Live Nation Entertainment Inc (LYV) 2014 Q3 法說會逐字稿

Good afternoon, my name is Carrie, and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the Live Nation Entertainment third quarter 2014 earnings conference call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer period.

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, including statements related to the Company's anticipated financial performance, business prospects, new developments, and similar matters. Please refer to Live Nation SEC's filings, including the risk factors and cautionary statements included in the Company's most recent filings on Forms 10-K, 10-Q, and 8-K for a description of risks and uncertainties that could impact the actual results.

Live Nation will also refer to some non-GAAP measures on this call, in accordance with SEC Regulation G, Live Nation has provided a full reconciliation for the most comparable GAAP measures in their earnings release. The release, reconciliations, and other financial or statistical information to be discussed on this call, can be found under the Investor Relations tab on investors.livenationentertainment.com. It is now my pleasure to turn the call over to Michael Rapino, President and Chief Executive Officer of Live Nation Entertainment.

Good afternoon, and welcome to our third quarter 2014 conference call. I'm joined today by Joe Berchtold, our COO, and Kathy Willard, our CFO.

We had a great third quarter, and 2014 is on track to be another record year delivering revenue, AOI, and free cash flow growth. For the first nine months of the year, revenue was up 9%, and AOI was up 11%, with all divisions growing both in revenue and AOI. Our business model of building the leading concerts platform as a flywheel for driving our other high margin businesses is working. We're continuing to build share in concerts and artist management, and driving growth in sponsorship and ticketing. The live business to have a robust outlook as artists are now fully reliant on touring as their main earnings driver, and the best means to engage and connect with their fan base. The ongoing flow of new artists continues to re-energize the business, as fans more than ever find the live experience, from club shows to stadiums to festivals, a top entertainment choice, and the best means to celebrate their favorite artist and share the experience with friends, both on-site and online.

The connected world and mobile access allows fans to become the greatest marketing boon for artists and concerts. Our research shows 64% of concert goers engage in online activities at the show, and 76% of concert attendees in the US who took photos or videos at the concert post them online. All of this generating billions of earned media impressions on social media for our shows. At Live Nation, we see great continued runway ahead, given the fragmented global landscape in concerts, management and ticketing. As our scale grows, we continue to drive increased economics in our business model, with higher profits per show, more advertising, and improved ticket conversions.

I will now provide you an update on our core strategies.

First, we continue to grow our global concerts market share. Fan demand remains strong globally, and we're continuing to grow by taking share, promoting 22 of the top 25 global tours this year, including Jay-Z, Beyonce, One Direction, and Luke Bryan. We are also further growing our festival portfolio, and we're expecting nearly 5 million fans across 65 global festivals with 8% growth from 2013. And we continue to add more markets to our global footprint, promoting concerts now in 40 countries, adding an office in the Philippines this quarter, and we increased our attendance per show.

Artist management is now offered in a full year, as we've attracted a number of new managers to this group, repping acts including Madonna, Lady Gaga, Alicia Keys, Britney Spears, Miley Cyrus, Nicki Minaj, and Lil' Wayne.

The sponsorship and advertisement business continues to deliver strong margins and growth to drive our overall AOI. At this point, we have sold over 90% of our planned sponsorship and advertising for the year, with contracted revenues up 10% from this point last year. The success of the Live Nation channel at Yahoo demonstrated the potential we have, in further monetizing our concert's platform, creating compelling content that we can widely distribute, and drive advertising revenue. We have now delivered over 100 continuous days of a live show a night, with millions of viewers tuning in to watch.

With this proof of concept successful, we look to expand and grow our live streaming and content products, to further provide advertisers with a full suite of products from Live Nation. We believe we have a great growth opportunity, as we improve the advertising experience with brands that want to reach that highly desirable music fan on-site, and on all screens in a highly targeted fashion. Our combination of on-site access, engaging content, and data, provides a unique and compelling network for advertisers.

And finally, Ticketmaster continues to deliver on its three priorities. First, our Ticketmaster Plus product is even working even better than our expectations of a year ago. It has been activated from over 13,000 events since it launched last September, and year-on-year global secondary GTV is up 44% year-to-date. The broad adoption of this platform by fans and teams, gives us confidence that we'll capture over 1 billion in resale GTV since our launch last September through the end of 2014, with continued growth into 2015.

Second, our mobile segment continues to grow rapidly, as we make ongoing improvements to the mobile experience for fans to buy, transfer, sell and scan their tickets. The number of tickets sold on mobile platforms is up 33% for the first three quarters, accounting for 18% of total ticket sales. At the same time, we remain committed to delivering the best fan experience on every platform, and lowering our cost structure as we do so. We continue to deploy new products this year, but we will continue to reduce our costs by up to $0.15 per ticket this year, ahead of schedule and halfway through our achieved goal of $0.35 per ticket.

