Los Angeles Music Scene: Live Nation reports Q2 2021 results

This might be my last look at Live Nation's financials. COVID-19 is spiking across the United States, but it doesn't appear like we'll be seeing a shut down of music venues anytime soon. Just because live music is back doesn't mean that all is well in the music industry. I think that can be seen by the fact that Live Nation ran a $20 all-in ticket promotion for nearly 1,000 shows. We also know that some planned 2021 tours have recently been postponed (Stevie Nicks and Lynyrd Skynrd are examples). Yet, at least for now, venues are open for those who want to tour and those who want to attend. Also, as can be read below, it appears that Live Nation sees itself as having a solid concert pipeline for the next few years (which means a solid revenue pipeline).

As with prior looks at their financial statements, my main interest is their cash flow situation. Here's the key quote from their August 3rd earnings call:

Looking at free cash and liquidity. As of June 30th, we had total cash of $4 billion, including $1.1 billion in ticketing client cash and $1.8 billion in net concert event related cash, leaving free cash of $1.1 billion. This was flat relative to our first quarter reported number.

Our free cash, along with $971 million of available debt capacity, gives us $2.1 billion in readily available liquidity up from $1.6 billion at the end of 2020, and steady with our Q1 ending liquidity. Benefiting our free cash position, the second quarter was $161 million in favorable timing, largely the result of classification of our event-related deferred revenue between short-term and long-term.

Our total free cash usage in the quarter was $163 million or $54 million per month, which included $115 million per month of operational burn up from $100 million per month in the first quarter, as furloughed employees returned to prepare for our reopening and we reinstated full pay for most employees, plus another $58 million per month of non-operational costs, including investment in capital expenditures, acquisitions and artists and ticket client advances to give us $173 million average per month in gross burn. In Q2, we had $119 million average per month cash contribution margin, double our Q1 average.

Now I'll admit that in my Q1 2021 review, I anticipated that cash would drop by $500 million. Instead, it dropped by only $163 million.

What drove my $337 milion miss in cash usage? First, their cash contribution margin increased by $180 million versus the first quarter. I didn't think this would happen as concerts in the United States (at least in California) didn't start up until July. Also, they had a $161 million favorable cash timing due to "event-related deferred revenue between short-term and long-term." I'm thinking this means that if events are only a short period off in the future, they can shift cash that is related to advance ticket sales into the free cash part of their cash flow statement.

Here are some other key comments that I picked up from the call:  

What does Live Nation have to say about consumer behavior? People are buying more food and beverage. We're selling more VIP packages, more upsells. So, in general, the pocket books are open.

What do they think about their calendar? And we're not -- we're very content with our 2022 lineup right now. We're talking mostly about what to add now into 2023 and 2024. So that idea that -- it's just one year of -- our bigness isn't really true. We've got three, four years here of strong demand that we're going to smooth out over the time, so everyone can get the right markets and the right Friday nights and the right dates.

Los Angeles Music Scene: Live Nation reports Q1 2021 results

Considering that the Los Angeles music scene should be up and running by mid-June, this might be my final look at the financials of Live Nation. The reason I've been doing quarterly reviews such as Q4 2020 is that Live Nation owns The Echo and so I felt it was important to keep an eye on how they were doing financially. By financially, I don't mean their P&L, but their cash flow as I figure that is the more important metric during this time of limited concerts and therefore revenue.

FINANCIAL REVIEW

Here's what their Q1 2021 earnings call had to say about their cash position:

Looking at free cash and liquidity, we ended the first quarter with $1.1 billion in free cash, compared to $643 million at the end of 2020, an increase of $462 million. Our free cash, along with $964 million of available debt capacity gives us $2.1 billion in readily available liquidity, up from $1.6 billion at the end of 2020. Benefiting our free cash position in January, we raised $417 million of net debt and we had a $181 million timing benefit, largely associated with deferred revenue classification.

