This TheTicketingBusiness insights post examines Live Nation Entertainment’s latest results and the pivotal role played by Ticketmaster in the group’s performance. Strong on the surfance but are there signs of a slowdown?
The headlines of the Live Nation Entertainment Q1 2019 Results (PDF download here) stressed the overall growth in revenues, which has pleased the stock market, but there are a number of underlying matters which warrant further examination.
The world’s leading live entertainment company Live Nation Entertainment (LNE) ‘produces more concerts, sells more tickets, and connects more brands to music than anyone else in the world.’
However, despite the Promoter-led culture of LNE the Concerts, Festivals, and Venue Management businesses still don’t fundamentally contribute to the company ‘flywheel’ anywhere near the same financial scale that the Sponsorship & Advertising or Ticketing divisions do.
Additionally, since its formation in 2005 (as a spin-off from Clear Channel Entertainment) and then merger with Ticketmaster (in 2010), the LNE conglomerate has consistently failed to make an annual profit and pays no dividend to shareholders despite the historical increase in stock price.
Concerts: Every 15 Minutes… Somewhere in The World
Concert Revenues for the quarter were up $279M (27% Y-O-Y) which represented 76% of consolidated total revenue, up 6 points from Q1 2018.
But Concert Direct Expenses were also up $234M (29%), driving the Gross Margin down 1.5 points to 21.8%.
The number of Events were also up 12% Y-O-Y (15% North America / 6% International), as were attendees up 22% to 15M (31% North America / 9% International), with notable tours including Justine Timberlake, KISS and Travis Scott.
Overall Concert Operating Expenses were up $40M (13%) with the resulting Operating Loss equating to $59M, which was $5M and 7% better than Q1 2018.
Sponsorship: We talk to fans – When they’re truly listening
Seasonally Q1 is typically the lowest activity quarter for Sponsorship & Advertising but Revenue was $75M, up (1%) $0.5M Y-O-Y and contributed $32M in Operating Income, up 3% from prior year period.
Ticketmaster: ‘What’s Happening in (Select Your City)’
Q1 2019 Ticketing Revenues were down $35M (9% Y-O-Y) to $338M, representing 20% of consolidated revenue (down 5 points from Q1 2018).
The Company reported that this revenue decline was due to a strong number of Onsales experienced in Q4 2018, but by mid-March this sales trend had turned around, and through mid-April, Ticketmaster has apparently sold 4 million more tickets for events this year than at the same time in 2018. Based on a rough calculation of ticketing revenue and tickets sold, the average revenue per tickets appeared to decrease 4% from $7.02 to $6.75 in Q1 2019.
Q1 2019 Ticketing Direct expenses were also down $13M (10%), resulting in a slight 0.3 point Gross Margin percentage improvement to 66.9%.
Operating Expenses were flat at $183M but slightly up from 49% to 54% of revenue.
Overall Ticketing Operating Income declined to $43M down from the $65M reported in Q1 2018.
All Together: LNE Consolidated
At a Consolidated level despite the $245M Quarterly Revenue improvement (Y-O-Y), the overall Operating Loss was $24M – a 4x higher loss than Q1 2018. Direct Costs increased $220M and 24% driving Gross Margin down 3.8 points and 10% from 37.1% to 33.3%. SG&A increased $30M and 7% and Depreciation and Amortization increased $11M and 13%.
Overall net cash on the balance sheet increased to $2.7Bn, up $306M and 13%. Excluding client cash, the cash balance was $1.8Bn, up $310M and 21%.
It’s perhaps worth noting that cash balance for period ending 31 March 2018 was $2.9Bn on the cash flow statement compared to $2.4Bn on the balance sheet. As such, the cash flow statement shows a $265M decrease in cash versus the $306M increase shown on the balance sheet. TheTicketingBusiness still trying to reconcile the difference.
Adjusted Operating Income
‘AOI’ is a non-GAAP measure of Operating Income that includes a number of significant add-backs. These add-backs include (Q1 2019 add-back value in parenthesis) stock-based compensation expense ($13M), Depreciation and Amortization ($99M), Amortization of Non-recoupable Ticketing Contract Advances ($17M) and Acquisition Expenses ($10M).
Companies often will use a non-GAAP measurement that will adjust for the effects of one-time, non-recurring items to report an operating income number that better represents the ordinary operations of the business.
However, the AOI calculation includes items (e.g., amortization of non-recoupable advances and depreciation and amortization), which are often not considered extraordinary items in the ticketing industry but rather are normal business expenses.
As such, excluding these items results in a higher income figure than should be represented as ordinary course of business. (For the technically-minded – and as an example: non-recoupable advances are effectively marketing expense or advanced payments on client contracts. However, under the AOI definition, these costs would never be reflected in AOI. Excluding depreciation and amortization will also hide the impact of acquisition transactions where the Company may have overpaid for intangible assets).
Capital expenditures in Q1 2019 pursuant to the Annual Report were $62M, up $25M and 66% (Note: the supplemental financial data provided in the investor’s section of Live Nations website showed capital expenditures at $63M, up only $22M and 52%).
This significant increase may reflect:
a) more acquired venues requiring additional capital;
b) upgraded venues with revenue-generating upgrades ($18M of the $25M increased spend);
c) a sign of higher future capital requirements for venue maintenance ($7M of the $25M increased spend).
Annualized Q1 2019 capital spend would be ~$247M for the year; whereas the Company is forecasting $310M spend for 2019.
A deeper review of the performance by Ticketmaster reveals a number of key definitions and metrics:
Fee-Bearing Tickets is defined as Primary & Secondary ticketing sold via Ticketmaster systems or issued through Affiliates, whereas total non-fee-bearing tickets are estimated as Primary tickets processed via Ticketmaster systems, including its D-I-Y Platform, venue clients’ box offices, and season ticket packages.
In Q1 2019, Ticketmaster fee-bearing tickets declined by 3 million tickets Y-O-Y, a reduction of nearly 6% from Q1 2018.
The explanation for this downturn was the timing of Onsales for some 2019 events apparently shifting earlier to the fourth quarter of 2018.
The decline in fee-bearing volume therefore impacted the overall revenues across both Primary and Secondary ticket sales, predominately in North America.
Specifically, ticketing revenue decreased $34.7M during the three months ended March 31, 2019 as compared to the same period of the prior year.
Excluding the decrease of $6.9M related to currency impacts, revenue decreased $27.8M, or 7%, primarily due to lower North America ticket volume along with lower associated ticket fees driven by fewer higher priced concert events on sale in the quarter and, as mentioned earlier, partially driven by more Onsales for 2019 events in the fourth quarter of 2018.
Strong ‘theatre/mid-size venue’ performance
During the Q1 2019 Earnings Call greater detail was provided relating to a stronger than usual performance within the U.S. theatre division (500-6K capacity venues) which would have also lowered the average ticket face value and associated fees.
Nevertheless, Ticketmaster delivered its fourth highest Gross Transactional Value (GTV) quarter ever – trailing only its performance of Q1 2018, Q4 2017 & Q4 2018. (GTV is defined as total ticketing revenue including the ticket face value as well as associated service fees.)
Demand-based pricing growth
One driver for this has been the continued shift towards market-based pricing in particular growing the use of ‘Platinum Tickets’.
Michael Rapino (CEO LNE) commented that ‘amphitheatre pricing is up double digits this year, and both amphitheatres and arenas have seen an increase in pricing of over 30% across the past two years’.
He further offered that even with this improved pricing ‘we’re not seeing any pullback in demand for concerts as sell-through rates continue to be strong globally, across arenas, amphitheatres and stadiums, and from the best seats in the front to the lawn seats at our amphitheatres’.
Complimenting the re-pricing of the ticket, the Ticketmaster Secondary business has also been growing, identifying an $8Bn-$10Bn opportunity ‘still priced outside of the house from a consumer demand perspective’.
Revenue & Yield Management at work
Rapino acknowledged that for some Artists, there is a ‘right balance’ to be found between market-based pricing and what makes sense for their fan and their brand. He further emphasised that increasingly Artists are embracing the adoption of ‘Revenue Management’ strategies via Ticket product differentiation. Essentially these (multi-year, multi-event) Revenue Management strategies include:
- Pricing by Performance – Mid-Week Vs Weekend, Capitol Vs Region;
- Location – Stalls Versus Balcony, VIP, ‘Meet & Greet’, Festival ‘Golden Circle’, Soundcheck Ticketing;
- Timing – Early-Bird Pricing, Discounting, Standby Pricing;
- Variable Scaling – Changing the configuration of an auditorium between performances;
- Inventory control – ‘Slow Ticketing’ i.e. increasing or decreasing the amount of inventory available by adding shows or increasing allocations whilst ensuring ‘Supply (always) exceeds Demand’ albeit with resultant media scare over unsold events.