As we near the end of 2014, Live Nation has never been in a stronger position. We've built the best live platform in the world, and we are successfully leveraging our platform to build adjacent, high margin businesses. We are on track to deliver our three-year strategic plan for 2015, and have great confidence in our longer term growth opportunities, in our core lanes of concerts, advertising, and ticketing.

I'll now turn the call over to Joe, who will take you through an update on the divisions.

Thanks Michael. First, with concerts in the third quarter concert revenue increased 11%, and AOI was up 17% compared to 2013. We had record fan attendance for the quarter as expected, with 22 million people attending our shows. The growth this quarter was driven by North America, and notably a tripling of our stadium business, looking more broadly at our full year-to-date, which does a better job of smoothing out timing, we've had a record 46 million fans attend our shows delivering commensurate record profitability. We've seen that having a broad portfolio of markets and venue types continues to pay off for us, as this year we had the high volume of stadium shows and strong performance in amphitheatres and across festivals to grow the overall business. We're also continuing to increase our profitability per fan with pricing per ticket up 6% on a global basis, and per fan spending our amphitheaters and festivals is up 6% as well. Looking at the fourth quarter and full year, we continue to expect to deliver double-digit AOI growth in the concert business. The fourth quarter looks to continue our trend of a bit lower arena activity, but we still expect to end the year with record attendance, as we continue to build our global market share.

On Artist Nation, our artist management business had another great quarter as well, with revenue up 18%, and AOI up 73%. Again, here we expect to see a bit lower activity from timing in the fourth quarter, but overall for the year project revenue and AOI growth, along with a strong lineup set for 2015.

Turning to our sponsorship and advertising business. For the third quarter, sponsorship and advertising revenue was up 4%, and AOI up 6%, consistent with our year-to-date performance. Our top focus for the year has been on taking our advertising business to the next level, leveraging our content platform to create products we can monetize to the third-party platforms. Our live streaming show is the first example of this success, with more to come soon. Our second focus has been continuing to build the breadth and depth of our strategic sponsorship relationships, and now we now have over 50 sponsors spending over $1 million each a year with Live Nation. As we look at 2014 in total for sponsorship and advertising, given where we are with contracted revenue, we continue to expect AOI growth consistent with the past few years, with a strong fourth quarter and more back end activity this year.

Finally, Ticketmaster, for the quarter, ticketing revenue was up 8%, while AOI was up 7%, and year-to-date revenue is up 9%, and AOI is up 7%, as we have processed over 300 million primary tickets, totaling over $15 billion in gross transaction value, up 5% year-on-year. As Michael said, our secondary ticketing gross transaction value is up 44% year-to-date. These growth rates along with our expectation of again delivering a net renewal rate of over 100% for the year, indicates that Ticketmaster's platform is continuing to deliver a great value proposition, to both fans and venues. For fans, our integrated primary and secondary is not only driving growth in our secondary business, but increasing overall conversion.

In general, we have seen that fans are 30% more likely to buy a ticket when they see both primary and secondary tickets together, versus just what's left of their primary options. And at the same time, our mobile offerings are making it easier for fans to buy and manage their tickets, and our continued rapid transition is further reinforcing Ticketmaster's multiplatform leadership. Our venue clients also continue to see the benefits of our ongoing technology investments, as we've had a big push in the mobile products for them as well this year, growing our mobile box office and mobile reporting products.

Looking at ticketing for the fourth quarter and full year, we expect to maintain our momentum with continued secondary growth, capture improvements in our cost structure, and have another strong fourth quarter of on sales for 2015. Collectively, we expect this to deliver mid-single digit AOI growth for the business for the full year. Overall, we had a great third quarter, and expect to deliver our fourth consecutive year of revenue AOI and free cash flow growth, and grow the profitability of each of our businesses.

And with that, I will turn the call over to Kathy, to take you through more details on our financials.

Thanks Joe. And good afternoon everyone. I will start with our results for the third quarter, revenue was $2.5 billion, up 11% from last year.

Concerts revenue was also up 11%, primarily due to more shows and higher attendance in North America from several successful stadium tours, along with increased sales in amphitheaters. Ticketing revenue was up 8%, driven by higher domestic resale fees, as a result of the continuing success of our TM Plus products, along with increases in primary ticket revenue.

