SFX Entertainment, Inc. (SFXE) Q4 2014 Earnings Conference Call March 13, 2015 9:00 AM ET
Executives
Joe Jaffoni - Investor Relations
Bob Sillerman - Chairman and Chief Executive Officer
Richard Rosenstein - Chief Financial Officer
Analysts
Tim O’Shea - Jefferies
Larry Haverty - GAMCO
Ben Mogil - Stifel Nicolaus
Richard Tullo - Albert Fried & Company
Operator
Greetings and welcome to the SFX Entertainment’s 2014 Fourth Quarter Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.
I would now like to turn the conference over to Joe Jaffoni, Investor Relations. Please go ahead, sir.
Joe Jaffoni
Thank you, operator, and to those who are on the call and listening on the webcast, we apologize for the problems that we had in respect to connectivity this morning. In a moment, SFX Chairman and CEO Robert FX Sillerman, and CFO and Chief Administrative Officer Richard Rosenstein will review recent operating and financial developments. We’ll get to management’s presentations and comments momentarily, as well as your questions and answers. But first, I’ll review the Safe Harbor disclosure.
This morning SFX issued a press release announcing its fourth quarter financial results for the period ended December 31, 2014. The release is available in the Investor Relations section of the company’s website at sfxii.com.
Before we get started, I would like to remind everyone that this call is being recorded and a webcast replay will be available for 90 days, the details of which are in our press release issued this morning.
During the call we may make certain forward-looking statements about the company’s performance. Such forward-looking statements are not guarantees of future performance and therefore one should not place undue reliance upon them. Forward-looking statements are also subject to inherent risks and uncertainties that could cause actual results to differ materially from those expressed.
For additional information concerning factors that could cause actual results to differ from those discussed in our forward-looking statements, you should refer to the cautionary statements contained in our press release as well as the risk factors contained in the company’s filings with the Securities and Exchange Commission.
Also during today’s call, the company may discuss non-GAAP financial measures as defined by SEC Regulation G. The GAAP financial measure most directly comparable to each non-GAAP financial measure discussed and the reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found on the company’s website at www.sfxii.com, by selecting the Press Release, regarding the company’s 2014 fourth quarter financial results.
Finally, on March 10, 2015 SFX named independent members of its Board of Directors, John Miller, Michael Meyer, and D Geoffrey Armstrong to serve on a Special Committee to evaluate a proposal from Robert FX Sillerman, the company’s Chairman and Chief Executive Officer, to acquire all of the outstanding shares of SFX that he does not already own, at a price of $4.75 per share in cash.
Mr. Sillerman presently owns approximately 37.8% of the outstanding common stock of SFX Entertainment. The special committee will also consider alternatives to the proposed transaction that will enhance shareholder value, including any other offers to acquire the company. In addition, the company has retained Moelis & Company LLC to serve as the Special Committee’s financial advisor and Steptoe & Johnson to serve as the Special Committee’s legal counsel.
The Special Committee will consider and advise shareholders of its recommendations to enhance shareholder value in accordance with applicable legal requirements. No assurance can be given that an agreement on terms satisfactory to the Special Committee will result from the proposal submitted by Mr. Sillerman or any transaction will be consummated.
The management does not intend to discuss this matter on today’s all and the company has been advised by Segment [ph] Council not to answer such questions on this call. Any update regarding this [indiscernible] Special Committee created and informed news announced and filings with the Securities and Exchange Commission. Thank you for add on that.
And with that, I’ll turn it over to Bob Sillerman. Bob?
Bob Sillerman
Thanks, Joe. And additional apologies for the technology issues [ph] with this call, we’re sorry we’re delayed but as Joe said, the service provides continues to experience problems. I hope we’re able to complete the call. Also apology for the short notice for the call, there was somewhat live meet the data due to new current circumstances as for whether it was appropriate to do a call or whether I could participate. But obviously here we are.