However, in the Live Nation model the overwhelming majority of the GTV (ticket face value and associated service fees) will be distributed to the Artist with a smaller element shared between the event promoter / producer, and then the hosting venue, event co-marketing partners, sponsors, affiliates or ticket retailer.
In order to partially address excess event capacity i.e. unsold inventory, Live Nation has now established an annual National Concert Week – in effect, a flash-sale mechanism, this year offering 2M tickets at $20.
Once Live Nation gets the consumer to the event then the strategy is to upsell F&B, Merchandise, Car Parking and other ancillary revenue opportunities – the latest initiative of which is Reserved Lawn Seating at Amphitheatres.
From a technology perspective, mobile is increasing the leading event discovery and purchase platform for Ticketmaster. In Q1 2019 46% of total tickets were sold via mobile and tablet devices, driving a 40% increase in LNE app installed customer base to over 60 million.
These app installs are viewed as critical by LNE as it gives a real-time channel to ticket purchasers, enabling teams, artists, the venues and brand partners to directly communicate too and engage with consumers whether via the smartphone or app.
This adoption of mobile has also assisted in the accelerated implementation of Ticketmaster ‘Presence’, now installed at over 500 venues with more than 135M expected to gain admission via the system this year.
Digital ticket transformation
Following the first year of digital ticketing with the NFL, Ticketmaster is expecting to see more teams shift to a purely digital model, with seven teams this year up from two last year, whilst shifting to encrypted barcodes give Rights Owners more control over how tickets are sold, distributed and resold.
This migration of clients and consumers to a digital ticketing environment will potentially allow Ticketmaster to technically ‘ring-fence’ global GTV, data and ticketing-related services enabling it to become the single most effective marketplace to sell tickets.
In summary, Q1 2019 despite the revenue-growth headline, there is nothing much to note:
- Revenues up, but (Concert) Losses are also up.
- Acquisitions of Promoters & Festivals, and occasionally Ticketing, to maintain growth, will undoubtedly continue.
- Ticket Pricing and Revenue Management are key drivers of the ‘River of Nickels’ strategy (as identified by Mark Wienkes, Goldman Sachs in 2008) i.e. all about the Incremental Revenues & Margin Maintenance.
- LNE have held Operating Costs increases to about half the increase in Revenue but the Direct Costs are increasing 40% faster than Revenue with a resulting decreased Gross Margin and 4x the Operating Loss.
- One of the most significant results was the decrease in Cash-Flow quarter-on-quarter from $1.1Bn in Q1 2018 to $306M in Q1 2019.
- Significant event onsales can obviously skew quarterly results and Q1 is typically a weak quarter so will need to review again in Q2.
Can the ‘flywheel’ maintain momentum and move the group to profitability? Wall Street has been mixed recently on Live Nation Entertainment. After making strong gains since January, the stock has effectively been flat since March, despite beating the consensus revenue estimate by almost 9%. Earlier in the year several analyst downgraded LYV including Citigroup and Zacks Investment Research. However, more recently several hedge funds and institutional investors have increased their positions. Overall, the markets remain bullish and investors are still jumping on the stock. How much longer can LNE maintain its impressive growth curve with Ticketmaster as the engine behind it?
Other articles in our Finance Insights series:
- (26 April 2019): StubHub’s performance in the wider eBay picture
- (19 April 2019): DEAG – Growing & diversifying the portfolio
- (4 April 2019): Eventbrite’s stock performance since IPO
- (22 March 2019): CTS Eventim’s dividends and performance
*ABOUT THIS ANALYSIS: This series of financial insights is provided by the The FP&A Team at TheTicketingBusiness. The FP&A Team comprises a group of industry finance experts who volunteer their expertise to provide ad hoc analysis of key industry financial, M&A, funding and investment news. All in an effort to better-inform the market and support the industry’s long term development. Any questions or feedback welcome to [email protected]
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