Adjusted operating income for the third quarter was $258 million, up 17% from last year's $221 million. Concerts AOI was $83 million, up 17% from the strong stadium activity in North America. Ticketing AOI was $86 million, up 7% from the growth in domestic primary and resale revenue. Sponsorship and advertising AOI was $88 million, up 6%, driven by growth in international venue and festival sponsorships, and domestic online advertising. And Artist Nation AOI was $22 million, a $9 million increase over last year, from higher management commissions from existing managers and the addition of several new managers.

Operating income was $151 million this quarter, 19% higher than the $126 million reported last year, driven by the growth in AOI.

Net income in the third quarter was $105 million versus $44 million in 2013. The improvement in net income was driven by our higher operating income, lower income tax expenses this quarter associated with deferred tax benefits from acquisitions, and the loss on debt refinancing we had last year.

Now for the nine-month results. Revenue was $5.3 billion, up 9% over last year. The increase was driven by a 10% growth in concerts revenue, due to more shows and higher attendance in our North American amphitheaters and strong stadium tours, along with increased global touring activity. Ticketing revenue was up 9%, driven by higher domestic primary ticket volume and fees, along with higher resale ticket fees.

AOI for the nine months was $483 million, 11% higher than last year, as we grew profitability in all of our business segments. Concerts AOI increased by 17% to $117 million, from increased amphitheater and stadium activity in North America. Ticketing AOI was $232 million, a 7% increase from the growth domestically in primary and resale ticket sales. Sponsorship and advertising AOI grew 6% year-over-year to $163 million, due to the growth in North America's sponsorships and online advertising, along with increased venue sponsorships internationally. Artist Nation AOI grew from $20 million for the first 9 months of 2013 to $30 million in 2014, from higher management commissions.

Operating income was $194 million for the nine months, 27% ahead of the $153 million we would have reported last year, without the $38 million higher gain on disposal of assets, an increase consistent with our AOI growth. On a reported basis, our operating income was up $3 million from $191 million in 2013.

For the nine months, net income was $96 million, up from $39 million reported last year, with the growth coming from operating income, along with a $27 million decrease in our income tax expense, driven by a reduction in taxable foreign earnings, and deferred tax benefits associated with acquisitions. Free cash flow in the third quarter was $198 million, 19% higher than last year, driven by our higher AOI.

Free cash flow for the nine months was $308 million versus $283 million last year, with the growth primarily due to the increase in AOI, less higher CapEx and non controlling interest distributions.

As we noted in our last quarterly call, we still expect that free cash flow for the year as a percentage of AOI, will be roughly in line with our 2013 results.

Cash flow from operations was a negative $14 million for the nine months, compared to $265 million last year. This swing came from three of our working capital lines, all reflecting short-term timing impacts. Accounts Receivable were up about $90 million following the very high volume of stadium shows in the quarter, with several of the latter part of the quarter not yet settled at the end of September. Prepaid expenses and other assets were also up about $90 million, driven primarily by artist advances for tours in 2015. In general, we are more than willing to extend advances to more tours as we continue building our global concert business. Accrued liabilities and AP were down about $130 million, largely from the timing of ticketing client on sales versus last year. All three of these factors are merely short-term timing, and in general concerts remain an attractive working capital business. We expect much of this timing anomaly to work its way through the system by year end with more comparable levels of receivables and payables at that point.

As of September 30th after redeeming the $220 million of our original convertible debt and completing our largest quarter of the year in terms of show activity, we reported total cash of $1.4 billion. This includes $532 million of ticketing client cash and $186 million of net future concert event related case, leaving a free cash balance of $640 million, up approximately $100 million from this time last year.

Total event related deferred revenue as of September 30th, was $319 million, slightly higher than the $313 million we reported in September last year. Our total capital expenditures through September were $89 million, with $47 million spent for maintenance CapEx projects, and the remaining amount spent on revenue generating projects. For the full year 2014 we continue to expect that total capital expenditures will be approximately $135 million, around 2% of revenue.

After redeeming the full $220 million of our original convertible debt this quarter, our total debt was $2.1 billion as of September 30th. Our weighted average cost of debt excluding the debt discounts and including the debt premium on our term loans and notes was 4.3%. Our debt covenant currently requires a maximum leverage ratio of 5.25 times, and we are comfortably in compliance at below-4 times as of September 30th.

In the third quarter we delivered the strong results we expected, and we are excited about the growth that we delivered across all of the business segments. Looking forward to the end of the year, we continue to expect to deliver growth in revenue, AOI, and free cash flow, and to grow the overall profitability of each of our segments, while continuing to invest in and to build our businesses to set them up for continued growth in the future.

