LYV | SMOKE ON THE WATER

overview

With the opening acts out of the way (3Q22 / 4Q22 / 1Q23), we now look forward to our back-to-back headliners 2Q23 and 3Q23.

As we discussed in September 2022 and wrote after last Q’s earnings:

“The risk to the short in the short-term was always going to be comparing against omicron to start 2023. The first couple months of 2022 were VERY slow for the live event industry – everyone was champing at the bit at the start line – but it wasn’t until the middle of 1Q22 when the gun went off, and the race began. And so that means easier comparisons during this window, where comps get increasingly more difficult from here into May/June for bookings activity.  Recall that Q1 was weak last year for LYV – they weren’t scheduling arena or stadium tours until the start of Q2.”

And so, as expected, LYV did have a good start to the year – with over 50% of AOI growth and over 90% of attendance growth driven by international markets in LATAM/APAC (they were not open this time last year). The company expects OCESA accretion will be approximately 40% higher in CY ’23 compared to 2022 due to faster organic growth from when they acquired it in late 2021. Event deferred revenue growth accelerated to 28% YoY in 1Q23 to $4.4B, an increase of $1.7B versus 4Q22 (and $1.1B increase 4Q21 -> 1Q22).

While demand trends (in aggregate*) have come in better than we anticipated (thus far), there are enough signs of weakness (i.e., smoke) to keep us entertained and not wanting to leave the show early (i.e., cover the short):

• There are notable signs of weakness in North America (our main focus area). The cracks first emerged in 3Q22 and have grown wider since. In 1Q23, North America concert attendance declined 15% relative to the same period in 2019, and this is the third quarter of slowing. On a per-event basis, 1Q23 attendance was the weakest Q1 since 1Q20 (or 2011 by pre-COVID standards). While international has been a strong contributor, it has been lagging North America wrt reopening by 6-12 months (approx). Therefore, we expect international will see its ROC peak 1H23 while North America continues to slow. See 'Exhibits A and B'
• A slowdown in contracted sponsorship agreements. Revenue expected to be realized from the backlog as of 1Q23 for the remainder of 2023 declined for the first time since reopening at -3.8% YoY. We have seen elongated sales cycles in past downturns due to increased uncertainty. Total sponsorships under contract were $1.5B at the end of 1Q23, unchanged compared to 4Q22 (versus +20% QoQ 4Q21/1Q22). On a YoY basis, the sponsorship backlog increased by 25% YoY in 1Q23, down from 50% in 4Q22 (expect to slow faster into Q2).  See 'Exhibits C and D'
• Reported GTV growth rate is misleading. Management reported $7.7B in fee-bearing GTV in 1Q23, up 60% versus 1Q22. This growth rate implies $4.8B GTV in 1Q22. However, on 5/5/2022, management disclosed a GTV of $6.3B for 1Q22, which implies a 1Q23 YoY growth rate of 22% (something doesn't add up). Looking back, management began disclosing GTV figures again in 4Q21, defined as "transacted ticketing gross transaction value, excluding refunds." Starting with 4Q22 earnings, the word "transacted" is no longer being used explicitly but is only described as "fee-bearing GTV" and has no mention of "refunds." The company also stopped disclosing the number of refunded tickets in 1Q23. We can't help but question if, starting in 4Q22 (as we hit the tough comps), management began basing their stated GTV growth rates off the prior year figures that included the impact of refunds (making growth look better because comparing against a period of still high refund levels). This could also mean that the 16% growth in average primary ticket prices YoY 1Q23 is overstated and help explain the widening gap between fee-bearing GTV growth and ticketing revenue (beyond just geographic mix).
• It is all downhill from here. Given the easier Q1 comparison due to Omicron and international reopening, we expect growth rates will slow across all KPIs from here. And a stronger Q1, more weighted toward international and stadium/arena tours, actually sets up for an even weaker Q2/Q3 as seasonality normalizes as we hit the tough prior year comps (when the timing of the event schedule resulted in Q2/Q3 being seasonally concentrated). We still find it interesting that management will no longer quantify confirmed show bookings growth or supply-side dynamics.
• Third-party data tracking is weak. To our last point on event supply, our proprietary live event tracker still suggests the pipeline of music-related events in North America is only growing (+/- 5% YoY). Meanwhile, in both U.S. and Worldwide, Ticketmaster mobile app downloads took a sharp turn south in April 2023. 'See Exhibit E'

*We have been directionally right in North America (primary focus); International strength has been upside surprise.

masterclass in misdirection

As it relates to the company's poor and inconsistent reporting practices. At worst, it’s malfeasance. At best, obfuscation, but at minimum, needs to be addressed. I volunteer my services if IR needs help putting a trending schedule together. Even if it does mean I miss picking up my son from daycare late on Friday afternoon (again). I'll even buy the Pizza. But in all seriousness, management’s reluctance to answer investor questions that attempt to make sense of it is a red flag (oh, and the gaslighting doesn’t help either).