Our total free cash usage in the quarter was $136 million, or $45 million per month, which included $100 million per month of average operational burn, roughly in line with Q4, plus another $4 million per month of non-operational cash costs to get us to $104 million average per month and gross burn. This gross burn includes the benefits we realized from the sale of a non-strategic minority investment and timing on interest payments and severance costs. In Q1, we had $59 million average cash contribution margin per month, roughly 50% higher CM than we averaged in Q4.

They ended Q4 with 643 million in free cash, but really it was $1.1 billion as they issued debt in early January. When they included debt capacity, they were at $2 billion. Now their free cash plus debt capacity gets them to $2.1 billion. Basically, they ended Q1 2021 in the same position as Q4 2020 (adjusted for their early January debt issuance).

How were they able to keep cash basically flat? It looks like they had some one time benefits. Their non-operational cash costs dropped from $44 million per month in Q4'20 to just $4 million per month in Q1'21. The significant drop was driven by sale of an investment, interest and severance payments (that I'd assume would occur in Q2'21 instead). This led to total free cash usage of $136 million, which reduced their free cash. This was off-set by another timing benefit that allowed them to shift $181 million of deferred revenue into the free cash column. 

So $136 million in cash used during the quarter was off-set by adding $181 million into the free cash column resulting in basically no cash usage for the quarter.

There are a couple cash questions that pop up to me.

First, how much cash did they use for the purchase of VEEPS -- a question I had set aside from their Q4'20 financial results? Second, why did they decide they could change the classification of deferred revenue?

In terms of VEEPS, there was a question asked by Morgan Stanley. It looks like they are looking to use VEEPS to make additional money from their music festivals. They specifically mention Lollapalooza at a price point of $49 (just a tossed out idea, not that this will be the price).

There was no indication of how much they paid for VEEPS, but in their 10-Q they say the following:

During the three months ended March 31, 2020, we used $32.5 million of cash primarily for the acquisitions of a festival promotion business and a venue management business, both located in the United States.

Okay, basically, the purchase of VEEPS wouldn't have had much of an impact on their free cash position, which makes me wonder what other plans they have in mind for the $425 billion that they raised in January? Are we going to see Live Nation buying up destressed venue assets? Or will this cash be used to survive until Q3'21?

They have this little tidbit about deferred revenue:

For events that have been cancelled as of March 31, 2021, the deferred revenue has been reclassified to accrued expenses on our consolidated balance sheets where not already refunded to the fan.

So I'm guessing that the $181 million benefit for deferred revenue is just a timing issue of getting refunds back into the pockets of music fans. I have a suspicion that their Q2'21 free cash will drop by over $500 million off-set by any cash received via any the restart of music concerts (which based on what I write below won't be that much).  

Interestingly, their deferred revenue is $1.8 billion so does this imply that about 10% of concerts are getting pushed off? Does that lend any credence to my post that bands are starting to delay their tours until 2022? That question brings up the next topic regarding the return of live music.

RETURN OF LIVE MUSIC

In the US, Bonnaroo, Electric Daisy and Rolling Loud festivals all sold out in record times at full capacity. In the UK, we have 11 festivals planned this summer, including our largest ones Reading, Leeds and Parklife where tickets are already sold out. New Zealand, the country's largest festival, Rhythm and Vines quickly sold out. And as we get further clarity on reopening timelines, we are announcing more tours for late this summer, including Dave Matthews, Luke Bryan, Maroon 5 and others to come, showing artists' increasing confidence in performing this summer.

. . . We have lots of great conversations with probably every artist you can imagine, talking about when they're going to be back on the road. And artist typically tours once every three years on a cycle, so we're kind of condensing 2021 and '22. So the good news is we've got incredible supply and now we're just sorting through what makes sense to go out in '20 -- at the end of '21 still -- into '22, and some artists were talking about moving into '23. So I would say, the artists are patient and they're smart in terms of what their cycle is predicting, maybe they have a record coming out in the fall, maybe it's in Q1. So right now, we have a great supply. We don't have any issues in terms of availability.