Thank you for joining us today for an overview of our record third quarter results. We will now open the call up for questions. Operator.

(Operator Instructions). We'll take our first question from Vasily Karasyov with Sterne Agee.

Thank you very much. Congratulations. I had a question on the secondary tickets market. Can you please quantity what percentage or what portion of the revenue growth came from secondary? I think in the 10-Q you said that the majority of your growth came from there. If you could give us an idea about the margin profile of that revenue, how different it is from the primary? Thank you.

So we said the secondary growth was up 44% year-to-date, and I'm not sure I fully understood the question, but the margin profile as we've said is very consistent with our primary tickets. We have margins that we expected over time as that business scales to be consistent with kind of that low to mid-20s range.

My question was, if you look at the revenue growth year-on-year, what percentage of the revenue increase came from secondary?

We're not breaking that out.

We'll take our next question from Amy Yong with Macquarie.

Thanks, one question and one follow-up, if I could. First, I was wondering if you could actually comment on some of the acquisitions that have been talked about in issue rags, including C3, also Greek Theater, and I guess now that you're wrapping up your CapEx spend, what are your priorities for free cash flow, and then just one really quick housekeeping question, Kathy, can you give us what the right share count is, given all of the different convertible activity that's been going, and what is the right number we should be using to go forward is? Thanks.

Hi, Amy, it's Michael. We historically have not commented on our acquisitions until we close them. I think it would be fair to say we've been very vocal on our priorities over the last couple of years, that we were continuing to grow our global concert business, whether that means the festival channels like we did with EDM. We've been very clear that we've been under serviced in our festival business in the US, a big hole for our business which really drives our ticketing and then sponsorship, and we're going to continue to grow internationally. I can't comment on the rumors, but it would make sense that we would be looking to acquire a strong festival company in the US, that we've outlined already as a priority for us for cash flow, and we're going to continue to evaluate. There are a lot of great global opportunities, and sizeable ones in the ticketing and concert space, that would continue to supercharge our growth, if the price and the return was at the right level.

Amy, on the share count on a basic level, I'd use the number on the front of the Q, which is 200.7, on a diluted basis, you're right because of the timing of when we bought in that convert, the diluted is a little bit high. And if you want to use the dilutive we use, I would take out about 8 million shares, which would take you down to about 213 million on a diluted basis, on a comparable basis.

Got it, thanks.

We'll take our next question from John Janedis with Jefferies, LLC.

Thank you. Can you talk a little bit more about what you're seeing in the sponsorship segment? Growth seems a little below trend year-to-date, and I'm wondering if there's anything timing for us to think about or maybe any change in renewal rates?

That's why we tried to give you some very specific numbers in terms of being up 10% on a contracted revenue basis relative to last year, to give you some comfort that even though what we have recognized thus far year-to-date is at a lower trend. We gave you that. We're over 90% sold, and we're up 10% year-on-year, so we think that should give some comfort that we'll continue to grow at that historical rate that we have done in the past few years, so it will be more fourth quarter backloaded this year.

Joe, on that 10% for example, is the average length the same, or has that been extended?

There's no material change in the duration of our average sponsorship deal.

Okay, great. Thanks. Maybe one unrelated question. I know it's early, but is there any evidence that your channel in Yahoo is driving growth or efficiencies across other parts of the Live Nation platform?

Well in the ecosystem, we know that any way we can continue to add ad units to our advertising business is how we very clearly outlined how we're going to continue to grow, so one of the holes in our portfolio to-date has been that video, so Yahoo was able to provide us enough eyeballs with our content, though my advertising team now, when they're walking in to deliver against those RFPs has an ad unit on video, so our sponsorship business was the sole benefit of that strategy.

Then on a secondary point, we don't have any evidence yet that scale would have mattered. We know from our research that the average fan when he is debating going to a concert, the casual fan, he spends a couple of weeks shopping. We know that the number one way that you can get a casual fan to press the buy button is by a live video of that artist, it is a very stimulating conversion tool. We do know that the more we scale and bring a high quality live experience to the fan, and add a buy button, we know it's also a great conversion mechanism for our core business, so it will be - core benefit is a sponsorship ad unit, and a longer term benefit is conversion around the ticket.

Great, thank you.

We'll take our next question from John Tinker with Maxim.

Thank you. 8% festival attendance growth, how much of that was organic?

That would be all basically organic, because we had a full year in. We started, we launched as we do every year, we organically launched across the globe from our various 30, 40 markets, we launch eight to ten festivals a year, and organically see which ones of those ones are able to sustain, MIA in Los Angeles, we launched a country one in Detroit. We launched a few across the UK and Europe. So mostly organic, and we'll continue to do both organic and bolt-ons to remain the leader in the festival segment.

