2005.

Maintenance capital expenditure comprised $41 million of the total capital expenditures for the nine months ended September 30, and $17 million for the quarter.

In an effort to more accurately reflect actual free cash flow from our core business, by both eliminating swings in our quarterly cash flows from time differences in ticket sales versus actual event dates and including cash income or distributions from only the portion of some of the businesses we acquired, we have redesigned free cash flow.

We now define free cash flow as adjusted EBITDA less maintenance capital expenditure, less net interest expense, cash taxes, less the cash flows to or from our minority interest partners, plus the cash flows from or to our nonconsolidated affiliates. For the quarter ended September 30, free cash flow was $44 million.

As of September 30, our cash balance was $497 million. As you know, our cash balances include cash we collect from advance ticket sales for future shows, less expenses that we have prepaid on these shows, including artist deposits. Our cash also includes amounts that we expect for third-party shows in our venues. As a result, our free cash is a much lower number than what appears on our balance sheet.

Making adjustments for the cash that is temporarily on our books from advance ticket sales, net of the cash we have paid out related to these shows, we estimate our free cash balance was $223 million as of the end of September. Our total debt in preferred stock totaled $406 million at the end of September. As Michael mentioned, last Friday we closed the acquisition of House of Blues, and now have total debts in preferred of $679 million.

To give you a sense of where we stand from a leverage perspective pro forma for the 12 months ending September 30, assuming the acquisitions of House of Blues, CPI, Musictoday, and Trunk were made on October 1, 2005, we estimate that our adjusted EBITDA would have been one $194 million for the year. This includes the $15 million of expected cost savings at House of Blues, but excludes the $6 million to $7 million anticipated onetime severance costs, which we will discuss in a minute. That would all imply that our pro forma ratio of total debt and preferred to pro forma adjusted EBITDA for the 12 months ended September would have been 3.5 times.

I would like to reiterate that as we continue to be in the early stages of transformation of our business, we continue not to provide guidance. I will now turn the call back over to Michael to discuss the rationale behind the House of Blues transaction.

Thanks, Alan. I want to reiterate how excited we are about closing on the acquisition of House of Blues. I believe that this as an acquisition will accelerate our venue plan by 10 years. It is an acquisition that we have been looking at as a Company for years.

I will take you through our strategic rationale on why this deal makes sense for Live Nation. First, it significantly increases our presence in high-growth, small-music venues in North America. There seems to be a greater supply of artists playing smaller venues than larger ones. According to Pollstar, attendance at clubs has grown at 20% a year from 2000 to 2005.

House of Blues clubs have a track record of delivering double-digit, same-store EBITDA growth. Seven of the top 10 clubs in the U.S. are House of Blues venues, according to Pollstar. Pro forma, Live Nation now owns or operates or has exclusive booking rights to 48 small- and mid-sized music venues.

Our second strategic rationale was it diversifies our North American venue mix. Pro forma, Live Nation's small- and mid-sized venue contribution increases from 33 to 38.

Three, it drives our domestic and international club venue growth by capitalizing on a well-respected and established House of Blues brand. House of Blues has been really the only concert company to truly establish a branded company. We believe there is great potential to rebrand some select Live Nation venues, to selectively open new venues in key markets and casinos. House of Blues brand joined to Live Nation's other marquee venues, such as the Filmore, start to create a portfolio of superior branded venues.

Four, it improves our amphitheater venue presence in key top U.S. markets, complementing Live Nation's already strong eastern U.S. presence. The San Diego, Los Angeles, and Denver House of Blues amphitheaters are areas that Live Nation had no presence in. The marquee amphitheater in Seattle, The Gorge, and the Gibson Amphitheater in Universal are super venues that, again, complement our existing portfolio.

Five, it extends our music presence into Canada. We currently have no music venues in Canada. Canada continues to be a very hot market for concerts. We now have the Commodore in Vancouver and the Molson Amphitheater in Toronto.

It excels our web presence beyond 3 million unique visitors per month. It fortifies Live Nation's website ranking as the second most popular entertainment event website. It increases our unique visitors from 2.9 million to 3.2 million, and adds 1.8 million houseofblues.com registered e-mail users to our existing 24 million fan database.

Seven, we also know there is significant cost-cutting and synergy opportunities, given the complementary businesses. We expect $15 million of headcut reduction savings alone, primarily at the corporate level, to be implemented shortly, with a $6 million to $7 million onetime severance cost associated for these reductions. We are very comfortable with these cost-saving numbers we have spent a lot of time validating during our due diligence.