The list we issued was somewhat more robust than we had in the past. As we have promised you, we were growing [indiscernible] a more thorough look at what the future holds for SFX. Having completed all of the fundamental investments and actually having un-compared and extremely exciting application through the people at service which was introduced about 10 days ago on pre-streaming service, we now have a comp list what we need to grow the business in accordance with the numbers we’ve indicated.
As you know, guidance for this year was prior to the de-stabilization of our currencies was Euro - Euro census was about $80 million and in fact as we’ve indicated we anticipate being right on that number such that only through the continued erosion of the Euro.
The numbers we prepared in our budget are based on the Euro and the dollar being far so to the extent that the Euro and the dollar change that number will go up or down accordingly.
You see that we’re anticipating a very sizable increase in attendance at the best goals we already have inside in the many slow-down festivals for the Summer Set and therefore we are quite comfortable with the number that we’ve given.
Similarly, on the marketing partnership the thing that is really most gratifying to me is that our partners are expanding their, spend with us and their reach. The latest selling tool for us for adding partners is in fact a core group of satisfied participants. And as we’re announce spending around the globe, with [indiscernible] expense were the T-Mobile around the country and conversations with other mobile providers.
We’re in a position now where we are selling from strength not from speculation. The fact that our participants are expanding now, which means that what we’re doing as working not just for them, not just for us, but most importantly for our fans. It’s been a very gratifying albeit challenging year, one where I authorized continued investment somewhat above what I anticipated would be necessary in the fourth quarter with the uncovering of the new opportunities that we worked.
Those at then, partially displayed when we enter towards the streaming service and two weeks at the Winter Music Conference which is the largest industry event in the U.S., we will be unveiling in conjunction with T-Mobile and some other participants the broad range of services and features that will come online immediately as well as throughout the rest of the year.
It’s been as I said a gratifying start for us. And in particular as I pointed out in my release, the employee and our partners at SFX have gone above and beyond. We’re doing more regular people and we’re achieving more.
And with that, as a general introduction, I’m going to turn it over to Rich, who is going to give you some more specifics and then we’ll take questions from you. Again, as reinforcing what Joe said, and the awkward position of not being able to discuss anything related to my proposed offer, we will acquire that while we have standard shares.
Richard Rosenstein
Thank you, Bob. I will now review our financial results for the fourth quarter and full year 2014. This morning’s release includes the GAAP financials so I won’t review them here. As an acquisitive and growing company, we believe adjusted pro forma comparisons if we’d own these companies, these businesses for both periods and adjustment for one-time extraordinary items is the best measure of our progress.
On a pro forma basis revenues for the year were $386.2 million marking an 8.3% increase over 2013. EBITDA for the year came in at a negative $3.4 million versus positive $17.7 million in 2013. The swing in profitability was largely a function of incremental investments the company made throughout 2014 in both start-up festivals and the platform build-out which totaled approximately $20 million as well as the impact of the absence of the bi-annual Rock in Rio show in Rio which represents a swing in profitability to us totaling $12 million.
In our live business, attendance grew on the same approximate basis by 10.9%. We also saw the first contributions from new marketing partnerships forced in 2014.
On a pro forma basis, revenues in the quarter were $95.9 million and that reflects the impact of more than $4 million of foreign exchange headwinds during the quarter. With marketing partner revenue of approximately $5 million in the quarter and more than that in the debt level sponsorship, pro forma revenues declined by 7.7% year-over-year.
In addition to the 4% negative impact of foreign exchange, the primary reason for this decline in the quarter related to Stereosonic, the touring festival of Australia which was by far our largest festival and the otherwise seasonally slow fourth quarter.
As you may recall Stereosonic is held across five cities in Australia over two weekends around the end of the year. For year, this was held as a single-day event in each city and the overall festival grew dramatically over time. In 2013, the festival appeared as a two-day event in each city for the first time with tickets sold only as a two-day package in each of the five cities.