And as a follow-up, as the festival business tends to have a margin of 25% as opposed to the promotion business, which can be sort of 2% to 4%, at some point would you see your margin in the concert division starting to tick up as festivals become a bigger percentage?

First of all, our revenue is so big on our main line business, that affecting the bottom line margin on our business, even with 65 festivals or 100 festivals is always just a hard math game, because of our massive growth across our 25,000 plus mainline shows. But the core to the question is why we're in sponsorship and festivals. Remember, a concert may have a 4% margin business at the door, but an amphitheater concert may be 4% at the door, but it's still a 20%, 30%, 40% margin business when you add sponsorship to it. When you have any type of concert where you control the environment, your sponsorship is going to be highly accretive to that proposition. So festivals in Europe are driven by sponsorship, and so are US ones, and they are a key product if you want to call to growing to your core sponsorship business.

Thanks. Good quarter.

Thank you.

(Operator Instructions). we'll take our next question from David Joyce with International Strategy and Investment Group.

Thank you. I was wondering if you could provide some more color as to your recent acquisitions in Belgium, does that provide you now with a full compliment of assets and activities there? If you could talk about what else you have got in that country? Secondly, how does Eventjoy fit into your ticketing product sets? Thank you.

Belgium is a perfect example of why our model and our scale works. We have a very large festival and concert business in Belgium. We have not had a ticketing business in Belgium, so we are always weighing the options of buying the large one, starting our own, or finding a smaller acquisition that provides us a faster ramp up and Belgium was a perfect example where we were able to find a relatively inexpensive back room, and overnight we have our content now with our Ticketmaster support from the UK, to be now a legitimate ticketing and concert business in Belgium. We're always looking where we have content in those 40 markets around the world, we would have an ongoing business development assessment on launch it or buy it, and with the best return, and Belgium is an example where that came to life and you'll continually see that model, and those two streams come together.

Eventjoy is similar to what we originally did with TicketWeb. We believe that Ticketmaster plus Ticketmaster Plus is obviously a fabulous mainstream brand that's going to continue to do and service its mainstream clients. We have a great company in TicketWeb, that's out there every day fighting other competitors on the GA club business, and we knew that we needed a do-it-yourself product, to be able to enter that do-it-yourself space. We wanted again to enter at a fairly low risk to understand the category, and then the magic with our scale is we like to go in low cost, learn, and then provide the scale of Ticketmaster to accelerate the growth. So Eventjoy, a really strong product team, we like the individuals, we like the product. We're going to learn a lot about that space this year, and we're already looking at ways that we can help attach the fire hose to propel that business in that space.

Great, thank you.

We'll take our final question from Ben Mogil with Stifel Financial.

Hi, good afternoon, thanks for taking my question. Michael, on the cost savings which you moved from $0.10 to $0.15 on the North American ticketing side, can you talk about what sort of drove the push forward, if you will about it? Then on the $0.35 target, do you see more upside from there, and then the a follow on, what about the international front, you can give us a timeline there around the ticket savings?

I'm going to let Joe take that one.

Ben, as you indicated we previously guided to $0.10 and just our overall technology investments that we're making are letting us move a little faster than we had thought three to six months ago, and we're taking out more costs aggressively as we can, to capture that for everybody. So combined with what we had already captured before this year, this is why we said we're more than halfway through the $0.35 target, and we think that overall we're on target or on track with next year getting to a run rate of $0.35. I don't think we're ready to declare that as something that we'll exceed at this point, but we certainly understand that over time one of the keys to Ticketmaster's success is we are truly omnipresent in all of the channels of online, mobile and so on, is having a very efficient cost structure-wise platform. Then our plan is yes, that as we get that technology fully deployed in the US, we then take that to our markets internationally. Again, I don't think we're ready for the public declaration on the timing of that, but that is absolutely the plan.

So maybe in the US, because obviously you're further ahead there, when do you think, you don't have to give me an actual date, but approximately when are you thinking that you can take the training wheels off of the new system and close down the legacy systems?

I think as we've talked, this is a redoing it as we go, modules being replaced by new modules. There are no training wheels in the approach that we are taking, we are redoing the pieces as we go. I think we will have complete products in our concert segment before long, that won't have any of the remnant core components of inventory management or eCommerce to them, and then we'll roll it out aligned with timing of the sports leagues, to those teams over the next couple of years.

Okay, that's great. Thank you very much.

Ladies and gentlemen, this concludes the Live Nation Entertainment third quarter 2014 earnings conference call. You may now disconnect.