If I'm doing my Internet search correctly, the first U.S. music festival on the slate is the Rolling Loud festival with a July 23 - 25 date. Also doing an Internet search, all the UK and New Zealand festivals also have Q3 and Q4 start dates. 

Note that in their Q4'21 call, they used the term mid-summer and here they're saying "late this summer." Wonder if things are starting a month or so later than was expected back in February? Anyways, that just putting a negative spin on things when in fact it looks like we're up and running starting in Q3'21.

Los Angeles Music Scene: Live Nation reports Q4 results

Since Live Nation is such a fixture in Los Angeles and the local music scene (The Echo, Echoplex, The Regent Theater), I took a look at their Q3 financials back in November. The company recently released their Q4 earnings.

FINANCIAL REVIEW

As with my Q3 review, in terms of their financial health, I would say that cash is king. Here's what their earnings call said about that topic (Feb 25th): 

Looking at free cash and liquidity. We ended the fourth quarter with $643 million in free cash, which increased to $1.1 billion in early January with our debt raise. This, along with over $950 million of available debt capacity, gives us $2 billion in readily available liquidity. Our total free cash usage in the quarter was $308 million or $103 million per month. We had $97 million per month average in operational burn plus another $44 million per month of nonoperational cash costs to get us to $142 million average per month in gross burn. And then we had $39 million per month in cash contribution margin and ended up with a total effective cash burn of $103 million per month. 

Free cash in Q3 was $951 million so they went through $308 million of their free cash in the quarter. In terms of what they call gross burn, they averaged $142 million per month. This compares to Q3, which was at $175 million per month (which included $40 million in severance expense that would run throughout the year). Severance expense wasn't mentioned during the earnings call so it probably didn't have much impact on Q4 gross cash usage. 

Live Nation continues to find ways to cut costs as their gross cash burn average was reduced by $33 million a month. They likely accomplished this via further reduction in discretionary spending, "As part of this, we further reduced discretionary spending by another $50 million and closed 2020 with over $950 million in lower costs."

Is discretionary spending a synonym for employees? TicketNews (Jan 21) had this little note on headcount reduction:

Live Nation Entertainment has laid off more than 96 percent of its staff amid the ongoing COVID pandemic, according to a letter from a regional manager in Connecticut. The manager, Michael Andrews, referenced the cuts in a letter to a Connecticut utility commission asking for forgiveness in over $1,000 in late fees associated with unpaid bills from 2020.

Live Nation is “hemorrhaging money each month,” according to Andrews. As a result, it has either furloughed or laid off thousands of employees – from a pre-pandemic number of approximately 18,700 to a current roster of around 700 – 96.25 percent of the total. This number includes the finance team that approves payment of bills such as the one he was appealing for forgiveness on the late fees being charged.

In my Q3 analysis, I focused on gross burn, but via the above quote I learned that there is an off-set to this called cash contribution margin. They have something called total effective cash burn, which comes out to $103 million per month -- and this ties out to the $308 million reduction in free cash.

Based on their Q3 cash burn of $175 million a month, I figured they had enough free cash ($951 million in free cash + 950 million in debt capacity) to last them 11 months, basically August, 2021. It now looks like Live Nation is very well set up on the cash side to go beyond August as they ended the quarter with $643 million in free cash + they still have the $950 million in debt capacity + they added $500 million in debt in January (wouldn't show up in their Q4 financials). Of this $500 million, $75 million was to repay a loan so my assumption is that the net is $425 million. So $643 million + $950 million + $425 million = $2.018 billion. With $2 billion in free cash and an effective cash burn of only $103 million per month, they could survive well into 2022 without live concerts.

