Live Nation Entertainment, Inc.
Q1 2013 Earnings Call Transcript

Published: 8 May 2013

[Operator:]

Good afternoon. My name is Carrie, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Live Nation Entertainment First Quarter 2013 Earnings Conference Call. Today's conference is being recorded. [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 risk and uncertainties that could cause actual results to differ, including statements relating to the company's anticipated financial performance, business prospects, new developments and similar matters. Please refer to Live Nation's SEC 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, reconciliation and other financial or statistical information to be discussed on this call can be found on www.livenation.com/investors. It is now my pleasure to turn the call over to Michael Rapino, President and Chief Executive Officer of Live Nation Entertainment.

[Michael Rapino:]

Good afternoon, and welcome to our first quarter 2013 conference call. I'm joined today by Joe Berchtold, our COO; and Kathy Willard, our CFO. Let me start with a review of the first quarter. And I'm pleased that we delivered overall growth, with revenue up 6% and AOI up 10%, led by Concerts and Sponsorship double-digit growth year-on-year, in both revenue and AOI. We continue to see strong global demand for live events driving this growth, and giving us confidence that we'll have another strong year in 2013. Through April, global ticket sales at Ticketmaster for events in 2013 were up 8%, with the Concerts segment up 18%. Our Live Nation Concert ticket sales were up 26%, outpacing the market, indicating we are continuing to build market share in Concerts. On our last call, I outlined our 5 strategic drivers that will lead us to our 2015 AOI and cash targets. First, we will grow market shares in Concerts and Ticketing by 5 million tickets through new events, global expansion and higher per event conversion. With Concert tickets year-to-date up double digits, I expect that we will deliver over 1/2 of this growth in 2013 alone. It makes me highly confident we can deliver this target by 2015. Second, we will drive event awareness and ticketing conversion by shifting advertising spend to more direct and efficient social and digital channels. This year, all of Live Nation's national tours are utilizing digital and social media. And through April, we almost doubled the share of spend in these channels to 20% of our total marketing spend. And we see this as a contributing factor to our double-digit growth in attendance per show in the first quarter. Third, we will continue to deliver rapid growth in our Sponsorship & Advertising business through 2015. With 15% growth in Sponsorship AOI during the first quarter, we continue to distinguish our platform as the most effective way to connect brands with music trends. Fourth, we will grow our market share in the secondary business. We are off to a strong start this year with our NFL, NBA and NHL secondary partnerships, with our gross transaction value through April up over 20% from last year. I expect this to accelerate further once we launch our Ticketmaster Plus, our new integrated inventory product this summer. And fifth, we will reduce ticketing cost through our reap platforming project. We expect the project to be more than 75% complete by the end of 2013, with cost savings starting to be realized in 2014 and continue on plan to save $0.35 a ticket in North America from the project. Our first quarter results and ticket sales for 2013 events give me confidence in our ability to deliver 2013 AOI revenue and cash flow as expected with our 3-year plan. I will now turn the call over to Joe Berchtold, our COO, who will take you through a divisional update.

[Joe Berchtold:]

Thanks, Michael. First, on Concerts, Live Nation's Concerts revenue for the first quarter was up 14% and AOI improved by almost 50% versus 2012. The first quarter performance was driven by a 12% increase in global attendance, and in North America attendance was up 16% with a 33% increase in arena shows led by sellout tours with Lady Gaga, Rihanna and Maroon 5. Internationally, attendance was up 7% with particular strength coming out of Australia, with Red Hot Chili Peppers and Cirque du Soleil and Girls Aloud in Europe. Looking at our Concert ticket sales for all 2013 shows, we were up 22% year-on-year as of the end of the first quarter, with consistent growth in both North America and our international markets. We had 7 artists sell over 500,000 tickets each for our tours so far this year

[Elizabeth Katheleen Willard:]

