Live Nation (LYV) – Part 3 – Accounting

I’m very uncomfortable with Live Nation’s accounting.

Live Nation does not seem interested in helping investors figure out how much money the company actually makes.  One of the unnecessarily tricky areas of Live Nation’s accounting is the interaction between ticketing advances and Adjusted Operating Income (AOI).  I would consider all ticketing advances to be operating expenses.  However, Live Nation adds a subset of ticketing costs to Adjusted Operating Income since non-recoupable ticket advances are amortized.  Management’s definition of AOI seems to be designed to mislead.

Ticketing Advances

Ticketmaster generally enters into multi-year contracts with venues.  Multi-year contracts make sense as it takes time to integrate Ticketmaster into a venue’s system.  It takes time for employees to get trained on the ticketing system.  Ticketmaster pays advances to venues to enter into these contracts.  Sometimes, these advances are beneficial for the venue if they need the money to finance renovations or upgrades.  So far so good.

Accounting-wise, a subset of these advances (the non-recoupable advances) are amortized over the length of the contract.  Here’s what the 10-K states:

Ticketing contract advances, which can be either recoupable or non-recoupable, represent amounts paid in advance to the Company’s clients pursuant to ticketing agreements and are reflected in prepaid expenses or in other long-term assets if the amount is expected to be recouped or recognized over a period of more than 12 months. Recoupable ticketing contract advances are generally recoupable against future royalties earned by the clients, based on the contract terms, over the life of the contract. Non-recoupable ticketing contract advances, excluding those amounts paid to support clients’ advertising costs, are fixed additional incentives occasionally paid by the Company to secure exclusive rights with certain clients and are normally amortized over the life of the contract on a straight-line basis. Amortization of these non-recoupable ticketing contract advances is included in depreciation and amortization in the statements of operations. For the years ended December 31, 2014,2013 and 2012, the Company amortized $79.4 million, $73.6 million and $48.1 million, respectively, related to non-recoupable ticketing contract advances.

Adjusted operating income

Live Nation has an “AOI” metric which is similar in concept to adjusted EBITDA.  Like EBITDA, Live Nation strips out amortization expenses to arrive at the new number.  Sometimes, this is reasonable.  A company that rolls up other companies will have non-cash amortization expenses from the intangible assets acquired.  Warren Buffett wrote an appendix to his 1983 letter (scroll to the very bottom) explaining how such expenses can create an accounting distortion*.  (*With Live Nation the case for ignoring acquisition-related amortization costs is less clearcut.  I would argue that payments for non-competes should be expensed over their life.)

As far as ticketing advances go, their amortization expense is clearly a real expense.  Ticketmaster has to pay for advances every time it enters into a ticketing contract with a venue.  To figure out how much money Live Nation makes, I would want to calculate the following:

AOI – non-acquisition related amortization – stock-based compensation – maintenance capex – interest – (cash) taxes

Live Nation makes it needlessly difficult to do this calculation because the company doesn’t conveniently break out amortization expenses for investors.  Go read their press releases and form your own opinion.

Why is Ticketmaster paying for advances anyways?

The amortization of ticketing advances has been going up, which suggests that Ticketmaster has been giving out more advances.  I couldn’t figure out the business rationale for giving out so many non-recoupable advances.  Live Nation’s cost of capital is rather high.  It should avoid lending money to venues, especially when real estate assets can be leveraged rather cheaply.

Giving out advances presumably turns operating expenses into amortization expenses, therefore boosting AOI.  I have my concerns.

Ticketmaster versus Live Nation’s accounting policies

Pre-merger Ticketmaster handled the accounting for advances differently.  From the YE2009 10-K:

Contract advances, which can be either recoupable or non-recoupable, represent amounts paid in advance to the Company’s clients pursuant to ticketing agreements. Recoupable contract advances provide for the client’s participation in the convenience charges and/or order processing fees and are generally recoupable against future royalties earned by the clients based on the contract terms over the life of the contract (generally 3 to 7 years). Non-recoupable contract advances are fixed additional incentives sometimes paid by the Company to secure exclusive ticketing rights with certain clients and are normally amortized over the life of the contract on a straight-line basis (generally 3 to 7 years).

