EVENTBRITE INC EB
July 17, 2019 - 12:45pm EST by
yellowhouse
2019 2020
Price: 16.40 EPS 0 0
Shares Out. (in M): 90 P/E 0 0
Market Cap (in $M): 1,476 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 1,200 TEV/EBIT 0 0

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Description

Introducing the Opportunity 

Eventbrite (EB) is an online ticketing platform. Chances are you’ve attended an event where Eventbrite was the ticketing vendor. At $16/share (<4x revenue and ~6x gross profit)we think EB offers rather low-risk 30% upside and potential for a +100% gain. Eventbrite is a growing, durable software business whose wheels got stuck deep in the mud following an ill-fated acquisition. We believe that the acquisition overhang will persist for another two quarters and then we expect the company will resume 15-25% growth, up meaningfully from the current trough of essentially flat growth.

In September 2017 Eventbrite acquired one of their largest competitors, Ticketfly, from Pandora for $200MM(roughly 4x run rate revenue and 9x gross profit). Pandora sold Ticketfly as part of its restructuring leading up to their sale to SiriusXM. They had acquired the ticketing business in 2015 for $335MM (actually $450MM before Pandora’s stock collapsed). Ticketfly caters to medium-sized music venues; some are quite iconic like the 9:30 Club in Washington DC. Until this year, Ticketfly was the ticketing vendor for Burning Man (we will return to Burning Man later). By contrast, Eventbrite has historically focused on festivals, smaller music venues and conferences. At $50MM in revenue and $22MM in gross profit, Ticketfly represented a little over 20% of revenue and around 15% of gross profit following the close. There’s little doubt that Ticketfly’s negative impact on EB’s stock price has far exceeded its economic significance.  

Eventbrite planned on migrating Ticketfly customers to their own Eventbrite Music platform within twelve months, after which they would be well positioned to roll out product enhancements that would further digitize and add value to the music venue customer experienceOn May 30, 2018, Eventbrite was forced to shut downTicketfly for three days after a hacker obtained personal data on 26 million ticket buyers and tried to extort the company for bitcoin. This disruption came at a truly awful timeNot only did it pour water on Eventbrite’s plans to migrate customers prior to the summer festival season, but it also weakened Eventbrite’s competitive posturewith Ticketfly customers (which was going to be tough in any scenario involving a platform migration)

Since the breach, and the resulting elongated migration period, competitors have aggressively pursued Ticketflycustomers. The heightened competitive environment in the newly acquired music venue vertical (where Eventbrite has limited operating history) has beenexacerbated by suitors offering large upfront payments for venues to enter into long-term contracts, which is a common practice in the industryThis has created major issues for Eventbrite. On the product development side, elevated competition has emboldened Ticketfly customerssuch that they are demanding product enhancements(even if the majority are simply to match functionality with the soon-to-be sunset Ticketfly platform) and economic concessions. On the sales and marketing side, teams have had to pivot their efforts towards retaining customers instead of winning new ones. Since EB has historically enjoyed near 100% net retention rates, these types of customer success processes are relativelyimmature. All told, these factors have ground the non-self serve parts of the business (around 45% of total revenue) to a halt, and have had a lesser, although likely still material, impact on the self-serve side of the house as resources have become scarcer.

Eventbrite came public in September 2018. Prior to listing, Eventbrite was growing 25-30% organically (+45% including acquisitions). Their growth in the most recent quarter dipped to 9%, and it could very well flatline before the Ticketfly platform is wound down in October (per timing laid out at most recent Ticketfly user conference). There is certainly risk that the migration pains could be worse than forecast. However, I believe that these worries have sufficiently scared off would-be buyers (investment managers live and die in 90 day cycles) and that the current share price more than compensates an investor for wearing the risk associated with last leg of Evenbrite’s Ticketfly nightmare.