Additional upside from selling more premium seats and sponsorships will drive our Sponsorship division. And savings from exiting certain unprofitable partnerships in newer House of Blues venues are coming at speed in Cleveland, San Diego, and Atlantic City.

We believe this transaction is great for Live Nation. Once again, I think we had a solid quarter, and [with] that, I will open it up for questions. Operator?

(OPERATOR INSTRUCTIONS) David Marsh.

Given the strong concert season that you had this year and kind of the artist sentiment out there, coming off of a pretty good concert season, how do you feel at this point in general about the concert landscape for the 2007 season?

We believe that every year there has seemed to be -- you never know in September, but by the time January comes around, they all seem to come out of the woodwork. And every year we seem to have Pollstar reports a higher year net revenue overall. So at this point, it's still too early to tell. We seem to see 2007 looking as consistent as this year and the last few years.

It seems like this summer you were pretty successful with a number of shows you went through with sort of co-headliners, with more known artists pairing up. Do you think that that is a trend that will continue and help make the amphitheater business more successful going forward?

Yes, we believe that was a big strategic move this year. We created a packaging department that spent their time with our key sellers, CAA and William Morris, who were very proactive on putting two artists together. And it really did work out this one summer that one plus one equaled three, when we put the Def Leppards and Journeys together, Sheryl Crows and John Mayer.

So we believe there is great opportunity for the two artists that cannot quite sell out a venue on their own, but together create a very good concert experience. So we're going to continue to ramp up that division next year.

Obviously, you had good success with it this summer. In general, is the artist community becoming more accepting of it and able to kind of put the egos aside a little bit and becoming more willing to pair up with other acts to go out there?

It absolutely has opened up a whole new door. When you put an act like Def Leppard and Journey together, it becomes your biggest seller of the summer, we have already had both CAA and William Morris approach us about what can we put together, and talking about a whole bunch of great ideas for next summer. And that has not historically happened. We have historically gone to them later in the year looking for ideas, and we are already sitting in November with a bunch of ideas on the table on what could be some great packages next year.

Generally, are these types of tours more profitable for you or are they more expensive because you are paying joint headliners?

They are usually more profitable the first year and more expensive the second. But they typically are a product that you have created and have taken some risk on. So most people have a lower expectation going out, which tends to get you a better artist deal.

Is there sort of a formula for success that you envision that can turn the Events business into at least a breakeven EBITDA business? Or is that still sometime off as you work through with the various artists to try to get them to understand the cost side of your business?

That is a great question, and it is an internal debate we have had, because we realize it's a complex business that the Street has taken a long time to understand, because it goes against the traditional business models of scale equals purchasing power.

Our Events division is probably a little bit skewed in the wrong way. As a concert promoter, we make money at the door. Internationally, we make a lot of money at the door as a concert promoter. In arenas, clubs, and theaters, we make money at the door.

Where we do not make money is at our amphitheaters. Now, if we took the amphitheater losses out of our Events division, we would be showing an Events division with a very healthy EBITDA. So the 950 shows in our amphitheaters tend to skew the remaining 10,000 shows we do around the world.

Now the reason we lose money in the amphitheaters is because when you get into that 10,000 plus venue segment, we have intense competition from casinos and arenas. And if you asked the arenas or the casinos do they make money at the door, they would say no also. They are doing the same thing we are. Whether you are an arena down the street in Los Angeles or a casino, you are subsidizing the artist to come and play your venue, because you have all of the other revenue streams from box, premium seats, etc.

So we look at the amphitheater internally as a holistic EBITDA number that says there is a cost to put the concerts through the pipe, but overall, we make quite a bit of money at our amphitheaters as a business driven by that show count.

So we are looking internally at how we maybe will look at reclassifying it to make it clearer for the Street that the Events division is not a complete loss leader. 950 shows in our amps are a loss leader to drive the engine behind the amphitheaters, which delivers us a sizable EBITDA.

But all of our other events are still cash positive EBITDA and doing very well, especially in Europe.

So on the artists' side, you are losing a bit perhaps on a ticket side, but you're making money on the beverages and the food and the merchandise?

In the amphitheaters, yes. But no different than the Staples Center or Madison Square Gardens or the Mohegan Sun Casinos. They are all -- unfortunately, there are more 10,000 seat venues than there are artists, so the competition is intense.