One caveat to that $2 billion in free cash was their acquisition of Livestream Platform Veeps. This was done shortly after the issuance of the $500 million in debt. They didn't get into how much they paid for the platform during the earnings call. They did say the following about VEEPS:

This is just now an opportunity with Veeps to do some of that direct-to-consumer on the club shows, amphitheater, festival shows that we think will have that added capacity and demand that will help increase some of the revenue for the artist. So we think it's kind of like a T-shirt and merchandise in a VIP platform. It's another incremental revenue stream to the current physical show.

I guess we'll need to wait until their Q1 results to back into an estimate of how much they paid for VEEPS.

RETURN OF LIVE MUSIC

Of course, what people care about is when will live music return? It looks like the focus for now is outdoor amphitheaters:

So we're feeling more optimistic than we were a month ago. Lots of artists are calling and looking at how we start up in July, August, September, maybe move things a month. So for right now, we still believe that we'll have enough open throughout the U.K., Australia, Canada, U.S., to keep what we have on the books and the amphitheater booked for now. We might have some certain states that might not be ready, but we have enough states, we think, and enough artists willing to play the open slots if we get to that level in the right markets. So right now, we think we have enough artists. And as long as these states open up to the right capacities, we can start mid-summer into Southern U.S. We could go all the way to November . . . So we have not, as to date, done a lot of work in the 0 to 50% capacity business. We don't see that as a viable model to ramp back up fixed cost. So we think we're close enough though where we are with COVID and with all the governors in the states we're talking to, that there will be a clear outline to a 75% to 100% outdoor green light in '21. So we think we're better off waiting for a high bar capacity moment in most of the states to ramp up and talk to the artists about getting paid properly.

Is this really more optimistic than a month ago? On CNBC (Dec 7th), Live Nation President Joe Berchtold said: In the key US, Western European markets, it continues to be our expectations that by next summer we're back with our major outdoor shows, our amphitheaters here in the US, festivals globally, we'll be able to do those shows.

Is there really any different from that CNBC interview and the Q4 earnings call statement of July, August, September?

Anyways, it definitely seems like the focus will first be on outdoor shows. Also, there seems to be a bit of political diplomacy in the discussion of which states won't open up soon: "We might have certain states that might not be ready, but we have enough states . . . " Then there is the comment about Southern U.S. Reading between the lines, is there a belief at Live Nation that California will be one of those states that won't be ready for outdoor events (at 75% capacity) by summer? 

Now my interpretation of this is that Live Nation will start concerts in the Southern states and then spread to other states (California) by November. I sent a Variety link to a follow LA music scene person and he stated that his interpretation was that Southern states could see their season last from July through November and that it wasn't necessarily true that California would need to wait until after tours finish their Southern legs. I noticed that there was an interesting grammar change between what was written in the transcript versus what Variety has: an assumed period between "U.S." and "we."

Variety (Feb 26) has:“we can start in midsummer and in the southern U.S. we can go all the way into November.” The transcript reads: we can start mid-summer into Southern U.S. We could go all the way to November.

Kind of changes the interpretation. Anyways, it really does seem that the Southern states will get first dibs at live music.

Also, I think the 75% capacity issue could also be applied to local indoor venues. It might not make financial sense for The Echo, Echoplex and even non-Live Nation venues like the Bootleg Theater, Hotel Cafe, and Moroccan Lounge to open up at less than 75% capacity. Their additional fix costs (labor, electricity, water, etc) might not cover a situation where they're stuck at 50% capacity. This is something to keep in mind as Los Angeles starts to open up from this pandemic shutdown. 

 

Los Angeles Music Scene: Live Nation Adding Debt - for expansion or survival?

Just came across this news article. Back in mid-December, Live Nation issued $500 million in debt. Per LA Business Journal (Dec 18), it was a private offering at an annual interest rate of 3.75%.

The PR release (Dec 17) states:

The company intends to use the net proceeds from the offering to repay $75 million aggregate principal amount of the company's senior secured term loan B facility, for general corporate purposes, including acquisitions and organic investment opportunities, and to pay fees and expenses related to the offering. Completion of the offering of the Notes is subject to, among other things, pricing and market conditions.

Most of the debt is being used for general corporate purposes, which could include the ability to expand. I don't necessarily think that the issuance of $500 million in debt is a warning sign about their financial stability as the annual interest rate is at 3.75% while a previous debt issuance of senior secured notes has an interest rate of 6.5% (per the PR release). It is interesting that they are issuing more debt instead of dipping into their available debt capacity of $950 million.

In a November blog post, I wrote the following that discusses their debt capacity: 

They look at what they call "free cash." Free cash makes various adjustments to their cash. For example, they adjust for "ticket-related client funds." I interpret that as the portion of ticket sales that don't belong to Live Nation -- probably advance ticket sales at this point. Anyways, after making those adjustments, their "free cash at the end of the third quarter is $951 million." They also have "over $950 million of available debt capacity." So they really have $1.9 billion in available cash.

I suppose the low interest rate was just too enticing. Of course, it should be noted that this was a private offering so is this a wealthy insider such as John Malone?

Based on the PR release, is this debt issuance for expansion? Considering that the interest rate is much lower than a previous issuance, you have to contemplate the strong possibility that they're heading in that direction and someone is buying into that vision. If that is their direction, one does have to wonder if they're playing a dangerous debt game or seeing some great post-COVID-19 opportunities (similar to Marc Geiger). Their debt will be around $5.3 billion as of December 31st. Just back in Dec 2017, it was under $2 billion.  

(I should note that my assumption a few months back was that Live Nation would end up needing to sell off venues to generate additional cash. That doesn't square with the above so this theory might need to get tossed.)

Their Q4 earnings release should be in early February and will likely provide some interesting insight.  

Los Angeles Music Scene: Live Nation reports Q3 results and along the way questions Mark Geiger's $75 million

(Yes, I know, this is a photo of The Satellite.
It is my current LA Music Scene update photo)

Live Nation Entertainment reported Q3 financials on November 5th. They reported earnings per share of -$2.45 and revenues of $184 million. Revenues were down 95% on a year-over-year basis. That wasn't exactly surprising. In Los Angeles, the company runs such venues as Hollywood Palladium, The Belasco and The Wiltern. For those of us who love the local music scene, we're well aware that they also own The Echo, Echoplex, and The Regent Theater. 

When it comes to financials in this time of COVID-19 where no significant concerts are going on in the United States and Europe, I suspect that the most important part of your financial statements isn't your P&L, but your cash situation. As of the end of Q3, they reported having $2.625 billion on their balance sheet. But that $2.625 billion isn't all that it seems.

During their earnings call, they had some clarifications on that cash.

They look at what they call "free cash." Free cash makes various adjustments to their cash. For example, they adjust for "ticket-related client funds." I interpret that as the portion of ticket sales that don't belong to Live Nation -- probably advance ticket sales at this point. Anyways, after making those adjustments, their "free cash at the end of the third quarter is $951 million." They also have "over $950 million of available debt capacity." So they really have $1.9 billion in available cash.

Now how quickly are they going through their $1.9 billion in cash? "As part of this, we have further reduced all discretionary spending by another approximately $100 million and have now lowered to us for this year by over $900 million and reduce our cash usage by $1.5 billion relative to our pre-COVID plants. With these reductions, we have lowered the estimate on our operational cash burn rate to $110 million per month and our gross burn rate to $175 million per month on average for the last nine months of the year and prior to the benefit of contribution margin generated by the business. Included in our gross burn estimate is approximately $40 million in severance expense estimated through year-end which we expect to generate over $200 million in annual run rate savings."

They are looking at a gross burn rate of $175 million per month, which should get reduced by around $5 million per month for temporary severance expense so we're looking at $170 million per month. So they should be able to last around 11 months; however, it appears that they don't feel like they will burn cash for that long. 

Here's what they have to say about the re-start of concerts, "So if you have a new if you have a new tour well let's think about the fall into 2022 but let's sit tight until January before you start moving any costs in place to get ready. So that's kind of a -- that the general sense is let's -- let's reset, let's get through 2021 summer with whatever we reschedules from 2020, add new stuff into the fall to 2022 as we get a better visibility into January." 

According to Live Nation, concerts that were planned for 2020 will shift to the summer of 2021 and any new concerts will start in 2022. That seems to imply that cash infusions related to early sales will start in Q1 2021. Based on that, they're probably looking at a cash drain of let's say 4 months worth of cash (October through January) or $680 million. That would eat up most of their free cash, but wouldn't require them to dip into the $950 million debt capacity.

I should note that Deadline (Nov 5) wrote the following: At the end of the second quarter, Live Nation said it had total cash and cash equivalents of $3.3 billion, including $1.8 billion of free cash and $966 million of available debt capacity. All in, the company has over $2.7 billion in available liquidity. Its cash burn rate is about $125 million a month to keep running. So they're saying that Live Nation has nearly $2.7 billion in free cash and available debt capacity, but this was as of Q2. So their free cash and available debt capacity dropped from $2.7 billion to $1.9 billion in 3 months (Q2 to Q3). So that's just under $270 million a month in Q2 cash usage, which they're now slashing to around $170 million. 

Okay, so enough with the cash flow analysis. Let's get to a more intriguing subject where one might argue that Live Nation is doing a little mocking of a potential competitor. As I reported earlier, Marc Geiger, the former global music chief of the giant talent agency WME, was able to secure $75 million to invest in a network of clubs. This is what Live Nation had to say about that:

"When it gets to the venues in general the thesis out there with Mark Geiger and some others is that these independent venues are so distressed that they're going to throw someone the keys at a very cheap price and you can maybe roll up some of these cheaply and have some scale. Well, the thesis is basically broken at the first point is any great Live club is not throwing anybody in the keys cheaply. There's a lot of capital out there. 

"So if you on the Troubadour in Los Angeles, it's a legendary business and you're having a tough year. You're not selling to Mark Geiger or anyone else, if one or two time multiple your access to capital PPE loans lots of ways you can keep your business afloat, while you get through the storm. So we don't think that there's a huge opportunity that that there's a fire sale happening at that level.

"Now number two as you know we -- we’re the -- we have a consolidation of clubs in our business. Clubs on their own are a tough business, if you scale them up on their own. They're not -- they're not a really, really fruitful business on their own. So, we like them as part of our -- our overall ecosystem. But we're -- we don't believe that clubs whether you own 10, or whether you own 20 of them on their own provides you much global synergy or US synergy to leverage off of.

"So we hope all of these clubs find their way through this pandemic like we -- we hope all Live service providers find their way through this and that the government and stimulus programs and can help them survive it. But we don’t think that that there’s probably many that are going to fire to anybody, because there’s too many great options for them."

Hmm . . . does this quote sound like they have inside information on what's going on at the Troubadour or are they just discussion the Troubadour, because it is a well-known independent venue? Wouldn't I like to know the answer to that.

Also, considering the length of the above quote, Live Nation had a planned response regarding Geiger's $75 million.

Back to cash flow to close this out. If you read my blog post regarding Marc Geiger, his opinion is that concerts start back up in 2022. Now he doesn't appear to clarify when in 2022, but let's just say he's talking January 2022. Please notice that Live Nation is talking summer of 2021 and Geiger is talking 2022. If Geiger is correct, this adds an additional six months before Live Nation starts to collect any significant cash flow. Let's say that instead of 4 months, Live Nation needs to wait 10 months. That would result in them using $1.7 billion in cash ($170 million x 10 months). Of course, they would likely have to take another scrub at their cash spending at some point, but just for this mental exercise they would nearly run through their total $1.9 billion in available cash and would need to do some combination of issuing additional debt and asset sales to survive.