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.
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
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.
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.
- Non-recoupable ticketing advances generated $79.4M in amortization expense.
- 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 […]“
- 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.