The pattern of behavior isn’t just with investors.  In an SEC correspondence letter 7/9/2022, when asked about the use of Non-GAAP vs. GAAP measures in their disclosures related to segment AOI:

Exhibit F Comment 2. Please precede the disclosure of non-GAAP measures with your operating results disclosure, which is presented on a GAAP basis, to avoid giving undue prominence to the non-GAAP measures. Refer to Question 102.10 of the Compliance and Disclosure Interpretations on Non-GAAP Financial Measures Response: We respectfully acknowledge the Staff’s comment. In reference to our response to Comment 1, we do not believe segment AOI is a non-GAAP measure. In prospective filings, we will remove the non-GAAP reconciliation and AOI discussion as shown on page 36 in the Company’s Form 10-K for the year ended December 31, 2021. For the remaining non-GAAP measures, we will precede the disclosure of non-GAAP measures with our operating results disclosure.

If it doesn’t stand out to you what is potentially wrong here – that’s okay. Let me be clear. In a response to the SEC, Live Nation’s SVP/Chief Accounting Officer said that they “DO NOT BELIEVE” segment AOI is a non-GAAP measure – and that instead of amending one of the most important segment disclosure in their filings or working with the agency further to address it, management just opted to remove it completely. Anyone that has a detailed segment model built knows how frustrating losing that disclosure was.

But what is most shocking is they told the SEC they don’t think AOI is a Non-GAAP Measure. When by definition, Adjusted Operating Income (AOI) means it is a metric that is not prepared in accordance with GAAP because it adjusts for 1) stock-based compensation, 2) losses/gains on disposal of operating assets, 3) depreciation/amortization 4) amortization of non-recoupable ticketing contract advances and 5) acquisition expenses.

What is even more perplexing is that management wrote they don’t believe segment AOI is a Non-GAAP measure - but in the last 10-Q filed 5/5/2022 (Before receiving SEC letter), they defined Adjusted Operating Income as follows:

Exhibit G “AOI is a non-GAAP financial measure that we define as operating income (loss) before certain stock-based compensation expense, loss (gain) on disposal of operating assets, depreciation and amortization (including goodwill impairment), amortization of non-recoupable ticketing contract advances and acquisition expenses (including transaction costs, changes in the fair value of accrued acquisition-related contingent consideration obligations, and acquisition-related severance and compensation). We use AOI to evaluate the performance of our operating segments. We believe that information about AOI assists investors by allowing them to evaluate changes in the operating results of our portfolio of businesses separate from non-operational factors that affect net income (loss), thus providing insights into both operations and the other factors that affect reported results. AOI is not calculated or presented in accordance with GAAP.”

So clearly, they knew AOI is Non-GAAP (and still think it is today - even though they told SEC otherwise). And to skirt the SEC’s focus on their use of Non-GAAP metrics, they 1) told the SEC AOI wasn’t a Non-GAAP disclosure, 2) stopped reporting AOI segment reconciliation table, 3) removed the AOI definition (Exhibit F) from the Non-GAAP term section starting 8/5/22 10-Q, but otherwise kept AOI definition unchanged 4) left AOI margin in the Non-GAAP term section (because AOI $$$ is not a Non-GAAP Measure, but somehow AOI Margin is…) and 5) took the Non-GAAP asterisks on footnotes off of AOI. See 'Exhibits H and I'

Masterclass in misdirection! After all, imagine if the stock was valued based on the $0.68 in TTM GAAP EPS or any terminal value assumption based on GAAP earnings potential.

