Live Nation's earning call yesterday provided rich insight into the largely positive numbers revealed by the live entertainment giant's Q1 earnings report, including details on how specific business areas are performing within the Live Nation structure.
Concerts drive the entire Live Nation machine, and COO Joe Bechtold noted that, through April, the company had already sold approximately half of its tickets for the year, with continued growth expected. Live Nation has also tackled a long-lived challenge for the live industry dating back to the shed boom of the 1990s: a glut of concerts in the warm weather months, and the reverse for October-March. Bechtold pointed out "a significant shift from Q2 into both Q1 and Q3." Shows in Q3 and Q1 primarily take place indoors, where reserved seats create higher ticket prices, and Bechtold says Live Nation grew show counts in arenas by 10% in Q1.
While it's worth noting that Live Nation is not in the arena business from a real estate perspective—they own/operate amphitheaters, clubs, and theaters. So they can't capture arena ancillary revenues like parking, concessions, and venue sponsorships. Still, grosses in arenas are typically significantly higher than those in sheds, where generally two-thirds of the house is GA seating. And arena shows are profitable and tap into a higher-end clientele and those seeking VIP experiences. Beyond that, Ticketmaster buildings generate revenues from transactions, and Live Nation has deals in place with many if not most arenas whereby they receive a financial taste well beyond the traditional concert promoter fee. Live Nation has leverage with arenas; the buildings crave content, and Live Nation has more content than anyone.
The same is true for stadiums, and one of the big storylines for the summer is the growth in stadium concerts. As was reported in Billboard, 2014 will be the strongest year for stadium shows in decades. Bechtold says attendance for Live Nation's stadium shows is projected to increase by over 50% for the quarter." Not only are more artists playing stadiums, those stadium shows that are on-sale are performing extremely well. For example, the Jay-Z/Beyonce On The Run co-headlining tour moved 500,000 tickets in three days last week, according to Live Nation president/CEO Michael Rapino, who remains bullish on the company's concert business, stating Live Nation will promote more than 23,000 shows in 40 countries this year.
Still, as CFO Kathy Willard noted, while the concert division's AOI improved 80%, it still operated at a loss of $2.6 million. Overall, LN saw a Q1 operating loss of $12 million, compared to a loss of $33 million last year. Net loss for the quarter was $32 million, almost a 50% decrease from last year. According to Willard, the improvement in the net loss "was driven by our higher operating income in the first quarter; lower interest expense, due to the refinancing of our debt in Q3 of last year, and a discrete one time tax benefit of $7 million, related to deferred tax liabilities recorded from an acquisition completed during the first quarter of 2014."
Rapino brought clarity to how LN's Artist Nation division (formerly Front Line) synergizes with the other divisions. Basically, more of Artist Nation's 250 acts are playing for Live Nation. "We are continuing to see this division as a feeding to our main concert division, which ultimately drives our on-site sponsorship and ticketing business," Rapino says. For the quarter, Artist Nation revenue was up 44%, with AOI at $5 million as opposed to a loss of $1 million for that period last year.
In large part, Artist Nation has been restructured since the resignation of former LN CEO and Front Line chairman Irving Azoff on New Year's Eve, 2012. Rapino says Live Nation spent last year streamlining and narrowing the focus of its management division. LN shifted away from Artist Nation "a lot of services and non-core businesses," including VIP, merch, and other businesses that basically didn't fit within the management construct. Today, Rapino describes Artist Nation as, "a very strong, single minded" division focused on managing acts and building careers.
Artist Nation is now firmly positioned as a pipeline for content, reporting directly to Rapino, and "much more integrated in our sponsorship, our ticketing and our concert division.” Rapino says Live Nation has doubled the amount of shows those 250 artists play for Live Nation. Management of successful acts is an inherently profitable business, but Rapino believes the division, when synergized with the rest of LN's businesses, the management division can drive profits for concerts, ticketing, and sponsorships. "If those 250 artists combined have a few thousand concerts, and now we have gone from promoting 300 of them to 600 of them, that's a great supply chain," Rapino explains. "We believe that if we add value to that division, we will continue to gather more concert market share from that division, if we have the best product out there. And that, in itself, even in the core business, you don't see reflected in the Artist Nation financials, but you do obviously see it reflected in our increased market share in our concert division."
On the sponsorship side, the 13% increase in ad units sold is significantly attributable to a 14% increase in traffic to the Live Nation platform. Rapino touts "large commitments" from blue chippers like Ford and O2, and growth in LN's digital platforms. "We continue to offer a unique proposition for advertisers, who want to engage with fans at scale on digital and on-site," he says. Bechtold adds that Live Nation has already generated about 75% of expected sponsorship revenue for the year, and half of planned online advertising sales.
Last week's announcement of the Live Nation online channel partnership with Yahoo! is considered a milestone venture by Rapino, and one that will crack the code on delivering revenue from online streaming of concerts. "While others have streamed shows in the past," Rapino points out, "only Live Nation, with the scale of 23,000 shows globally, can consistently deliver programming and establish a network with an ongoing advertising base. With this channel, we company-sell the advertising. So our advertising team has new ad units to sell, and we are attracting large commitments, that will drive advertising revenue from day one from this channel."
If the Yahoo! venture proves a success, Rapino says Live Nation will further leverage its content to the benefit of its sponsorship/advertising division. This basically targets Rapino's long-stated goal of broadening the razor-thin margins of live concert promotion beyond the actual site where the concert takes place.
On the Ticketmaster front, Live Nation continues to zone in on building market share in the secondary ticketing space, mostly by integrating primary and secondary ticket sales into one platform, a concept Rapino says research shows 90% of fans would value, and "a service we are uniquely positioned to provide, and now do." In April, Live Nation grew it's global resale volume by 40% over April of last year, and Rapino says they are tracking toward $1 billion in resale from the launch of their integrated platform through the year.
As far as cash flow, Live Nation appears to be in great shape. Willard says cash flow from operations was $366 million for the year-to-date, up $95 million over 2013, which she credits to the increase in AOI, higher deferred revenue from ticket sales for future events, and "timing of artist deposits," which were lower in the first quarter of 2014 compared to last year. As of March 31, Live Nation had cash of $1.6 billion, which Willard says includes $569 million in ticketing client cash and $697 million in net concert event related cash. Free cash for Q1 was $363 million.
And Live Nation is investing in itself. The firm spent about $11 million on maintenance and $10 million on revenue-generating additions to its properties, and projects about $130 million in cap ex for the year, with less than half of that spend on revenue generating projects.
While less important to investors than cash flow, the elephant in the room with Live Nation is its debt. As of March 31, total current and long-term debt, including capital leases, was $1.8 billion. Even so, Willard says LN is well within its debt covenant, which requires a maximum leverage ration of 5.25 times, "and we are comfortably in compliance of less than 3.5 times."