Business Overview

Eventbrite is the largest digitally native event ticketing business in the world. In 2018, Eventbrite helped more than 790,000 creators (13% yoy growth) issue approximately 265 million tickets (30% yoy growth) across 3.8 million events (27% yoy growth) in over 170 countries (there are only 195 countries; Eventbrite is fully localized in 19 countries)

Eventbrite is the market leader for small and midsized events (ie, everything but large sports and music venues). Eventbrite.com is one of top 100 most linked-to sites on the Internet. If you search for some variant of “things to do” in your city then your local Eventbrite site is almost guaranteed to be one of the top five links served up by the results page. The strength of their web presence is key to their success in acquiring customers and ensuring customer satisfactionWe believe that Eventbrite’s competitive advantage will grow as creators get more sophisticated and more reliant on using digital marketing (search and social media) and distribution channels (Spotify and YouTube).

Eventbrite enjoys ubiquitous brand awareness amongst event creators, and they are uniquely capable of delivering value to their customers. They drive more ticket sales than competitors (customers estimate that as much at 10% of ticket sales come direct through the Eventbrite website) and, critically, Eventbrite offers the widest breadth of distribution across the most important digital channels.

Facebook and Instagram – not only is Eventbrite integrated so that buyers can purchase tickets natively within Facebook and Instagram, but in in May 2019, Eventbrite was selected to power Ticketing on Facebook. These social integrations could significantly augment Eventbrite’s addressable market to include events such as food trucks and in-store sale promotions
Spotify – Eventbrite is one of only four ticketing partners, and the only operation not owned by LiveNation, AEG or Warner Music
YouTube – last October Evenbrite and YouTube announced a partnershipand, like Spotify, they are one of three ticketing partners and the only independent

From a software and technology perspective, Eventbrite is significantly advantaged as they are both built on an entirely modern tech stack and significantly larger than any of their “born in the cloud” peers. Eventbrite has invested over $100MM in R&D over the last three years. Their availability is second to none. Since 2013, Eventbrite has maintained 99.99% system uptime. This is a big deal. As previously mentioned, Ticketfly lost Burning Man as a customer in 2019 after hosting the event for five years. This year’s ticketing experience for Burning Man has been nothing short of a disaster (link). Furthermore, Eventbrite’s API integrations with software solutions such as Salesforce, HubSpot and MailChimp are best-in-class. As work continues to digitize with the rise of SaaS tools, these integrations will likely become even more mission-critical.

Although Eventbrite is not always the lowest cost option, their fees are much cheaper than the large incumbents, which range from 6-20% of a ticket price, and, as discussed above, the value Eventbrite delivers far exceeds the potential offerings from subscale web players. For events which don’t charge for entrance, Eventbrite distributes tickets at for free. This “free for free” offering accounts for 65% of total ticket volume. In 2018, Eventbrite distributed 167MM free tickets, a 27% increase from 2017. This freemium offering is a key channel for new acquisitions. Since 2015, 17% of creators for free events proceeded to host a paid event within a year. For paid customers, Eventbrite offers their services in three different tiers. Here is a clip from their website.

Eventbrite’s average revenue per ticket is around $3. Recently these fees have dipped a few percent, which has been driven by lower average ticket prices, but the competitive environment around pricing is relatively benign. As Eventbrite continues to add technology solutions that support operations and drive revenue they should be able to at least sustain pricing.

In summary, we believe that the vast majority of event creators are best served by Eventbrite. We believe that although competitors will always trade customers at the higher end of the market, Eventbrite will continue to improve upon their net retention rate (from 93% to 100% over the last two years) and, in time, they will generate strong operating margins (ie +20%). Their self-serve go-to-market strategy will serve as a key factor in their ability to successfully achieve profitability, and sustain market dominance. 

Financials and Drive Towards Profitability

Following is a table that depicts Eventbrite’s quarterly financials over the last few years.