The number of tickets sold last year fell a bit year-over-year by each grand pendant for two days meaning the earlier pendant increased significantly. This year, we found that there was much higher interest in single-day shows after samples of two-day format a year ago.
While reviews in the fan experience were amazing, tickets sales did not meet expectations. Consistent with our fan-first focus, we elected to preserve the quality we’ve had but the revenue and profitable of the festival suffered. As a result, we have pivoted back to a single-day festival theme with much longer cost for the single-day and expect this year’s show to resume its former success.
Excluding the impact of Stereosonic, the balance of our festivals performed well in the fourth quarter achieving same festival attendance growth of 9% and a slightly lower rate of revenue growth due to impact of foreign exchange headwinds.
Incidentally for the full year, excluding the impact of Stereosonic, overall same-festival attendance grew 22% and revenue by 15% which highlights the strong demand we enjoy overall for our customers.
There were few adjustments to EBITDA transaction related cost, non-recurring expenses such as severance and identified cost savings. We also achieved a reversal of the insurance proceeds booked in the fourth quarter related to two-canceled share base in the third quarter. Those proceeds were received in the fourth quarter and we recognized this in our fourth quarter reported results.
As we previously adjusted for these anticipated proceeds in the third quarter, this fourth quarter adjustment backset, our forward level counting. On an adjusted basis, pro forma EBITDA came in at a loss of $7.7 million compared with a little more than breakeven last year, by far the business impact on fourth quarter pro forma EBITDA was a swing in profitability in Australia.
Now, let’s look at 2015, we indicated previously that we would present guidance in the early part of this year at the 2015, we expect revenues in excess of $500 million. Embedded investor sponsorship and brand partnership revenue in excess of $100 million, of this sponsorship and brand partnership revenue, nearly half of it has already been committed. Some of this is embedded in our live events and some in platform. This includes local, regional, national and global sponsorships as well as broader brand partnerships.
Embedded with the live events, these revenues were supposed to show some consolidate and those that we denied such as partners and license events. In any case, our expected sponsorship and partnership revenue represent substantial growth from the nearly $35 million we had in 2014.
The 2015 EBITDA, we’re guiding to a range of $60 million to $70 million. This includes the impact of fairly significant foreign exchange headwinds around the world largely in Europe and now in some $15 million or so. The first quarter of the year is seasonally the slowest in terms of festivals and we just move on speed, the contribution from sponsorship around our digital platform will grow over the course of the year. We should expect the second quarter to be better than the first quarter and the third quarter will be bigger than the second quarter generally speaking given not only the timing of our festivals but also step on our digital platforms.
We’ve already announced T-Mobile as the first charter partner of our new Beatport streaming music services here in the U.S. There are more charter and other staff yet to come not only in the U.S. but also in other regions around the world.
In addition, the Beatport launch brings media inventory in the form of digital advertising and we have been previously sold. As we have now re-launched our platform aggregating millions of users, we are now in a position to sell this effectively.
To monetize this we needed to add to our sales organization an analog of three alternatives. The first is to hire on a PCO basis, it’s sort of time consuming as building a sales force from scratch can be somewhat risky as we have no tangible evidence of the sales team success until they tried to sell.
Second was to simply outsource the sales function to a third party rep fund. While on the surface this approach would be cost effective, it would also mean a valuable inventory could be bundled with inventory out-square and even at reps control over the sales process and in turn return on the contribution.
Third, we considered acquiring existing tier sports, which is the path we chose and in January we strengthened our management team executives with live and digital experience and the 25% Viggle revenue sales team.
The advantage to the Viggle sales force which is in place and functional already although with many have of them have excess capacity as Viggle’s audience is currently somewhat limited. We’ve structured the transaction in such a way that SFX assumes the cost of the sales team and we’re able to portray a large portion of these costs as SFX owns a commission on this team’s continued sales of their inventory.