That is why you have to have a business model that has a very long tail of counting all of the revenue that comes from that event. And that is our biggest transformation strategy here. It is not just about the food and beverage. It is about everything you can maximize from that event, on-site, off-site, on the web, restreaming music, selling T-shirts before, VIP parking. There are a lot of products that we're not currently in because we have been very focused historically on just a couple revenue streams.

Great, thanks. I will let some other people jump in.

David Joyce, Miller Tabak.

A couple questions. Could you give some color on the revenue and EBITDA contribution from some of the smaller acquisitions this summer, like Musictoday, CPI and Trunk?

If you look at Musictoday, that acquisition really closed in September, so there is not much revenue or EBITDA from that in this period. Trunk, again, it's a small business, so it doesn't really have a big impact on our results at this stage. CPI, which we closed in May this year, did have the Rolling Stones going through, so that generated about -- it was about $35 million to $40 million of revenue in the quarter, with approximately $2 million of EBITDA associated with it.

All right. Talking about your potential investments internationally and more festivals and expanding into other markets, what type of range of investment would you be looking at per venue?

Per venue, you said?

Yes, to get a sense of what kind of investment would be required in expanding into new markets.

Well, there is not a lot of House of Blues out there, or I would tell you that would be the simple way to do it. So it is a venue-by-venue kind of decision. We tend to not always buy the venue. Miami, we just did a great deal where it was a very heated fight to take over a great mid-sized venue in Miami. And we are taking over the lease and running the venue.

So it is not capital decision to buy venues. We tend to be able to get in, lease, manage, run the booking, and all the rights that go with that venue for a certain time period. So that tends to be the way we usually enter a market one by one. That's what we did in New York with the Gramercy Club; that is what we did in Miami. And we have a few of those in key markets around the world we are looking at.

Then internationally, we do not tend to buy venues or get deep into venues internationally, one, because it is just a very different landscape. Given that there's such a soccer-generated culture over there, there's a lot of stadiums, but not a lot of affordable mid-size and music venues. But internationally, the promoter tends to be the holder of most of the rights and the ticketing rights. So the international promoters that we have historically bought and are looking at are fairly small CapEx in relative size to anything we look at.

There's usually a fairly low entry cost into those markets. And sure, we are buying an established promoter, but small on its own in the big picture compared to us.

Okay. Do you have any updates on testing or any anecdotes on testing having a greater number of tiers of pricing to do a better job of filling up the back of the theaters? You had talked about that a little bit last quarter.

Yes, we feel very confident that this summer we, not only through -- buying the shows is the easy part. You've still got to sell the tickets. So just because you've bought 950 shows doesn't mean they are going to come.

We have a new marketing promotion department centrally this year that spent a long time with outside promotion agencies creating 3-for-4 packs. We had targeted database promotions where we reached out to past buyers and offered them incentives to come. All of the great theme park and sports models that have been working for years that this business has been fairly unsophisticated in. So we know -- we delivered an extra 1 million people to the amphitheaters, and we know that we drove a lot of lawn sales seats or bumps on the seats through our very aggressive promotions.

Then, as well, Ticketmaster has been very successful at launching an auction that a year ago would have seemed like a foreign concept to artists, and today, pretty much every artist is now going out and doing a good auction on their tour. We did it with Madonna and Coldplay. And most of the tours we are going out with now, we will put 5 to 1000 tickets up on an auction system. And that has proven very successful for Ticketmaster, ourselves, and the artists in increasing our gross.

So yes, we definitely have seen the market and the artist is shifting very quickly to very dynamic, open-pricing models and looking at all options on how to sell more tickets, which did not exist a year ago.

Great. Thank you.

David Kestenbaum, Morgan Joseph.

Just following up on the first question, you had said you did not want to comment on 2007. But can you at least comment on the fourth quarter of this year? I know you come off a pretty strong fourth quarter last year, but how is this fourth quarter shaping up?

I said, David, we're not giving guidance on the quarter, the following quarter or next year. No. All I can say is that there are some good tours out there for the fourth quarter, both domestically and internationally, and we will see how those shape up.

Okay. Michael, you were talking about the amphitheaters. My understanding is House of Blues obviously has some of those same issues that you discussed with your own amphitheaters. Do you think you can improve that because of the Live Nation brand and just your size? And did CB Ellis review any of their venues?

The amphitheaters kind of has a dual side to it. I talk about in our transformation, we have to be less reliant on amphitheaters and have a better, diverse portfolio. That is the end goal over the next three years. We are too reliant on amphitheaters and there is too much reliance on the 10,000-plus artists, while the industry in general is having great growth in the mid- to small-size venues. So in three years, we want to be sitting here with a portfolio that is much better balanced.