 

Q3 16

Q4 16

Q1 17

Q2 17

Q3 17

Q4 17

Q1 18

Q2 18

Q3 18

Q4 18

Q1 19

Net revenue

                        32,176 

                      33,905 

                   43,351 

                   44,802 

                   50,749 

                   62,695 

                74,526 

                      67,542 

                      73,628 

                   75,915 

                   81,326 

yoy growth

 

 

 

 

58%

85%

72%

51%

45%

21%

9%

% organic growth

 

 

 

 

 

 

36%

37%

19%

20%

9%

Cost of net revenue

                        13,352 

                      13,880 

                   17,157 

                   18,145 

                   20,993 

                   25,372 

                28,084 

                      29,863 

                      31,477 

                   31,229 

                   30,518 

Gross profit

                        18,824 

                      20,025 

                   26,194 

                   26,657 

                   29,756 

                   37,323 

                46,442 

                      37,679 

                      42,151 

                   44,686 

                   50,808 

Gross margin

59%

59%

60%

59%

59%

60%

62%

56%

57%

59%

62%

Contribution Margin

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Product development

                           5,767 

                        6,187 

                      5,458 

                      6,023 

                      9,351 

                      9,776 

                  8,834 

                      10,981 

                      12,856 

                   13,400 

                   14,264 

as % of rev

18%

18%

13%

13%

18%

16%

12%

16%

17%

18%

18%

yoy growth

 

 

 

 

62%

58%

62%

82%

37%

37%

61%

Sales, marketing and support

                        12,153 

                      11,655 

                   11,039 

                   12,132 

                   14,351 

                   17,648 

                17,538 

                      18,085 

                      17,428 

                   16,729 

                   21,170 

as % of rev

38%

34%

25%

27%

28%

28%

24%

27%

24%

22%

26%

yoy growth

 

 

 

 

18%

51%

59%

49%

21%

-5%

21%

General and administrative

                           9,987 

                      13,356 

                   13,112 

                   13,434 

                   16,479 

                   24,534 

                23,161 

                      21,833 

                      24,921 

                   23,867 

                   25,519 

as % of rev

31%

39%

30%

30%

32%

39%

31%

32%

34%

31%

31%

yoy growth

 

 

 

 

65%

84%

77%

63%

51%

-3%

10%

Total operating expenses

                        27,908 

                      31,199 

                   29,609 

                   31,589 

                   40,182 

                   51,960 

                49,535 

                      50,901 

                      55,205 

                   53,993 

                   60,953 

Loss from operations

                         (9,084)

                    (11,174)

                    (3,415)

                    (4,932)

                  (10,426)

                  (14,637)

                (3,093)

                    (13,222)

                    (13,054)

                    (9,307)

                  (10,145)

as % of rev

-28%

-33%

-8%

-11%

-21%

-23%

-4%

-20%

-18%

-12%

-12%

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

                           1,892 

                        2,047 

                      2,775 

                      3,186 

                      5,090 

                      8,367 

                  8,202 

                        8,580 

                        8,830 

                      8,996 

                      6,137 

Stock-based compensation

                           2,228 

                        2,546 

                      1,805 

                      1,956 

                      1,946 

                      5,151 

                  2,860 

                        5,248 

                      15,049 

                      7,074 

                      8,127 

Direct and indirect acquisition related costs

                              180 

                        1,057 

                      1,097 

                      1,228 

                      4,406 

                         606 

                     823 

                           622 

                           389 

                         767 

                         673 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

                         (4,784)

                      (5,524)

                      2,262 

                      1,437 

                      1,016 

                       (513)

                  8,792 

                        1,228 

                      11,214 

                      7,530 

                      4,792 

as % of Rev

-15%

-16%

5%

3%

2%

-1%

12%

2%

15%

10%

6%

CapEx (LTM divided by 4)

                         (1,900)

                      (2,117)

                    (2,198)

                    (2,179)

                    (2,104)

                    (2,170)

                (2,426)

                      (2,848)

                      (3,092)

                    (4,284)

                    (3,234)

as % of Rev

-6%

-6%

-5%

-5%

-4%

-3%

-3%

-4%

-4%

-6%

-4%

Free Cash Flow

                         (6,684)