We’re already seeing of having more ad inventories to sell including Beatport and other SFX inventory is an advantage of the sales force didn’t have previously.
To sum it up, the time and money we have invested to live at this point is necessary to be able to offer a compelling opportunity for marketing partners and run the 364. As operational executions throughout 2014 was solid as we prove will grow attendance in bringing distant customers to new markets attract partners to manage that risk with a substantial digital platform that is now being fully launched.
And we brought our year marketing partners who are not only spending with us already but are also interested in identifying ways to do more with us. We know results fall short of original expectations over a year ago and we’re working hard to overcome that which is why we are providing guidance today.
With respect to our obligations and liquidity, we ended 2014 with $63.3 million in cash and debt of $295 million comprised of our 9.625% second senior secured notes through 2019. Until we reach this point, investor focus is justified on our live events and sponsorship of those events.
Marketing partner engagement has been difficult since fully visualized this campaigns have been in development. Now that the Beatport streaming has launched and we’ve developed these products and services with the likes of MasterCard, 2015 will ensure far wider reach in terms of engagement in simply larger than sponsorship.
We also see that SFX is transitioned to a platform company offering an audience far larger than live event assemblies we represent identical asset coveted by marketers, we demand a credible and authentic way in which we engage these audience.
The community of our events, music and all of our concepts is exactly to be at those to provide that engagement.
With that operator, I’ll turn it over to you. And we’d be happy to take questions.
Question-and-Answer Session
Operator
[Operator Instructions]. Our first question comes from the line of Brian Pitz with Jefferies. Please proceed.
Tim O’Shea
Yes, hi, it’s Tim O’Shea for Pitz, thank you for taking my question. Just thinking about what you’re seeing at Stereosonic in Australia, just wondering how does this impact your thinking about hosting more on multi-day festivals. As you guys are measuring ticket demand across the globe, you view this issue as more of an isolated event or perhaps does this reflect any type of saturation in terms of the number of festivals that are out there? And then I do have some follow-ups. Thanks.
Richard Rosenstein
Sure. On Stereosonic I would say that the Australian market is a bit different in this event, in shifting from one to two days. This is not a camping festival so these are days that we need to come back for the second day or I think one, and some will be the in-grow events. And so this is a very different dynamic in the trek and camping festivals, which is what we’re seeing as we expand in other geographies to multi-day events.
And in fact, I would highlight this Mysteryland which has been running in the Netherlands for well over a decade is moving to a secondary and is introducing capital for the very first time in the Netherlands this year.
Tim O’Shea
Okay, thanks. And then, just curious about the decision to begin offering forward guidance, I believe this is the first time that we’ve seen that. So, the question is why now and what gives you the confidence in those 2015 numbers? And then going forward I’m just curious do you have any plans to start offering quarterly guidance and if not perhaps what would have to happen to get us to that point? Thanks.
Richard Rosenstein
Sure. The rationale behind providing guidance is a couple of things. One is, we have toasting in order to fulfill that promise. The second is, as you may recall when we started 2014 we had just assembled many of our assets, the lion’s share of our assets. And we were just beginning to sell to marketing partners.
And so we had some visibility as to how that sales process would work but it’s still our own days in throughout the course of the year, we found that continued sales of those marketing partnerships tended to be more concentrated than we had originally anticipated. We’re very happy with where we are with our marketing partners today.
And as a result of everything that we have in place, in terms of engagements with those marketing partners as we headed into 2015, our knowledge of the level of investment that we would be making in the year, that was quite different than what we made last year and the launch of our Beatport platform coupled with a very detailed bottoms-up budgeting process that included far more information from a historical basis going into this year, gave us a lot more confidence to provide that guidance.
We will not be providing at this time quarterly guidance, the business as we know is lumpy and we, the purpose of this is not because people fixated on quarter-to-quarter results, I think it’s just a general sense of how we see the business unfolding over the course of the year.