But don't take away from that amphitheaters are all bad. We own a lot of amphitheaters. Amphitheaters in great markets, in a market in the right location, is a great asset to have. An amphitheater in a C market is a tougher place to turn around.

The great part about House of Blues is because they were not as big as us, they built amphitheaters in the right markets. Toronto is a fabulous amphitheater on the waterfront in downtown Toronto and has great artist demand. San Diego is a great amphitheater. The Gorge is a great amphitheater.

So their amphitheaters are actually we would consider high profit margin amphitheaters that are the ones we need to stay in. We want to be in the top 20 markets with the right amphitheater. So thankfully, their portfolio is a model on what we want to be in the next three years.

Okay. And can you give us some color on how you're doing with the wiring of the venues and just how you split the economics with the artist when you sell a CD or if you were planning on a channel or broadcasting an event?

We have had great success this summer. We have probably walked a little slower than somewhat expected, and we have done that very strategic. Our competitor came out with a product called Network Live with a lot of fanfare around its distribution deals. But we knew that right now, the easy part is signing the deal with YouTube or a distribution partner. The hard part is delivering scale and economics for myself that makes sense.

So we decided instead of cutting the distribution deals with all of the obvious partners, we decided to spend it a little bit more patiently, wiring our venues, dry running a lot this summer, making sure we can economically record the show, have some success with the artist on the quality. And this summer we have been very successful at shooting a lot of shows for Cingular and Verizon, up to 400 shows.

So there are a lot of artists that are out of contract because our live business tends to be sometimes of an older artist. There are a lot of artists -- I think 40% of our inventory in amphitheaters were out of contract, which means their rights are free. And we're having great conversations with all the record labels about how do we both help sell more product online.

So we are very confident that because of our scale and because of our economics in the venue, we will be able to find the right economic partnership with both the artist/label and ultimate distributor to put money in our bottom line. We have done it this summer with Cingular and Verizon, and put a seven-figure check in our bottom line just from that experience. So we believe that we can really get it done on a more scalable basis.

So you'll get a much more favorable economic split with the artist than you are getting for the concerts today?

Yes. As we all know, the great upside about Live Nation is focusing on -- the door is the lowest-margin place you can participate in -- but focusing on everything else is where all the money is. The challenge with Clear Channel Entertainment, because we were so fragmented in all of these different businesses, we only really went very shallow in the chain, and focused on the door.

And what we need to do, in any one of these businesses, and music being our core, we need to go deep. Because every other product that you sell has a much higher margin than you are ever going to negotiate with the artist at the door. So everything else we do has the upside potential, and that is what we know that we have invested in this year and we have full belief that all of these products will now start to come to life over the next two years.

Okay, thanks.

And our greatest asset of the end of the day is we have access. It is very hard for an artist or a record label or a distributor to do a deal with 200 venues. You can do them one-by-one or you can do them with 10,000 shows or you can do them with 1000 artists. But we have great access because of our footprint globally.

So we feel very encouraged by the conversations we have had with all of the potential partners, which we could have signed any one of many deals two months ago. But we're going to make sure we have absolutely more control in the process than we historically have been. Because as part of being the branded company, we historically have been very good at being the middleman, and the artist made a lot of money and someone else made a lot of money. And we want to figure out how to be the branded provider throughout the process, not just the supplier. And that, we believe, we see coming to life.

Gordon Hodge, Thomas Weisel Partners.

Just a couple questions. One just in terms of the artist' costs on the event side, I think you -- I mean, you had some pretty high-profile tours going on -- Madonna, The Stones, etc., that probably take a very significant percentage.

I'm wondering as you go to exploit the long tail a little bit more, it would seem that maybe the margins might improve a little bit in terms of the artist splits, just because they will smaller-time or middle-tier artists. That is one question.

Then the other question, I was just wondering if you could comment about sponsorship trends that you saw in the quarter. Then lastly, it looked like average ticket prices are up quite a bit. I couldn't tell if that was mix with the sports and exhibitions dropping off, or if it is just a new dynamic in the marketplace. Thanks.

I will try to attack -- the first question you asked about the talent and the longer tail, I will answer from a strategic perspective. And it goes again to the transformation. Our business model historically has been that we are the promoter and we sell beer and popcorn. If that is the proposition you bring to the table to the artist, you have a limited opportunity to have a longer and a different relationship with that artist.