                      (7,640)

                           64 

                       (742)

                    (1,088)

                    (2,682)

                  6,367 

                      (1,620)

                        8,122 

                      3,246 

                      1,558 

 

 

 

 

 

 

 

 

 

 

 

 

FCF Margin

-21%

-23%

0%

-2%

-2%

-4%

9%

-2%

11%

4%

2%

Contribution Margin

 

 

 

 

30%

17%

20%

-4%

40%

45%

-71%

FCF Margin - incl SBC

-28%

-30%

-4%

-6%

-6%

-12%

5%

-10%

-9%

-5%

-8%

Contribution Margin

 

 

 

 

8%

-10%

5%

-36%

-34%

-48%

-232%

Paid Tickets

                        11,095 

                      12,110 

                   14,669 

                   15,605 

                   18,074 

                   22,698 

                23,598 

                      23,099 

                      23,896 

                   26,702 

                   27,026 

yoy growth

 

 

 

 

63%

87%

61%

48%

32%

18%

15%

Revenue Per Paid Ticket

                             2.90 

                          2.80 

                        2.96 

                        2.87 

                        2.81 

                        2.76 

                    3.16 

                          2.92 

                          3.08 

                        2.84 

                        3.01 

yoy change

 

 

 

 

-3%

-1%

7%

2%

10%

3%

-5%

 

Until recently, Eventbrite appeared to be a relatively healthy SaaS-based company. Their revenues were growing organically at +30%, sales and marketing was reasonably efficient with a 6 quarter payback (calculated as sales and marketing spend divided by changes in gross profit), and with the exception of G&A costs, they were achieving a reasonable amount of margin leverage. But starting in the third quarter of last year, the business took a turn for the worse. Organic growth was cut it half not once, but twice, and the trend of improving margins came to a halt. Adjusted for currency and amortization of creator signing bonuses, we believe the business grew 14% in the first quarter. This deterioration is a consequence of the challenges associated with the Ticketfly acquisition (even absent the migration challenges, Ticketfly isn’t a good business). Though we expect that the acquired music revenue will continue to dilute both the growth rates and margin profile of the self-serve business, we expect that the magnitude of this headwind will subside in the coming quarters.

Let’s take a moment to breakdown Eventbrite’s revenue. Thanks to the aforementioned dominant mindshare and Internet property strength, Eventbrite is predominantly a “self-serve” businessIn 2018, over 98% of the creators who used the platform signed themselves up on the Internet. This segment (which is a global revenue bucket; 27% of the overall business is international) contributes roughly 60% of revenue and is currently growing +20%. We believe this is exceptionally valuable (ie 8-10x sales) revenue. Self-serve software companies are amongst the most capital efficient businesses out there. Their products are sold without the need of a salesperson and the marginal cost to deliver software is virtually zero. The nature of Eventbrite’s self-serve go-to-market, which leverages a durable Internet asset whose moat is likely to only widen as they achieve more scale, suggests low risk of disintermediation (which is unique when compared to many SaaS products). Although Eventbrite does not provide stand-alone financials for the self sign-on business, we think it is reasonable to assume +20% operating margins and high (ie +40%) contribution margins. Put in relation to the company’s current valuation, we think this segment of the business alone is worth +$20/share.

The remaining 40% of the business is decidedly lower value. Approximately 25% is North American revenue which requires a salesperson, and the other 15% is international business that also necessitates a sales organizationThe North American segment, which includes Ticketfly, is not presently growing and its margin profile is quite poor. The international segment is growing in the double digits, and though its margin is also not very good there is a reasonable case to be made that it will improve as Eventbrite builds scale in these markets. The real problem here is that the domestic, sales-enabled business is an absolute albatross on the rest of the company. It’s unclear how the situation will improve, but it’s hard to see how it gets worse.