[…]

Recoupment of contract advances and amortization of non-recoupable contract advances are included in “Cost of sales” in the accompanying Consolidated Statements of Operations.

From what I understand, these costs were not added to the company’s adjusted EBITDA metric.

Estimated useful lives

  • Live Nation: YE2012 changed the estimated useful lives of computer equipment and software from 3-5 years to 3-10 years.
  • Ticketmaster (pre-merger): The estimated useful lives of Computer equipment and capitalized software was 1 to 5 years.

The computer equipment/software that was estimated to last 1 year under Ticketmaster is presumably estimated to last 3 years at Live Nation.  I don’t think that the computer equipment and software of the Live Nation and Ticketmaster businesses changed materially around the time of the acquisition.  Live Nation’s accounting seems to be more aggressive than Ticketmaster’s.

AOI = EBITDA = Earnings?!

At 7:23 of a BNN interview, the CEO of Live Nation (Michael Rapino) equates AOI to EBITDA to earnings.

Personally, I don’t like that attitude as metrics like AOI and EBITDA ignore a lot of very real expenses that businesses must pay.

Live Nation’s free cash flow calculation

Here’s an example reconciliation between “free cash flow” with the most comparable GAAP measure:

lyv-FCF-reconciliation

I don’t find their definition that reasonable due to the AOI / ticketing advance interaction mentioned above.

As well, the definition includes some non-cash components yet excludes the non-cash components of interest expense.

The bottom line

As far as the underlying businesses go, I think that Ticketmaster is a well-managed technology company while the concerts business is questionable.  I think that Live Nation should stop pouring money into concerts via acquisitions.  Perhaps Ticketmaster shareholders would have been better off without Live Nation.

In any case, I’m coming around to the conclusion that I don’t want anything to do with the current insiders at Live Nation.  I think I can understand why Irving Azoff (former Ticketmaster CEO and Live Nation executive chairman) sold shares at around $9 at the end of 2012.  I think I can understand why Live Nation has been issuing convertible debt, which is sort of a way to sell stock.  I may completely reduce my exposure to Live Nation in the future.

I’m going to go out on a limb here and say that John Malone may be making a mistake with Live Nation.

*Disclosure:  Currently long LMCA, feeling like an idiot for doing a poor job at due diligence.

**EDIT (12/16/2015):  I’ve since sold all of my LMCA shares.  No position in LMCA or LYV.

Links

Tracking John Malone (Part 4) – Live Nation (LYV)

Things I haven’t figured out

The Ticketmaster segment generated $204,901K in D&A for YE2014.  I couldn’t figure out how the number got so high.

  1. Non-recoupable ticketing advances generated $79.4M in amortization expense.
  2. Impairments charges of $9.2M “associated with an indefinite-lived intangible trade name in connection with the decision to rebrand certain markets that were not currently using the Ticketmaster trade name along with the impairment of certain technology intangible assets  […]
  3. 204.9 – 79.4 – 9.2 = 116.3.  There is $116.3M of D&A unaccounted for.  The prior 3 years’ capex averaged $122.06M/year (a 5.7M difference).  Given that Live Nation likely spends a good portion of that capex on new venues and non-Ticketmaster related areas, there might still be a little bit of D&A unaccounted for.

The second thing is that there is around $111M in other assets and $257M in other liabilities (see Note 12 in the 10-K).  I’m not sure what that stuff is.

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14 thoughts on “Live Nation (LYV) – Part 3 – Accounting

  1. Can you expound on this comment: “As well, the definition includes some non-cash components yet excludes the non-cash components of interest expense.” Their calculation seems pretty close to your calculation above (absent your subtraction of amort. of advances) – if we are looking for FCF, isn’t cash interest the only thing that matters?

    • Hmm I don’t think I was clear. Normally, with free cash flow, you start with cash flow from operations and work from there. Or you start with earnings, add D&A and subtract maint. capex.

      Live Nation’s “free cash flow” does things like ignore (cash) acquisition expenses and ticketing advances.

  2. Hi Glenn,
    I know you’ve been out of this investment since Dec 2015 but maybe you can help me on this. I’ve been looking at LYN and have been wondering how this works from an accounting perspective on the cash flow statement.

    Year 0
    LYN pays $30mm to a client for a 3 year contract (is that an artist or a theater?).
    Cash down $30mm
    Prepaid expenses/LT Advances up $30mm

    Year 1
    IS: Amortization of $10mm + Net income down $10mm,
    BS: Prepaid down $10mm + Retained Earnings down $10mm,
    CF: Amortization addback $10mm + Prepaid Expense positive change of $10mm

    How do they avoid the $20mm positive movement in the CF statement??

    Andy

    • 1- Maybe try reading a basic book or website on accounting. Some of the CFA material is decent. (Actually, I would make a terrible accountant. You probably shouldn’t take accounting advice from me… I don’t enjoy reading about accounting and actually dont know many of the rules.) I would recommend the CFA Level 1 material.

      2- LYV likely would not account for that as a prepaid expense??? It would be treated like an advance.

  3. Pingback: The shortcut method for figuring out a company’s accounting – Glenn Chan's Random Notes on Investing

  4. So after three long entries you sort of abruptly came to the conclusion that Malone “might be making a mistake” on LYV. Can you expand on exactly what you didn’t like about the business, beyond that their FCF & AOI / EBITDA definitions are somewhat convoluted and perhaps less conservative than you’d like like? You did mention that you think Ticketmaster is a technology company and you like it on a standalone basis, but not the concert promotion business. On that point I think you’re completely missing the mark that the concert side of the business is supposed to run breakeven while ad sponsorship / ticketing fees bring in all the high margins?

    Why is vertical integration a good thing for this business? A book you should really read that will help you understand this industry better is Ticket Masters by Dean Budnick (link below). But basically: 1) it allows LYV to lock up the entire value chain of concert promotion; when you own / operate the concert hall, under long-term leases, control the key regional promoters that bring in the acts and coordinate with each other for a national tour, AND also does all the high-volume online ticketing etc., as LYV you have a ton of negotiation leverage with the artists and basically make yourself irreplaceable;

    2) in your second post you questioned whether vertical integration is good for this business. In reality not only is it good for business due to 1) but counter intuitively also probably good for the market because being a one stop and shop basically takes away negative competition whereby promoter A and B bid each other to death in order to host a big act like Springsteen in a given market, which leads to squeezed margins across the value chain, and forces every player to increase prices…which eventually gets passed on to the consumer. This is a business where historically believe or not competition has led to higher prices, fwiw.

    I can go on and on, and there are for sure many reasons not to like LYV stock, but I am a bit disappointed that after all your work and three long blog posts the most you came up with was feeling like idiot because your diligence missed how amortization of artists advances work? You probably don’t even follow the company anymore nor care about the stuff I just wrote, but just in case I missed a monumental argument of yours I’m going to put this out there and look forward to your response

    https://www.amazon.com/Ticket-Masters-Concert-Industry-Scalped/dp/0452298083/ref=sr_1_4?ie=UTF8&qid=1473369013&sr=8-4&keywords=ticketmaster

    • I read the book and it’s very good. I think Malone did make a mistake on LYV (or entrusted that decision to somebody who made a mistake).

      The accounting is designed to mislead and that’s why it’s bullshit.

      Historically, the concerts promotion business has not been very good including the period when it was run by Robert Sillerman. (This is including sponsorship and any kickbacks from the ticketing company.) LYV doesn’t have a ton of negotiating leverage… the artists can go work for AEG and US antitrust laws will keep a damper on what they can do. If I had understood that the industry wasn’t great, I would’ve made more money shorting SFXE.

      • You didn’t really answer the question except repeating your opinion that the business is not good. What exactly leads you to say that other than stating your opinion? Sure, there’s AEG which is far smaller and focused primarily on sports as opposed to live music. Are you saying that having one other sizable competition makes LYV a bad business?

        Yes, you could’ve shorted SFXE. As a matter of fact we did and that was because 1) it was a pure promotion roll-up, 2) it was valued at a ridiculously by the market, and 3) after leaving LYV Robert Silerman decided he wanted to build a competitor to LYV and levered up to do so using a roll-up strategy, and failed.

        If you really believed LYV is an accounting fraud, you should go short it now.

      • Also, you might want to recheck your facts if you want to reference the history of the concert promotion business to prove your point. When Sillerman ran Live Nation, they had no ticketing business. So I don’t know what ticketing kickbacks you’re talking about. The predecessor of LYV didn’t enter that market until they did a licensing deal with CTS Eventim in 2008 to gain negotiation leverage with Ticketmaster, prior to the expiral of their existing contract. And what happened next? LYV merged with Ticketmaster, which did have to undergo serious anti-trust reviews but was given the green light after Obama became president.

      • Ok. To recap:
        1- If you read my blog posts, I lay out everything. I referenced the book “Ticket Masters: The Rise of the Concert Industry and How the Public Got Scalped”. And I quickly ran through the historically mediocre profitability of Live Nation’s predecessor.
        2- You state that: I am a bit disappointed that after all your work and three long blog posts the most you came up with was feeling like idiot because your diligence missed how amortization of artists advances work?

        I think you missed my point. Live Nation’s accounting is intentionally deceitful. They are going out of their way to fool investors like John Malone. You simply have to look at Ticketmaster’s accounting before and after the acquisition.

        3- If you really believed LYV is an accounting fraud, you should go short it now.

        Obviously LYV is not the worst of the worst, while SFXE was. I shorted SFXE but covered too early because I didn’t understand that the SFXE business was awful.

  5. Well, I guess we simply disagree on the business quality. There’re lots of reasons not to long LYV but I do think it’s a good business in the long term and I wouldn’t want to miss the forest for the trees. Ticketmaster was a transformative merger though so I don’t think it’s fair to dismiss the business model based on how their predecessors did. Those were different businesses and what LYV has done is consolidating and integrating the sector both horizontally and vertically. What you end up with is a collection of local near monopolies brought together via a centralized customer interface and ticketing and sponsorship apparatus. There will be a day when LYV stock trades poorly – mainly due to the financial and operational leverage of the company and the fact that concert attendance will go up and down – and personally I think that would be a good opportunity for Malone to profit and come in with a deal to buy even more of this company. But we will see.

    • I try not to do “this time it’s different” unless there’s a good reason for it. Some of the theoretical Ticketmaster/LYV synergies didn’t work out. Originally they thought that they could drag the industry into auctions, paperless tickets, etc. etc. Price tiering worked out, paperless tickets did not.

      The concerts promotions business is definitely not a local monopoly. IMO moats are ascribed to many businesses that don’t have them.

      • You’re again pontificating without facts. What do you mean paperless tickets didn’t work out, have you been to a concert lately? If you have a multi-year contractual lock on Madison Square Garden and Lollapalooza, yes that is a strong moat. We’re talking past each other at this point. I also disagreed with your premise that concert promotion historically was a bad business, that is too broad a stroke to paint an entire industry. It is a people / relationship business where some never made it and others who did consistently made a killing. If you can’t see how merging a concert promoter with a ticketing company creates a different business than before when it was only a promoter, I don’t know what to tell you.

      • The reality is, time will tell. SFX went bankrupt. If you and I (oh god) were to start a concert promotion business and break into the industry today, we will have a hard time. Why would an artist hire GlennC Promotions when somebody else has control over the local concert venue, promoter relationship, record working with big advertisers, ability to organize a national / international tour, and the backend technology to get the tickets sold and payments processed? To me that makes a difference. It is not a true monopoly, there will always be local concert halls here and there and festivals etc., but most can’t make money and are not relevant to LYV’s business anyway which deals primarily with larger acts. If there can’t be another LYV that is the bottom line when it comes to barrier of entry. LYV has done very well since Malone bought it. But it is not his greatest investment. It is also far from a big mistake as you say IMO but you and I disagree.

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