Tim O’Shea
Okay, thank you. And then, just I guess one final question, I know, we - I think Joe and Bob both mentioned we’re not going to be answering questions about the offer. I’m going to try, if I could ask it this way, maybe when could we expect any update on that, I don’t know if you could maybe you could just answer that question?
Richard Rosenstein
I don’t really think it would be appropriate to speculate on timing around this. As we’ve said, we’re not going to answer any questions about the process.
Tim O’Shea
Fair enough. Thank you.
Operator
[Operator Instructions]. Our next question comes from the line of Larry Haverty with GAMCO. Please proceed.
Larry Haverty
Yes. Rich, I was wondering if you could do deep-dive for SOM what the expectations might be for Rock n Rio because this didn’t happen last year, you’re moving within new and it’s Rio non-comparable I guess it’s in the second quarter?
Bob Sillerman
Larry, its Bob. Rock n Rio is not moving the venue we’re adding venues. And they’re going to take live in Rio where it always has. So we’re heading in the digital show. And it’s in May and the measured marketing brand on digits for Rock n Rio in the U.S. will be launched in 11 days. I happen to be drilling it down the foreign here on Monday for part of the [indiscernible], I remember it sold in pre-sales about somewhere around 30% or 35% of the tickets already.
But the major gig, revolving now in Western asset in the USD, one in Rio is sold out. And will be a major contributor as it has been. Does that answer it?
Larry Haverty
You haven’t - this is four days in Las Vegas right?
Bob Sillerman
It’s two weekends of three days, it’s like six days.
Larry Haverty
And you don’t want to share with us what your attendance - with that forecasted total attendance for that?
Bob Sillerman
We never do that on a principle like principle basis. But this I think we can share. That Rock n Rio in Las Vegas - in Rio is the most successful sponsorship festival by far in the world. And one in Las Vegas, were first year festival as already exceeded any other first year festival ever. As to attendance we’re just not going to know until we take off the - a full sales effort in 11 days.
Larry Haverty
Okay. Just, not connected with the deal, but can we hear sir in the public I mean, right now I missed that, it was disclosed by Joe I guess earlier?
Bob Sillerman
Probably 2 million is fully diluted. And fully diluted is, over 100. So by public domain that you mean need a management and other insiders is about half of that.
Larry Haverty
Okay, great. Thanks a lot Bob.
Bob Sillerman
Yes.
Operator
Our next question comes from the line of Ben Mogil with Stifel Nicolaus. Please proceed.
Ben Mogil
Hi guys, good morning and thanks for taking my question. So, Rich two questions. The first thing, in terms of the FX and I get that obviously the Euro is doing what it’s doing. What cost relief do you have around, I mean, guessing most of the local costs are by definition locals, so there is sort of a natural hedge there. Do you have much relief on artist costs or the Euro based or dollar based. And then, are your sponsorship abroad there, are there dollar or Euro?
Richard Rosenstein
Good question, Ben. So, by in large, we’re generally matched up on revenue and expense in most of our jurisdictions. There are a couple of costs that are - that might be validated, artists costs are you get on and then money in sync artist costs are dollar based, not in Euro in many. So that’s an area where there could be mismatch.
So, the impact broadly speaking is more what a translation than it is exposure on a mismatch. Sponsorship do vary, up until now a lot of what we have been engaging in has been dollar based, but increasingly we’re seeing it in multiple currencies around the world.
Ben Mogil
And that you’re seeing multiple currencies around the globe, that obviously gives you better hedging, is that your - was it your impact to go to local currency?
Richard Rosenstein
Yes.
Ben Mogil
Okay. And then, sort of tied to the sponsorship issue, I guess, yesterday Smirnoff and Insomniac announced over big I think 26th festival deal. Do you view that as a deal that could have been yours, do you view that as a deal that is good for you and then it gets other brand say somewhat lined up against a competitor and that’s lined up a few start. How do you view that deal both if you have a sense of what it was in terms of dollar, in terms of going through the ideology of vis-à-vis your initiatives because they’re obviously kind like comp against you?