To be clear, I am not presenting any of this as a "smoking gun." More like another puff of smoke. But in context with everything else, it does make you question the integrity/ethics of this management team and their internal controls.

exhibits

Exhibit A

Exhibit B

Exhibit C

Exhibit D

Exhibit E

Exhibit G

Exhibit H

earnings call notes

Prepared Remarks

• 2023 off to strong start
• All markets fully open for first time in 3 years
• Q1
• 19M fans attended
• 45M tickets
• $3.1B revenue
• Demand has been growing and shows no signs of letting up
• Live experiences are #1 live activity where they expect to spend more
• 90M ticket for concerts, 20% ahead of last year
• Record number of stadium shows
• Major tours -- demand so strong that artists can't meet fan demand
• Affordability
• Summer concert week
• 4000 shows
• Spending
• Outdoor season hasn't started
• Indoor venues demonstrate growth in average revenue per fan
• Vibey
• Destination events for live music
• Venues
• New venues to host 3M fans across 1,000 shows
• Ticketing
• Growth driven by new client additions in new markets
• Fee-bearing tickets
• Tickets up 40%, $7.7B in GTV (60% YoY)
• Continued adding new partners
• Google Pixel, PayPal, Levi's
• 70% of live music goers agree experience can be enhanced by brands
• Expect to host record number of fans even against 2022 comps
• Ticketmaster
• 600M ticket globally this year expected

Financials

• 2% unfavorable impact due to
• $26M in sponsorship
• Converted 59% of AOI to FCF of $193M
• Higher than 43% conversion in 2022
• Concerts
• Highest concert attendance ever for Q1
• Attendance up 79%
• Show count was 9,600 events, up 43% YoY
• More fans due to heavier mix of stadium and arena
• Stadium attendance quadrupled
• APAC and LatAm drove growth
• Theater and fan clubs up 45%
• Not a large quarter for festivals but fan count here up 50%
• International markets accounted for 90% of the increase YoY
• Expect continued strength across all global markets
• Overall profitability per fan will increase
• Ticketing
• Growing fan demand
• 72.6M fee-bearing tickets, up 41% YoY
• GTV was $7.7B, up 60% YoY
• Revenue was $678M, AOI was $271M, 41% margins
• Hard to compare due to geographic mix shift and staff ramps
• Margins ahead of FY 2022 numbers
• Expect full year margins in high 30s
• 16% rise in ticket price
• Fan demand for best seats at concerts
• Avg secondary ticket prices 2x as much as primary
• Non-service fee revenue grew double digits
• insurance upgrades and other upsells
• Clients
• 80M net new tickets, up 15% YoY
• Sponsorship
• Revenue up 47% to $170M
• AOI was $96M, up 37%
• Growth was driven by reopening of international markets
• Increase of high profile artist on-sales
• Onsite sponsorship represented most of AOI growth
• International markets 54% growth
• Marketing partnerships 85% of revenues here
• Higher variable expenses due to artist activation costs
• ticket volume up 4x
• Capex
• 2/3 on revenue generating projects
• 1/3 on maintenance capex
• $2.4B in liquidity
• Only change to guidance is accretion
• Estimate it will be 40% higher than 2022
• Factor into EPS estimates
• No material fx impact on revenue or AOI