When you are a branded company that has a much longer and vertically integrated relationship around the live experience and you can help them sell T-shirts and you can help them market their database and you can reach their customer base, as well as stage the show, and you can stream their show, you have a whole new proposition that you are bringing to the table now, that absolutely we would hope over time will also give us the opportunity to figure out how to reengineer our relationship with the artist.

You have seen us take a new approach with the band Korn last year, where we went into a very long-term relationship with that artist and a holistic relationship that was incredibly profitable this summer. We had a great tour this summer where we had the record label, the artist, and the promoter all working to one agenda. And we took a tour that probably was going to sell 6000 tickets and sold 18,000 in our amphitheaters.

So my point on the transformation has always been the reason we don't have deep relationships that have affected our economics with the artist is because we were so fragmented in our overall philosophy, whether we were in theater, in motor sports, in exhibitions, in Vegas, in music, in venues. But if you're going to be in music business and you're going to be in the relationship business with the artist and your going to maximize all the revenue streams, that is why we are ruthlessly putting all of our effort around being a vertically integrated, live business company.

And then you are truly a partner with that artist and you can bring more to the equation, more revenue and more services. And then you have a chance to have a different economic discussion with that artist and change the time horizon from a one-night affair to a much longer relationship.

So that is the end goal of why you want to be in those businesses, not only because you want to sell more to the fan, which we call earnings per fan, but you also want to be the best partner with the artist and help him earn more earnings per artist. So two sides of the stick, and if you fill in the middle, you have an opportunity on both ends.

I missed the question on the second one was --

Just sponsorship trends.

Yes, we are having great success in sponsorship. If you look at our Company over the last few years, we have had two great successes -- international has grown and sponsorship has grown. So this year again sponsorship grew, was overperforming. We noticed our Sponsorship division will tell us that the corporate strategy of corporations wanting to get into the event and wanting to touch consumers in different ways. The fragmentation of the radio and TV ad market is really helping us, as the corporations are looking for different solutions to reach fans. And again, we have that simple access for them.

So our Sponsored division has grown, and I'm excited because our Sponsored division has done what they have given that we have had mostly of an amphitheater inventory. And my present sponsorship will tell me the more and more mid-size venues and festivals and online presence we have, the deeper and more profitable our relationships with the corporations will be. Some more assets aligned, we can maximize that pot.

Lastly, just on ticket pricing trends, it looks like average ticket was $60 or so, unless I did the math wrong. At least up quite a bit year-over-year.

Absolutely. There continues to be a trend on ticket prices. We do what we can in our venues to provide access and promotional opportunities, but depending on the tour and the artist who dictate the ticket prices based on the cost of the show, there seems to be limited resistance to the ticket price.

And I think stub hubs of the world and Ticket Exchange and the auctions are demonstrating that the fan today wants to go to that show and is willing to pay for it, and the convenience to have a great seat. So with those secondary markets exploding, I think if you are an artist, it is pretty hard to convince an artist that ticket prices should go down when he is looking on secondary market and seeing, whether it is eBay or Ticket Exchange, one of his tickets going for five times what he is selling for.

So I think that is a great opportunity for us. We as a promoter need to figure out how to participate in that, and Ticketmaster is taking a great lead at legitimizing it with the Ticket Exchange program.

That's good. Thanks.

Bob Jordan, Morgan Stanley.

Talking about the Ticketmaster venture, now recognizing that certainly everyone you would want more and deserve more, would you say that your current deal right now in terms of the cash you get for the tickets is significantly below market, or is it mostly about the fact that the terms and information you get around the tickets you're selling are not what you want them to be going forward?

I think that the current deal that we have is a remnant of the Sillerman SFX days. I think it's almost eight years old now, so I don't think it's any fault of anybody's. I think it was the right deal to do eight years ago, and Ticketmaster and I have spent a lot of time together the last month and we both acknowledge that the world is changing. And we both want to grow our businesses and get into a lot of these other new business lines that are occurring, secondary markets and auctions and VIPs and etc.

So I don't think it is really about economics. I think that is the easy part. I think it is about how do we both change and adapt our businesses to maximize all these great opportunities that are popping up in the business. And as we look to -- we are a very different company that we were a year ago, so what we need today is very different than what we needed for five years, and Ticketmaster understands that. They understand our branded website and fan relationship objective, and we have two more great years to work together to figure out the future.

Got it. On the House of Blues, thanks for giving the pro forma total EBITDA. Would you mind breaking it down for the mathematically challenged and tell us what the House of Blues pro forma EBITDA was over those 12 months, just so I don't get the pro forma wrong on your side and misinterpret it?

If you look in the press release, you'll see a breakdown there in the notes in the back, but the trailing 12 months number at September is $21 million.

Great. What was the goodwill associated with that acquisition, if any?

That is not a number that we have put out there at the moment, but that is something we will possibly get to you in the future.

Okay.

I can also say you've got to remember on that $21 million, there's $15 million of cost savings that were inside during the due diligence that will come out in the next 30 to 60 days.

Definitely understood. Can you -- you went through a little quickly earlier. Can you explain for me again a little bit more about where the roughly $20 million of cost savings was reinvested, into which growth businesses it went into?

Yes, that really went into -- some of it went into building out the corporate offices or corporate staff, just that was required for being a public company. Then there was also additional costs that we incurred as a (indiscernible) company for insurance, healthcare costs. So that loss comes to -- that was probably about $10 million. The other $7 million has already gone into the future growth area, which is a combination of the Venue Management Group and the web division.

Okay. On the food and beverage rejuvenation program, which looks like it is going well, and it's sort of a subject -- what inning would you say you are in if this a baseball game, as of the third quarter? I know you have many initiatives, but I'm just not sure where you stand in terms of actually being able to put them in place versus know that they're coming in the future.

Well, I will work backwards. I guess the ninth inning is when the Aramark deal comes up, 2008. And we are just really aggressive right now on formalizing how can we make more money at our venues by having a better food and beverage experience. So granted, we inherited the company in January. We did a lot to get it public and ready and running.

And I think we did a good first inning attempt this summer at quickly trying to mobilize some programs to drive food and beverage. And I know -- plus we have already seen a plan last week about what food and beverage initiatives will look like next year, that start getting really creative on where we go over the next two years. So I think we are in the first or second inning of that very important business line.

Last question, on the House of Blues, can you give us some sort of sense, whether it is on revenue or operating earnings, any measure that you're comfortable with, how much of the business comes from what some of us might think of as the traditional restaurant side of the business. And I realize that gets driven by the events there, of course. But just to help us think about the different segments of the business and what the future could be.

I apologize. We cut you off in the middle of a question that said what is the breakout of House of Blues restaurant versus others? Is that the end of a question? I guess you are gone now.

Yes, that is exactly right.

Sure, I apologize for the mess-up on the phone. Basically, House of Blues, as you -- or don't know, has amphitheaters and then clubs. So their amphitheater business, they have nine venues, and their clubs, they have 11.

We don't actually break down the revenue and the EBITDA between the amphitheaters and the clubs. But the numbers we have given out are -- the sales for the last 12 months are about $370 million. And like I said earlier on, the EBITDA, including the $15 million of cost savings, would be $36 million on a 12-month basis.

Got it. Thanks for your --

I would just say to you that the strategy is simple. The amphitheaters were tuck-in acquisitions in A markets. They roll right into our existing infrastructure and are profitable, the right markets with the right venue. The club sight is the branded side that's the pure growth model.

Since we announced the deal three months ago, even until closing, we have had numerous conversations around the world on people that would love to roll out the House of Blues branded club, hotel, casinos, and great opportunities. So regardless of what it is today, that is the reason that that excels our mid-size venue strategy and has great growth potential, well beyond any existing club that anyone owns today, because it is truly the only branded live club with huge brand power and wanted by developers everywhere that are looking to drive traffic.

Thanks for your time and good luck moving the business forward.

(indiscernible)

How many of your current venues could you potentially rename The House of Blues? The second question is, I know you aren't giving guidance for next year, but can you at least tell us how we should be thinking about your tax rate going forward?

On the renaming, at this point, it would not be a big number. We have some pretty profile venues in that size category, from kind of the 1000 to 2000 seat, in our portfolio right now. It would be a handful in terms of size of definition for you.

One thing we do not want to do is in any way limit or dilute the brand. So we do not want to just put the House of Blues on one of our venues that does not fit the brand experience. So we think there are a handful that we could convert that we currently have, and then I'm looking at other options.

On your tax question, if you exclude the $42 million of impairments that went through in the quarter, then we are estimating our effective tax rate for the year to be a roundabout sort of 38% to 40%. That is made up principally of international cash taxes on the domestic side. We do not expect to be paying cash taxes due to goodwill amortization that we have for a few years.

Any more questions?

There appear to be no more questions at this time.

Thank you, everybody.

Thank you, everyone. This concludes today's conference call. You may now disconnect. Have a wonderful day.