Bob Sillerman
We were thrilled to see the growth. Everybody will recognize its value as an aggressive millennial promotional capacity is good for us. There are many sponsors we share with Insomniac for enter that, some business from being. And we’ve also share sponsors with them, we were obviously - we put it lots to in the band that particular sponsorship. But the markets of concentration for Smirnoff were ones that Insomniac was better positioned to serve.
You can expect to see a multiplied I don’t know the dollar amount to that share. I can’t say comfortable but you’re going to expect to see a large myriad deal announced by us in a relatively near future.
Ben Mogil
That’s great. And then, in terms of $100 million sponsorship revenue, did you say this for implicit or invaluable guidance if you will. Do you release what the sort of the QMA EBITA is the way you have in previous quarters?
Richard Rosenstein
No EBITDA Ben. And the reason for that is now that we have greater visibility around each of these marketing partnerships and record level of engagement initiation of Q&A to grow a notion that is always out of our high yield rates. It’s matched right at the front that this includes all anticipated revenue and profitability not necessarily the contracted elements of it. And so that’s really how we look at the business.
Ben Mogil
Okay. That makes sense. Thanks a lot for the color guys.
Richard Rosenstein
And then just offer to the fully charging, your last question, I just want to clarify and answer to what Bob had provided before. Rock n Rio in Rio is a two-weekend event it’s three days per weekend so it’s a six-day - actually seven days because I believe if there is an additional day on one of the weekend.
Bob Sillerman
That’s right.
Richard Rosenstein
But in Las Vegas, the first year will be two days per weekend for two weekends that’s actually four days. I just wanted to clarify that.
Operator
[Operator Instructions].
Richard Rosenstein
Operator?
Operator
Yes.
Richard Rosenstein
We had a question, someone e-mailed us right.
Operator
Thank you.
Richard Rosenstein
All right. The following question comes from Richard Tullo of Albert Fried. Richard’s questions were how many festivals will SFX for 2015? Please update and provide color on Beatport yet are the numbers you indicated why is it, the rollout slow? How do you get to $500 million in a slower market per concerts in the first half in ‘14 any benefit to SFX in 2015? Again, that’s from Rich Tullo at Albert Fried.
Bob Sillerman
I’ll do first and just a simple bring on the revenue online. We anticipated that when fee-based on per-sales and sale-back festivals, attendance growing from 4 million to 6 million and additional 2 million attendees and average spend of $50, was then an extra $100 million of revenue alone. So simplistically we’ll leave it at that.
On Beatport, the question was why was it slow? I thought that I had address the fact that we indicated we uncovered something very impactful that we were able to do and that we in fact believe that the first part of that about 10 days ago, little bit more and that the balance will be seeing in March.
We had anticipated a tabloid release and we have approximately 230 days to live, was directly related to that. When you see the slide you’ll understand precisely what was involved and the doxology required to, do what we’re doing.
Richard Rosenstein
And then on the other question, how many festivals we host in 2015? Right now we’re looking at between 80 and 100 for the full year. There was a question about the slower market for concerts in the first half and is that any benefit for SFX? Certainly our first quarter is seasonally slower one, so in terms of our customers so it’s not really any impact at all. And as Bob said, having MTV the bigger Summer Festival season, some of our shows have already been signing up.
Operator, any other questions?
Operator
There are no further questions at this time. I’ll turn the call back over to you.
Bob Sillerman
All right. Thank you, again apologies for the technology issues that we had, and thanks for your continued support. We are focused on running the company on a day-to-day basis. And we will continue to be focused and will not let the noise surrounding the potential deal, distract us from accomplishing what we’ve laid and hopefully more. So, thank you all for your interest.
Operator
Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation. And ask that you please disconnect your lines.
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