Q&A

• Do you think bills meet lawmaker standards? Regulatory environment
• Believe through all of the noise that everyone is arriving where LYV is
• Fully supportive of all bills
• Help artist control their tickets
• Better protection from bots
• Aligned with all of the bills and have said for a long time they're better for our business
• Any bills of these natures that put better controls in will help our overall business
• Vibey - can you frame the opportunity, is it something you plan to build for major festivals/residencies, etc
• Look at the segment overall - premium business is a huge opportunity
• Great job scaling GA, but not premium
• As an industry, music has not followed sports/new stadiums
• Want to provide a better premium experience
• This is an extension/continual strategy for premium experiences
• 1000 events this year based around the concert/tour
• Ticketmaster launched Ticketmaster Travel
• Combine ticket/airline/hotel
• Vibey comps to Pollen, on-location stuff
• Difference is we have the scale and expertise
• Insomniac team built out Vibey, launched U2 experience
• Ongoing strategy in clubs, premium memberships, etc --> turn GA into premium experience/product
• We have the rights so can do things in house and don't have to outsource
• Klobuchar bill attacks your venue exclusivity - can you respond to it and how important is the exclusivity model? Last year was compressed for margins - should we see a bounce-back here?
• Exclusivity
• Venues figuring out how to best monetize their rights
• Auction them off for exclusivity
• Were there to be changes, venues would be hurt the most
• Lose ability to maximize their rights
• Handle on-sales like no one else can do
• Margins / business performance
• Think that we look more on cash profitability and how that's operating on per-fan basis
• Expect to grow this year
• On concerts, last year was bottom tick on margins but expect it to come back this year
• Don't worry too much about margins
• Inherently a low margin business for stadiums but still pursue it
• Do you feel good about supply-side coming out of 2022 into 2023? Do you feel confident with what you're seeing?
• Yes, we feel good
• Don't think pent-up demand or COVID affecting it anymore
• Regular, back to business
• Thrilled we are sitting here looking at comps - 2022 was like 1.5 years combined and we are above and beyond it
• Global strength of the business across all territories and venues
• Supply strategy
• For years it was US and UK artists filling stadiums internationally, now the world and consumer is truly global
• Global superstars from all over
• Gives next kick to supply chain for next ten years
• Can you talk about demand for smaller venues?
• Don't have a lot of amphitheaters yet - but theaters and clubs tracking 8% ahead for average attendance per show
• Increased pricing, lower cost structure
• Unlike movie theaters we aren't a hit-driven industry
• Festivals doing really well, club acts doing well
• incredible demand - not just the top stuff
• Ambitions on venue side - how many incremental shows/fans can you add over next few years?
• This year typical to what they'd hope to add - low millions at existing venues
• Cash balance - you used to run $500M or something and now it's much larger - why? And how will you use it?
• Cash numbers include untapped revolver capacity. Not quite as extreme as quoted in question
• Lots of opportunities to enhance fan experience
• At the moment being conservative, but looking to grow the business
• Stock price seems so depressed relative to fundamentals - COVID, DOJ, etc. - why didn't you take advantage with share repurchases?
• Flip side is that share repurchases tactically are one thing.
• Market takes repurchases as being out of growth ideas
• We have so many growth ideas we wouldn't want it to be misunderstood
• We are compounding growth
• As I said we will continue looking at all options moving forward
• Proposed legislation and potential impacts - can you provide color on competitive position of Ticketmaster internationally? Junk fees - FTC can determine if fees are excessive, how would fee caps impact service fee revenue?
• This is the venue business
• venue demands most of the service fee
• We think the venue building the billion dollar arena or stadium, will be vocal about returns and which companies they can hire to service their business
• Europe
• International is moving more towards an exclusive model than away from it
• As new buildings are coming up, they realize it's another revenue stream
• International will move closer to US model than other way around - they've been undervaluing exclusive ticketing rights to their venues
• We do really well in open markets
• Secondary ticketing market seems to be an area of growth for smaller entities - what is new with respect to this and what can you do to protect yourselves better?
• Remind you that of all legislative noise, the common theme is around limiting the scalper
• We see a lot of this legislation being helpful for primary ticketing
• Will be harder for the scalper/bot/website
• We do think that overall this market is moving against the secondary business in general
• Helps primary, hurts secondary
• Secondary for sports is very different for concerts than sports
• Sports scalpers perform the function of guaranteeing upfront funding
• For concerts, they're using illegal practices to get tickets and increase the prices
• You need to give the power back to the artist
• Have to survive and adapt by adding value in your ecosystem
• Secondary prices 2x primary - can you update us where the trends for pricing are today? Where do you feel the industry is? What're your thoughts on AI?
• Pricing
• Secondary market helps look at models and see what's competitive
• Business has gotten sophisticated on pricing models
• Years away from finding equilibrium between artists and demand
• Have seen the artists looking at their ticket prices and wondering how we can bring prices down in the back and up in the front
• Dramatically underpriced vs. demand still
• 5-10 years more of this as artist moves closer to market
• Years of upside to look at
• AI
• It's all upside for us
• No concern it will replace live experience
• Infrastructure tool for efficiency and effectiveness
• Recommendations, marketing, personalization
• Using machine learning for pricing
• Fighting bots using AI
• What's the pace of growth? Deferred revenue up 30%, ticket sales up... can pace of growth be sustained?
• Think that generally we start the year fast out of the gate being led by stadiums and arenas
• 4x level of activity in stadiums
• Huge increase in attendance and ticket sales
• Not ready to declare an exact number but Q1 probably high point of the year
• More important to us to help both sides realize the future
• How does 2023 and 2024 look? very optimistic
• 2024 and forward, look at what was historically delivered
• Think we are back to strong YoY growth business
• Industry is back bigger than ever
• Rising tide
• 8-9% growth across the industry and we intend to beat it
• Called out APAC and LatAm - long term, as they become bigger piece of the pie will the margins rise? What's the potential there?
• Massive growth potential markets - not thinking of them as margin
• Volume of fans, overall profitability we can drive

Please call or e-mail with any questions.

Andrew Freedman, CFA

Managing Director
@HedgeyeComm