The majority (we estimate 75%) of the North American sales enabled business comes from the Ticketflyacquisition. As a stand-alone business, Ticketfly’s margin was downright awful prior to the acquisition. In the S-1, Eventbrite broke out Ticketfly’s financials for both 2016 and the first eight months of 2017 when it was still an independent companyThe operating margin for both periods was an atrocious -100%. For a business that was only growing ~20%, this is terrible. Without segment-level details it’s tough to estimate how much of a drag this “bad business” is on the “good business”, but if you simply back out the additional $50MM expense burden (which is the -100% margin on Ticketfly’s ~$50MM in 2017 revenue) then margins would improve by over 2,000 basis points. Admittedly we don’t have a strong view for how management rights the ship, however even without specificity, we do have confidence that both the management and current owners will take corrective action that is likely to result in material share price appreciation from here.

Management and Ownership

Eventbrite was valued at over $1B in 2014. If you add in the $200MM they paid for TicketflyEventbritesvaluation is unchanged over the last five years, despite the company growing several times. This has not gone the way anyone planned. It appears to us that the seemingly misguided acquisition of Ticketfly was driven by a desire to “cross the chasm” and scale the business in a way that would allow Eventbrite to cement its role as a dominant force. Though this long pass appears to have been intercepted by the opposing team, we still have a high level of confidence in the people and organizations behind Eventbrite. The opportunity cost for those involved is very high. If the ship doesn’t turn in the next year then I think there is an extremely high likelihood that Eventbrite gets sold.

Eventbrite was founded in 2006 by husband and wife team, Kevin and Julia Hartz, along with their technical founder Renault VisageThe Hartz’s own 8% of the company and control 17% of the voting shares. Mr. Visage has negligible ownership. The largest holders of the voting class of shares are Tiger Global (32%), Sequoia (30%), T. Rowe Price (8%) and Baillie Gifford (4%). Importantly, none of these holders have sold a share since the IPO, despite having many opportunities at much higher prices. 

Kevin Hartz, who is currently Chairman of the Board, served as CEO until 2016 when he stepped down for unspecified health reasons. Julia took over as CEO and continues to hold the position. Kevin and Julia are considered one of the more prominent Silicon Valley power couples. In addition to co-founding Eventbrite, Kevin also co-founded the money remittance company Xoom (acquired by PayPal for $890MM in 2015) and is considered one of the better VC tech investors around. Kevin was a notable early investor in PayPal, Pinterest, Uber, Airbnb and TruliaUntil recently, Kevin was a partner in Peter Thiel’s esteemed Founders Fund. Although Julia carries somewhat less of a heavyweight reputation, there is little doubt that she is one of the higher profile women in technology. For instance, you may have recently seen the news coverage of Bill Gates lamenting in an interview that his greatest mistake was Microsoft failing to win the mobile operating system, having lost out in tremendous fashion to Android and Apple IOS. The interview was conducted by Julia Hartz. 

The strength of their reputation is well reflected by Eventbrite’s blue-blood investor base (Sequoia led the early rounds and Tiger Global led the most recent private funding), their board composition (which is highlighted by Roelof Botha, partner at Sequoia and a member of the famed PayPal mafia), and, finally, by their murderers row roster of go-to-market partners including leadoff hitters Facebook and Square (more on this second partner later)

The final management topic worth covering is the pending CFO search. Randy Befumo, who joined the company in 2013, has held the CFO title since 2016Randy is not a natural CFO. He and his colleagues describe his skill set as being more geared toward product strategy. Since Randy has done a pretty awful job managing the forecasting and communication with investors, the company announced on the last earnings call that he will be stepping away from the CFO position and focusing on his role as Chief Strategy OfficerOur conversations with Former employees describe Randy as an engaging leader who communicates the company vision well. We are glad that he is staying and look forward to the company finding a more natural CFO to take the reins.

Potential Acquisition Candidate

If Eventbrite’s share price doesn’t recover then we think the business gets acquired. Although this is pure speculation on our part, we detail some potential acquirers below.

Square – