Live Nation Entertainment, Inc. (LYV) Earnings Call Transcript & Summary

Hello, everybody. Good afternoon. Quick disclosure statement. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/research disclosures. If you have any questions, please reach out to your Morgan Stanley sales rep. I said good afternoon. I should also say good morning to the folks on the West Coast, including our next guest. I want to thank Joe Berchtold, the President of Live Nation, for being back with us today, Joe, it's good to see you again.

Thanks. Appreciate you having me on, Ben. Great to see you.

So I know you just reported last week, we actually just got off interviewing with Warner Music's CEO. So we've been talking quite a bit about the return to live across the music space. And I'm not going to ask you about your balance sheet much today, so that's probably also a nice relief for you. Let's talk about what you guys are up to right now. So we seem to be getting ready to reopen. And I'm imagining for Live Nation, turning the lights back on is not as simple as it sounds. So maybe you can just spend a few minutes just talking about what you guys are up to as we reopen and what that's going to mean for the financials over the next couple of quarters.

Sure. And As you know, we're doing this on a global basis in 40 countries. So just if you want to add a degree or 2 of complexity here. But the good news is we have teams in all the markets, and we are taking it a market-by-market approach. I think the U.K. is the leading example of what's really working well right now. On a macro basis, obviously, they got out fast in the vaccines. U.S. is catching up there. But importantly, what they've also done that matters a lot for us is they came out of the plan last week. They came out and they said, "Okay, based on hitting thresholds for vaccines, for COVID cases, for hospitalizations," their factors, they said, "Based on that, you can now count on -- if it hits this level, this is when we'll open up to this extent, culminating in late June being fully open for everything." So first, importantly, that lets us plan. So we talked about we need 90 days when we have a festival or a show that lets us bringing back our people, get the show marketed, on sale, open the venue, gives the artist the time they need to prepare. Let's the ecosystem market scale. And because we have those dates, we can then say -- we can then make an informed decision. Do we think it all happens by the end of June? Do we give it a couple of week buffer to be safe? How do we want to do it? But let's just do it, and lets us plan. Probably even more importantly, because at the end of the day we'll scramble and get some stuff going, is it really has had a big impact on the consumer side. The consumer is knowing, what can I plan, when, has been massively important. So in the U.K., as soon as they announce these guidelines, people look at their summer calendars and said, "I'm going to Creamfields, I'm going to Reading, I'm going to Leeds." We had an explosion in ticket 6. And so that has, if you will, restarted the ecosystem because we know the demand is there. We can get going to every stat you want on that and we've given those a lot. We know the supply is there. Again, we've given those rates. And we know we've got the infrastructure to pull it off. The question is, how do we get those all launched? And so that's probably the best example. I would love it if Jeffrey [indiscernible] and his team could come out with that for the U.S. And if not, we need to start to get that on a state-by-state basis so that we can play on and understand at what point do we have enough states with enough scale. It looks like the south is moving fast already from the announcements we've seen this week. And then I think you're starting to see a more aggressive positioning or more aggressive actions and plans by some of the big states like California and New York, that I think for a while, we're taking a more conservative stance. I think some of the signaling -- some of the steps they can more recently give us hopefully over the next 30 to 45 days, we get plans out of those states. And we have plans out of those states. We get plans out of the south. The rest will start to follow, which will really let us get to where we think we can be, certainly from a science standpoint of having outdoor shows at capacity, at scale this summer.

And as you point out, summer is typically a very big festival period with a lot of the more tours in the fall. So does that line up, I guess, reasonably well, so you've got that sort of one-off buffer you can work through?

Well, yes, it's -- I think everything is working for us in the regard of, again, the science says that outdoor transmission is pick your order of magnitude lower than indoor because of the ventilation issues. So that says that as we're opening, that should be the safest. You've got to take into account, health and sanitary protocols and all that, and we can get into some of those steps. But in general, outdoor, much safer. So getting the outdoor amphitheaters and festivals open seems like a logical first step. The benefit for us also is because those are the major venues and large volume of fans where we actually operate the venue, that means we get all the food and beverage, we get the parking, we get all of the money. And our 2 most valuable fans that we have as a company, they are the fans in our amphitheaters and the fans at our festivals. So from a getting us ramped up and going, starting to generate some contribution margin, if we can get a good chunk of the amp season, a good chunk of our festivals that's the best way also economically for us to get moving.

Yes. That makes sense. I was speaking with Greg Maffei earlier this week and talking about the outlook for your business beyond the pandemic. And even heard an interview with John Malone recently, where he also believes your business will be stronger on the other side of this than it was going in. You guys have delineated some things for us back in November that you've been working on while you've been in this forced experiment. But what do you think are the 1, 2 or 3 things that are going to be most powerful that make this a even better business on the other side than what we saw pre-pandemic, if you agree with his thesis?

I never disagree with John or Greg. Really one of the most insightful guys out there. So I think that if you distill it down, our business model, our strategy is pretty simple. How do we continue to drive more and more fans into our ecosystem and then how do we most effectively monetize those fans? And so if you break it all up into those pieces. On the more and more fans, we are clearly entering a multiyear run of elevated supply and demand as we come out of this. We've given these numbers. If you look at the historical touring cycles and given the interruption of '20 and '21, you have a very large pent-up supply issue. Roughly 45 artists would naturally be on cycle in 2022, of the large artists over 500,000 fans per tour versus mid-20s, normally. That's not all going to go in '22, but that's going to create a multi-year increase in your supply because some of those will go every other year, some every third year or some 2 years out of 3. But logically, that will create, at least, a 3-year elevated supply. Supply creates the demand, right? Because the demand out there is actually much, much larger than the number of people that go to shows. It's because you have a tremendous latent demand of people waiting to go to the show of the artists they want to see. So we are very confident that the increase in demand -- or sorry increase in supply will naturally have a big impact on an increase of demand. And then all of our surveys, right, we talk about 95% of people want to go back as soon as they can. 64% of fans say they want to go to more shows to make up for lost time. 83% of fans holding on to their tickets. Right, all the empirical data reinforces that, that demand is there. So we're going to have an accelerated supply/demand dynamic. And we're going to continue to do what we've always done coming out of this, which is that we're going to continue to be acquisitive. We're going to continue to look for bolt-ons to bring us into new market whether those new markets or new countries. Continue to be very excited about Mexico and Latin America as they get through this or it's continuing to be super local in terms of how we go after every market to make sure we're serving every market as richly as we can. So those steps say that the feeding of our ecosystem, the step 1, will absolutely be stronger than where we thought we were sitting here a year ago at this time. And then how are we monetizing it? So again, step 1, we're taking $200 million out of our cost structure. And taking costs out is hard when you have been where we've been at for the last 10 years, which is driving double-digit growth year in and year out because then you're always having this conversation or debate with yourself on, "Do I take the risk of slowing down the growth rates", which is really how you drive the value ultimately for shareholders for a onetime cost reduction? It's a hard trade-off to me. Well, we've done the opposite, obviously, for the past year but we stopped, and we took out $950 million at cost last year. And in some regards, while you never want to go through it this way, it's easier to take $950 million out and add 750 million back to end up with 200 million less than it is to take $200 million out, right? Because you're debating the margin if you're trying to go from your current base down. But when you truly 0 base it and you ask yourself, "Am I doing things the most efficient, the most effective way, how can I do it better." We have incredibly talented people. They've had the time to stop work through that and figure out what is it we're going to do differently. So we're taking those costs out. So again, so that just is a more efficient system, lower cost, but we also think more nimble and ultimately more effective. And then there's the array of pieces on how do we better monetize it. We look for some new revenue streams. Are moving into streaming, the acquisition of Veeps. We think -- we don't know the scale of that. We don't know exactly if that's a product, is it a feature. But we do think it -- there are fans out there who are going to not be able to go to the show. It's not in their city, it's sold out, a variety of reasons. They'd love to watch the stream. And we think that we can use our platform, our infrastructure of amphitheaters, theaters, clubs, festivals, to have some infrastructure in place that makes us low cost at the acquisition of those streams. And we can leverage Ticketmaster on distribution to have a low customer acquisition cost. So we can very efficiently provide for our thousands of artists that we work with the option of do you want to add a stream to a show or multiple shows in a tour, and that's an incremental revenue stream for them. And because it's an incremental revenue stream for them, and we participate that incremental revenue stream for us as well. So that's an area of it, I would call it a continued expansion of how we build that flywheel and monetize it. Clearly, a big area has been Ticketmaster, and we've talked a lot over time about the digital ticketing. This is absolutely going to accelerate digital ticketing from simple health and safety, touch lists and know the fan standpoint, it's going to accelerate digital ticketing. We need to be able to offer in our venues the ability to order and pick up and not wait in line, to go through and go into the venue on a touchless basis to start ordering -- buying merch can be challenging because you're in a scrum, not even often the cleanest of lines, but being able to order it and pick it up. So those will all be advances that we'll have, which will improve the fan experience, but also reduce friction. And obviously, just when you read is friction in anything, more of it happens, right? So if you reduce friction in food and beverage, you'll sell more food and beverage. Reduce friction in merch, we'll sell them on merch. So that I absolutely expect will accelerate to be adopted at a higher level. That will have direct benefits for the fan, for the on-venue, and then it will accelerate some of the things that we talked about on the data side, that then further plays into the benefit of our knowing our fans or being able to market to them for additional shows they going to be interested, are being able to create value working with our sponsors in terms of enabling them to provide a direct value proposition to fans. So the whole system starts to work better because of this. Again we don't want to go through what we've done in the past year again, but absolutely across all the pieces of our business, we're finding ways to do it better. And we're finding ways to either increase how we think we can monetize that fan experience or add some new legs to it.

Great. That's a great comprehensive answer. I should have mentioned at the outset if people have questions for Joe, go ahead and layer them into the webcast, and I'll relay them to him. You mentioned digital ticketing. And I always tell people if you want to understand the digital ticketing opportunity, go read the transcript of Joe and my conversation in San Francisco, 2 people who had no idea was about to happen for the next year. But I think at the time, you articulated the beginnings of, I think, a revenue opportunity and one that might start kicking in, in '21, which is probably not realistic, given what we've been through. But what is the time frame to getting presence deployed and enough scale globally to kind of turn this into a revenue per fan driver, which I think is what we're all focused on?

Yes. Again, I won't because the transcript exists, I won't belabor, there'll be elements. But there's 3 general buckets of benefit from the digital ticketing. One is at the venue, our ability to directly interact with you. And I would put the order, food and beverage, order the merch are being able to ask you if you want to buy upsells, do you want to buy the VIP club, do you want to buy the VIP parking. There's all of that of increased average per fan revenue on site. There is an element with our sponsorship and advertising, I just mentioned, where we can work with Hilton, and Hilton can have access to our VIP Club and sends a text to their best clients that say, "We know you're at the show. We appreciate your loyalty, go to the VIP Club on us." And then there is -- because we start to understand actual behavior as opposed to this ticket purchase, our ability to market our shows, first and foremost but more broadly for Ticketmaster through understanding the fan behavior, their ability to market more effectively. Again, the lower cost of customer acquisition, more fans going to events. So when you look at that, you're right. We're looking to try to have that increased efficiency at the venue on a touch list this year, but we're a year behind where we were going to be in terms of gathering the data. I need to have some data on you, certainly for the marketing piece. You can start to do the venue and the sponsorship thesis with less marketing, but what I'd say is we're going to be doing as much as we can this year, but it's really -- we're a year behind where we had hoped to be in terms of getting it to the point where I think that we'll be talking about more specifics on the impact.

Yes. Well, I get the sense everyone's focused on next year generally speaking, anyway, realizing this is a transition year for a lot of businesses in the live space. Another topic I get asked a lot about is your sort of artist economics and how that may or may not change as we come out of this. You guys offer artists a level of scale that gives you a really great opportunity to win a lot of business, so to speak. Do you think there's anything that changes structurally in risk-sharing or the relative economics of ticket prices, et cetera or anything else?

Our fundamental philosophy remains unchanged. You're going to the show to see the artists, the artists deserves the money from the show. We're going to -- we're committed to paying as more -- as much or more than anybody else to the artist, and there's never a point where we've ever had any discussion on how do we somehow advantage ourselves with the artists. It's simply not in our DNA it's not our culture, it's not how we approach it. And because we can do that, and the artist gives us the right or the privilege to figure out other ways to make money off of the show. That's the simplicity of the deal. Now for a week or a month, sure. There was a period back in time where we said, "Wow, we don't know what's going on." Every investor was paranoid where We have 83% ticket returns, not retention. So as an industry, we said, "Hey, we got to figure out how we're not taking -- as Live Nation, taking on all the risk for the industry. That quickly passed because we have seen the level of demand." So I don't think that fundamental relationship with the artists changes. I think they know we're here to serve them and then to enable them to connect with the fans. And I think we've got a reasonable business model that because of our scale of doing that effectively for a long time, we've got the ability to create secondary and tertiary streams at scale that we can benefit from.

Speaking of which, your Veeps acquisition, I don't think you guys disclosed the size. So obviously, it wasn't an enormous amount of capital. But I've gotten a lot of questions about it. The idea of a virtual concert feels very unappealing to me as I sit in this Virtual conference right now, but I understand the long-term opportunity. What's your perspective on what that turns into on kind of a 3- to 5-year basis? And obviously, you made the acquisitions, you must see something.

No, absolutely. First of all, we think the leadership team there is great. Benji and Joel Madden are super impressive, and have really elevated our game in the streaming because they understand what the artists needs. So we've been very happy our work with them, and I was working with them initially that ultimately led to this. You're right, there aren't a lot of people that would say, "I want to go to the stream instead of go to show." 80-odd percent of the people that we've asked to stream shows and said, "Of course, I'd rather go to the show rather the stream, right?" You're going to hang on my friends, have a beer, sing along, feel connected. So that's good and bad, right? It reinforces the unique power of the live event, which is very important to us. But it means what is -- as you said, what is the value proposition of streaming going forward? That we believe -- we do believe there are people that will continue to watch the shows that there are just a lot of people that can't make it. When we do the show here in L.A., you can't watch it, right, or you can't be there. So it opens it up on a global basis for anybody to be able to watch the show of their favorite artists. So we're just going to leverage that scale of distribution, if you will, to make it an option for artists. And I think it will become an important element of how the artist views their overall benefits of touring, right? I think it will be for most artists integrated in touring. There will be some artists, they can do some stand-alone events on streams, that will be great. But I think for the bulk, it will be an additional element of their live show.

And do you get the sense that artists are -- have really seen this as an opportunity? Do you think we'll see tours announced for later this year, '22, that will have a virtual access opportunity embedded in them?

Yes. This is just a logical -- again, particularly if you can leverage our infrastructure in our buildings, it it's a low-cost additional element to provide, and it's great. And I'm doing a 30 or 35 AMP shows. Hey, the first one in L.A., the middle one in Chicago, the last one in New York. Why don't we stream those cover the major time zones, give our fans the opportunity? Again, I think that the guys of Veeps are great at figuring out how is it not just a stream, but how is it something more of an experience if I'm streaming. So is there a VIP element? Is there something that's more personal connection to the artist, so it's not just a simplistic stream of the show, it may be less interesting. So they're great at figuring that out. And I think with that, it will be a big opportunity for a lot of the artists that are joining next year.

Yes. Let me ask you about -- you mentioned earlier, Joe, sponsorship. And that was certainly an area when you talked about the worries of a year ago or maybe 10 months ago, is what's going to happen in that business? What are you hearing from your partners? Obviously, there was a lot of money you didn't book last year. And do you have the same view that we're going to be at an elevated pace over the next couple of years that you do on the live side?

So again, you're right. 10 months ago, we didn't know what was going to happen. We ended up keeping 90% of sponsor advertiser commitments that we had at this point a year ago, which to me is phenomenal. And almost all of our multi-million dollar multi-asset, multi-year relationships kept their money. So there was a very strong statement by these brands, some of whom were hurting quite a bit themselves that the continued connection with the live music fan was very important to them. And then the fact that we were able to take half the money that we had planned at this point for last year and still give them assets that they saw value in, while doing no shows, is another strong statement in my mind about the commitment of the sponsors to the space, the desire to say, "Give me -- what assets can you give me? How can you create something that is the music fan connection that I can use?" And I think it forced us the thing more broadly, we obviously have a lot of sponsorship at our amphitheaters, at our festivals associated with our own sales all that was gone. So it pushed our sponsorship and advertising team very hard to say what is it that we can give them. And it opened us up to a lot of brands saying, the more you can give us the more assets you can create, the more advertising, I can go. Simple enough. So I do believe that this push will help us to build the business because we're coming up with more assets than we had thought of a year ago at this time. And as we came up with more assets, we're finding brands, particularly the brands that already advertisers are sponsors with us. They're the first ones that want to do more. So as we can create new assets, more ways for them to connect, that's a natural path of growth for us to take in that business over the next few years.

Yes. It's an interesting business because it's very hard for us on this side of the screen to sort of figure out what drives it, right? It's -- we can't analyze your inventory opportunity set even if we know there's demand. Would you say that one of the governors on growth, we look back pre-pandemic was just -- you sold everything you could kind of create?

Well, part of it is that for these large sponsors, it's not -- there are some straightforward ad units, but a lot of it is not that straightforward. A lot of it is figuring out what are the assets that you need for that sponsor. And so it's getting better at that, figuring out new assets that can be created. Digital ticketing, as we talked earlier, that will unlock the whole another level set of assets that will be available to advertisers as we get into '22. So there are definitely compounding benefits of the additional assets that we create.

Makes sense. In the minutes we have left, why don't we talk a little bit about -- and this is sort of an interesting twist given what we've talked about for the last 3 quarters, what you'll do with your cash flow as it starts to come in? You got -- you mentioned earlier in this conversation acquisition, that's been a big part of the strategy at Live Nation. I did notice, I think your CapEx guidance this year is lower than sort of the years pre-pandemic. So what's your posture on M&A this year? And what's the market like? Because we've been surprised. And a lot of businesses like yours, the sellers haven't been selling as fast as maybe some had expected or as low.

Yes. Well, I think there's a huge difference between this period that we're and now in 2007, '08. Just if you're a distressed investor, you're very unhappy now because you haven't had the level of opportunities that you thought you were going to have. There's been so much liquidity that's been pumped into the system that I think it is -- and which is a good thing. I'm not -- it's a good thing because it has enabled the ecosystems, ours but others, importantly, to survive at a much better rate than they did historically. So I think that's a good thing. We're going to take the same approach. We've been in a mode for the past 10 months or almost a year now, where we have been very aggressively saying we need to conserve cash because we can always spend later $1 that we save today. We can't save later a dollar that we spend today. So it's why you saw us continually increasing the level of cash savings that we had through 2020 is because we wanted to have the full flexibility to come out of this. That's why you saw that low CapEx guidance because that's all we're going to let the teams have until we know what is happening going forward. So it is absolutely our expectation and our hope that the CapEx ramps back up to previous levels because that means there's growth opportunities. And that the M&A picks back up because there are opportunities. And there aren't going to be fire sales but I do believe there are definitely going to be promoters or have a build in a festival promotion business, and I got through this. And Live Nation is a partner, wow, okay, I don't want to go through that again. I can take -- I can sell them 51%, 70%, 80% of the business now, gets the money off the table, continue on operating the business. They're good to work with. And then in 5 years, I can sell the rest. So that sounds like an attractive model. It still works for us. We're not dependent on fire. So we've built the business successfully for the past decade, not needing fire sales in terms of our M&A strategy and how we work. So we're very confident that's going to come back and be growing. I don't know if that's June 1 that starts or August 1. But certainly, by the time we get into '22, our expectation is that that's ramping back up.

Yes. And lastly, just is there a desire to pay down any bank debtor all the bank debt as you get to the later part of this year? Because obviously, you had a lot of success with all your covenant stuff last year. But eventually, I'm sure you want to address all those numbers.

Yes. I mean, on a macro basis, you look at us between '16 and '19. We delevered a fair bit as we grew our free cash for 2021 aside for the moment. By the time you get to '22, you're a turn or so higher than you were in '16. So you're not -- I mean we're not sitting here with a dramatic level of leverage that has us really concerned. And then naturally in '23 because the converts come through, you delevered naturally. So TBD, what we do, my only point is, is that we're not feeling stressed about the situation and where we stand today. We've been getting great rates on our debt at 3.75% on the debt that we took in January. So we're getting great rates. We're feeling comfortable with where we're at overall. And as we look at the opportunities in front of us, we'll continue to assess what the right way to go is.

That's great. All right. Well, listen, it's great to see you on screen once again. Hopefully, we can eventually do this in person. But thank you so much for your time and looking forward to turning the lights back on, so to speak.

Thank you. Looking forward to it and looking forward to next year in person.

All right, everybody. Thanks for joining us.