Thanks, Joe, and good afternoon, everyone. Today, I will provide some more details about our first quarter results, and I will discuss what we see ahead for the rest of 2013. Let me start with the first quarter results. As you heard from Michael, we delivered strong results with growth in revenue and adjusted operating income, and also improved our operating income by 22%. For the first quarter, revenue was $924 million, up 6% over the same period in 2012. This increase was driven by Concerts, which improved by 14% compared to last year, through higher overall attendance, increased global touring activity with Lady Gaga and Rihanna on tour, and more North America arena shows and growth in Australia. Adjusted operating income for the first quarter grew 10% to $53 million, as compared to $48 million in 2012. Concerts drove this AOI growth, with a 48% increase from higher show count and attendance in North America, and growth in emerging markets including Australia. Sponsorship & Advertising AOI was up 15%, driven by growth in online advertising and sponsorship-related to venues. For the first 3 months of 2013, our overall AOI margin was 6%, which is flat compared to first quarter of 2012. In the first quarter, we had an operating loss of $33 million, compared to a $43 million loss last year, a 22% improvement. This was driven by the improved results in our Concerts segment and also led to an improvement in our net loss for the quarter, which was $63 million compared to $69 million last year. Free cash flow was $14 million in the first quarter compared to $24 million last year. This decrease year-over-year was due to a cash tax refund of $26 million that we received in 2012. Cash flow from operations was $270 million for the quarter, up 2% over last year. As of March 31, we had total cash of $1.2 billion, which includes $441 million in ticketing client cash and $503 million in net concert event-related cash. Our free cash was $302 million. Our total capital expenditures for the first quarter were $22 million. Approximately $12 million was maintenance expenditures and $10 million on revenue-generating additions. This spend is slightly lower than last year's $23 million at this time, and we continue to expect that our total capital expenditures for 2013 will be approximately $120 million. Total event-related deferred revenue was $774 million as of March 2013, as compared to $613 million in 2012, due to higher ticket sales for 2013 Concerts, which are up 22%, as compared to this time last year. This increase in deferred revenue and Concerts ticket sales, to date this year, provides strong momentum for the summer concert season. As of March 31, our total current and long-term debt, including capital leases was $1.73 billion. Our weighted average cost of debt, excluding debt discounts is 5.2%. We continue to remain comfortably in compliance with our credit facility debt covenant requirements. As of March 31, our total debt-to-EBITDA ratio was under 4x versus the maximum of 4.5x, and our interest coverage ratio of EBITDA to net interest expense was over 4.5x versus the minimum ratio of 3x. While our weighted average cost of debt is at a historic low of 5.2%, we continue to consider alternatives to take advantage of the very favorable interest rate environment, in both the senior debt and high-yield markets. We delivered great results for the first quarter of 2013. Looking to the remainder of the year, we continue to focus on generating improved profitability while investing in the future growth of our business through our ticketing platform, as well as expansion in mobile, social and retail technology. Overall, our early results are solid, and we remain confident in our growth expectations for the year. Specifically, in 2013, we expect to deliver substantial growth in Concerts AOI, as Joe noted. Based on tour and festival timing this year, we expect to see some shift in activity from Q2 to Q3. We expect Sponsorship & Advertising to continue its steady high single to low double-digit AOI growth, and we expect Ticketing's AOI to remain flat to slightly down, due to the investments in our ticketing platform and the loss of the 2012 Olympics earnings from last year. As a result, we currently expect margin improvement for the year in Concerts, while our Ticketing and Sponsorship & Advertising segments margins will remain essentially flat to 2012. On our cash flow, we expect an increase of cash taxes to be paid in 2013, of roughly $40 million over last year because of our tax refunds received in 2012, along with improved AOI this year in taxpaying jurisdictions. Despite this cash tax increase, we currently expect free cash flow to still be at or above last year's level, based on our expected improvements in operations. Thank you for joining us today, and we will now open up the call for questions. Operator?

[Operator:]

[Operator Instructions] And we'll take our first question from Doug Arthur.

[Douglas M. Arthur:]

Kathy, Artist Nation AOI for the year, I think you had said on the fourth quarter conference call, you were looking, given all the transition in management and changes there, flat for the year. Is that still the outlook, or is it based on Q1, could you do a little bit better there?

[Joe Berchtold:]

I think -- this is Joe, Doug. I think flat is still probably our best guess with the visibility we have at this point. We don't see a lot of movement from there.

[Douglas M. Arthur:]

Okay. Then a follow-up, Joe, for you. You're adding a lot of amphitheater shows this summer. Are you confident you can, obviously, you are, given your guidance, manage that growth profitably with higher margins?

[Joe Berchtold:]

Well, I think probably in our viewpoint, more important than the number of additional shows is how the shows themselves perform. And as I said, our expectation, you can do the math off of the -- off of what we gave you on ticket sales, is we think that our attendance per show will be up and our profitability per show will be up. That's really what matters most to us.

[Operator:]

And we'll take our next question from John Healy with Northcoast Research.

[John M. Healy:]

I wanted to ask just a little bit about the outlook for the Ticketmaster business. I think in your prepared remarks, you mentioned kind of flattish for the year in terms of -- flat to maybe, I think, just slightly up in terms of volumes. With just the strength you're seeing in the concert market, let alone what you're seeing specifically at Live Nation, where are you seeing the give-back in terms of the volumes? Or is there something in the numbers that might impact kind of the reported volume statistics on a year-over-year basis?

[Joe Berchtold:]

Yes. 100%. Remember, Ticketmaster counts the ticket sale when the sale is made, and Live Nation counts the ticket sale when the show occurs. So when Ticketmaster has a big Q4, which are all the Pink and Rihanna presales for 2013, they're counting that ticket sale and that revenue in Q4. We're not counting the sold-out Rihanna, or Pink tour until it happens now. So when we say ticket, Live Nation's ticket sales for 2013 events are up 26%, to look at Ticketmaster, and to put it on apples-to-apples, we'd also have to count Ticketmaster November, December ticket sales for anything that was for a 2013 show, to give you apples-to-apples. So overall, you're going to see, if you just do a 2013 where more tickets flow through Ticketmaster, regardless of whether the sale was in December or in the year '13, the answer will be yes, the business will be up, tickets will be up as will the Concerts.

[John M. Healy:]

Okay, no, that's helpful. I appreciate that. And I guess just a, kind of a, gauge your temperature in terms of the overall health of the business and what you see out there from the consumer, I thought your comments regarding Europe at the margin were probably a bit more optimistic than I would have expected. You seem like you're very comfortable with the summer lineup. Do you feel like you're incrementally more positive about the business and what you're seeing out there relative to maybe where you were 2 months ago when we last spoke? Are we right in picking it up that maybe the business is operating maybe a little bit ahead of where you expected maybe 2 months ago?

[Joe Berchtold:]

I think that's a fair assessment. I think we're feeling, on a global basis -- when you're sitting with 26% ticket sales up year-over-year and you're as big as we are to start with, as you know those are big gains on a big base. So we're very confident that it's a strong season. Consumer seems to be coming back very strongly, both in America and in Europe. And remember, most of our business in Europe is in the North. So I'm not betting on a Spain or an Italy recovery, but in Northern Europe where the bulk of our volume is, Ireland and England, London, Paris, Sweden, the Nordics, Holland, those markets seem to be doing very well year-over-year. And a lot of it has to do with our teams just executing a lot better this year than last year. We bought smarter. We reduced some risky events. We shut down some festivals that weren't working. So I think we'll grow our business, both through execution and a slight increase in the consumer spend over there. And in North America, the consumer seems to be coming back very strong to the show.

[John M. Healy:]

Okay, great. And this is just a last question. I think in your remarks you mentioned maybe a reallocating some resources on non-core assets. And I thought you were talking maybe about the focus in terms of where you were looking to promote shows. I wasn't sure if that was by a specific genre of music or in certain areas of the country. So I was hoping to understand a little bit more about that statement, as well as your thoughts on kind of more future growth. I think there were some press reports out in the last week or 2 about some interest in some electronic music opportunities. What does the acquisition pipeline look like? And should we expect a bit more activity there in the not too distant future?

[Joe Berchtold:]

Yes, I think we've been consistent that we think that there's 2 opportunities to continue to grow the business from a portfolio perspective. One is always an international expansion, where you continually see us whether organically, as we did in Russia, or whether we bolt on a strong promoter like we did in Australia. But we think there's still great opportunity in Latin America and in the Pacific Rim, and also in Eastern Europe. So lots of markets for us to continue to expand, both Live Nation and our Ticketing business. You'll see us do that. And then on the other end, think about we have 100 offices in over 35, 40 countries. Those are the outlets. But what's really important is that you're putting the content through. So the more shows we buy, the more content we have, the more fans that will walk through the doors. Ultimately, our business model works and ultimately, sponsorship lays on top of that. So we're always looking at our portfolio to make sure we got a diverse and renewed content platform. So country happens to be on fire in North America. So we're continuing to look, and we launched a country festival in Michigan this year. If you look around the world, we've been saying it for the last couple of years, electronic music is a global phenomenon globally. Every country is looking, from a club to Vegas to a festival, to look to get into that space. So we're going to look to build upon our cream fields and hard acquisitions, and if we can find the right deal to build that piece of our business, we will. And we've talked about continuing to grow our festival business in North America. It's probably the one piece of the overall portfolio that we're under-serviced in. So we think we'll accomplish that through electronic music. You look at a company like Insomniac, they have the second largest festival in the world in Vegas, after Rock in Rio, 300,000 tickets. So they are -- electronic music is truly a festival business in itself. So we'll look to either electronic music and we'll look to traditional festivals in North America, whether organically or some bolt-on acquisitions to keep driving our portfolio.

[Operator:]

[Operator Instructions] We'll take our next question from John Tinker with Maxim Group.

[John Tinker:]

Just a follow-up on Insomniac, what kind of multiples do you have to pay to buy into these festivals now, if the cost was $50 million?

[Michael Rapino:]

It's a good question, John. You're straight out there. You know we're not going to comment on anything until we get deals done. But I would say that, good properties, festivals that are doing really well, are probably going to get a decent multiple. So every deal is different. Lots of content out there. I would say, other -- we're certainly -- unlike maybe some others out there, we're not desperate, nor do we need to buy a lot. So we buy, and if we think that we have the right festival to add to our portfolio, we like buying -- we don't like buying 100% of these businesses. We like the entrepreneur to have some upside and risk in the game with us to build the businesses. So we tend to look for businesses where we think they've got a strong foundation, an exceptional entrepreneur at the helm. And more importantly, that they can use our distribution to grow that asset like we've done with Festival Republic in Europe, like we've done with Roc Nation here. So we'll continue to look for the right acquisition that we think works with our distribution. And then ultimately, we look for, is regardless of maybe what that asset makes today, where can we take that business over the next 2, 3 years, and can we grow that business with a strong return for our shareholders, when you put their content plus our distribution together.

[John Tinker:]

You mentioned that mobile, it's adding -- it's about 10% of ticket sales. Is there any difference in the kind of person who buys mobile rather than online? And that do you think you're reaching a new audience in any way, or is this getting rid of some of the inefficiency out there where people haven't heard of the tickets, perhaps hearing of them now, and then it's easy to buy? Or is this just business as usual, but just a different platform?

[Michael Rapino:]

We think long-term, it's absolutely an aid to conversion in selling more tickets to, let's call it the casual buyer. We think any time that you can make something this convenient versus having to run back to your computer and log in, that if any time you're sitting with that phone in the car or wherever you may be, and you can instantly buy 2 tickets to the Rihanna show, we think that's going to drive ticket sales. We know from early data that when we send out our email blasts and our mobile blasts, that you look at -- a traditional email converts online at 10% to 15%. When you start sending out mobile alerts, they're converting somewhere in the 20% to 30% range because you're delivering probably a context -- a content-rich message and an immediacy. And we're seeing some great conversion on mobile. Believe it or not, the fan is young and old. We sold out a Paul McCartney show in Canada on a mobile presale. So let's assume that's an older demo, as well as electronic music and Rihanna. So young and old, I think the consumer just looks at it as an efficient channel. We love it because we get to take all the same economics to that channel, and we get to start directly communicating with users of mobile alerts and bringing email to live -- to a conversion on your mobile phone. So we think it will be a big part of the future of how we increase our conversion rate.

[John Tinker:]

Would you warrant a guess as to what the percentage of business might be, desktop to mobile, in 2 or 3 years?

[Michael Rapino:]

I think it's just -- it's only limited right now, really by the adoption of the ecosystem versus the consumer. So I think as you see all ticketing companies, ourselves included, ramping up our apps, our transferability and more importantly, all the scanner equipment needed at the venues, but over the next -- so we're equipping daily, converting venues to make sure they're able to scan that digital ticket. And I think over the next few years, you'll see that 10% double and triple fairly fast as the system catches up to the consumer.

[Operator:]

And we'll take a question from Doug Arthur with Evercore.

[Douglas M. Arthur:]

Yes, Michael, this might be a little bit repetitive, but can you just remind us with the Ticketmaster re-platforming, what are -- for the venue operator, going from kind of old to new system, what are the 3 key upsides for the venue operator when this thing is finally up and running 100%?

[Michael Rapino:]

Just from a venue perspective?

[Douglas M. Arthur:]

Yes.

[Michael Rapino:]

Not our end. Well, for a venue, Ticketmaster is truly a partner in the ticket-selling operations. So if you are a venue that has our box office, installed our software, you trained on our platform, we're your support team, we are your complete, let's call it Salesforce.com. We're the center hub, where all of those tickets flowing through your venue, your biggest revenue stream, the heartbeat of your business. To date, we've been a fairly transaction-based platform, as I've shown you at our presentations, green screen and fairly bulky. As we've now started to launch already some new business apps, reporting and inventory, we start to become a much deeper partner with you. So on the first and most important, some of the venues that now have our new platform tools or part of the tools, we're providing incredible analytics and reporting on ticket sales. So on our old system, you knew that you sold 5,000 tickets at 10

[Operator:]

And we'll take a question from Andrew Rittenberry with Jennison.

[Andrew Rittenberry:]

A question for Joe or Michael. Joe, I think you mentioned the secondary product integration, that you're going to roll that out in the third quarter. Would you guys mind filling us on your strategy there, and I think you mentioned you were going to market that with a couple of large tours, et cetera. But can you just kind of fill us in on the product, and how you're going to market that, et cetera?

[Michael Rapino:]

So we're going to launch TM Plus this summer. We've already got a head start, obviously, with the sports business because we have relationships with the NHL, NBA and NFL. So we are the official secondary partner with those 3 leagues. So you'll start to see those teams and venues, a part of our integrated inventory this summer. And then you'll also start to see, as we're selling through the concert season, you'll start to see, first, most importantly, we'll start with our Live Nation shows since we can help kind of sell those in for our partner, and then we'll expand out from there. So we're looking to beta launch it in July. And we have adoption rates from July on to December on getting inventory up and available, as we've kind of missed the concert season on purpose because of the load. So we're ready for next summer in terms of the full season, but we'll still be able to catch the back end of the year in the Concert business, and we'll be able to get most of the on-sales for the sports leagues for the fall. So we're in selling-in through all of the different constituents right now. I think our sales pitch is easy, honestly. It's a sales pitch that starts with, we work for you, the content. You're not participating today, there's $4 billion sitting somewhere else. You don't have the data. You don't participate in the revenue. We think that you should be. So we're working for you and we want you to share in some of that revenue and share in some of that data, and it seems to be well received to date.

[Andrew Rittenberry:]

Got it. I guess one more follow-up question. I think it's the first call in a couple of years where no one's asked about the CTS arbitration, so I guess I'll ask about it. Any update there to share with us?

[Michael Rapino:]

No, it's almost the old question at this point. But we continue to think that it's going to be soon. We're nearly hearing from the arbitrator and the counsel that a decision will be coming soon. So we would assume that, again, as I've said for 2 years, we think it's coming soon.

[Operator:]

And we'll take our final question from Ben Mogil with Stifel, Nicolaus.

[Benjamin E. Mogil:]

Kathy, on the free cash flow guidance that you gave, are you including all CapEx, like revenue and maintenance, or are you just including maintenance? And then how do you also see in that number the distribution to minority partners, sort of when viewed on a year-over-year basis?

[Elizabeth Katheleen Willard:]

So it is our definition of free cash flow, so it does not include revenue-generating, when I'm talking about that guidance. And we don't see dramatic changes in our minority-interest partners. Year-over-year, we will probably see a little bit of growth in Europe coming out of on Concerts and that will drive that some. But that number won't dramatically increase.

[Benjamin E. Mogil:]

And can you remind us what is your -- what was your maintenance CapEx number for '12, and the breakdown of what do you think it will be for '13?

[Elizabeth Katheleen Willard:]

Yes. 2012's maintenance was $62 million and expecting a pretty similar number for 2013.

[Michael Rapino:]

That's TM and Live Nation.

[Elizabeth Katheleen Willard:]

Yes, that's combined.

[Michael Rapino:]

That's everything.

[Benjamin E. Mogil:]

Sure. And then Michael, question for you on the TicketsNow platform. The sports leagues, at least right now, have minimum floors. Can you talk about, the best that you can given confidentiality, et cetera, what conversations you've have with them about sort of looking to remove some of them to make the site better for them effectively?

[Michael Rapino:]

Better, sorry, what was that -- repeat the last part?

[Benjamin E. Mogil:]

Sure. Well, I mean, have you -- what kind of conversations have you had with the sports leagues about removing some of the price floors that they basically implemented on TicketsNow, that if you can get rid of those floors, that would obviously make that product for their customers more competitive with some of the other retail sites out there? What kind of, sort of conversations -- and better for them, obviously, because they participate in the revenue as well, then being in the leagues. Can you sort of talk about where their minds are at around price floors, et cetera?

[Michael Rapino:]

Well, I think we -- as I said already, we're in business with content, so we're going to do what's right from their perspective. And I think, there's been lots of talk about what MLB has done and selling tickets in the nosebleeds too cheaply. So I think it's a fine line that if you're going to open up some of the doors to secondary, to try to take advantage of some of the inefficiencies in the top-end pricing, and you also have to protect your core customers who are buying everyday on the bottom end. So we don't look at the advantage of secondary to figure out how to sell discount tickets. We look at secondary as an opportunity to figure out how to capture some of the inefficient low-priced top end. So I don't think you'll see floors removed. I think that's a pretty smart basis for the product. But to your core idea, just so we're clear, our goal in life isn't that TicketsNow grows dramatically on its own and competes against StubHub. Our strategy is that Ticket Plus, the Ticketmaster Plus that we'll launch this fall or the spring/summer will be the way that we best are able to take -- tackle the secondary business. So we think our main front-door, having that big traffic that Ticketmaster gathers, is the best way to sell you a primary and/or a secondary ticket when you come shopping the first time.

[Benjamin E. Mogil:]

How long is the StubHub MLB deal? Do you know?

[Michael Rapino:]

I don't know.

[Benjamin E. Mogil:]

Okay. And have you gotten any feedback from MLB owners? I mean I know, just because you obviously, you sell tickets from MLB as well. Any feedback from them on terms of how they're feeling about that deal so far?

[Michael Rapino:]

We don't comment on the other guys. We just know what the leagues are doing with us at this point, and we seem to be fulfilling most of their needs on the business right now, and lots of opportunity on the upside.

[Operator:]

And this concludes our question-and-answer session. I will turn the call back over to Mr. Rapino for closing remarks.

[Michael Rapino:]

Thank you, everybody. Have a great summer, and we'll talk to you on Q3.

[Operator:]

Ladies and gentlemen, this concludes the Live Nation Entertainment First Quarter 2013 Earnings Conference Call.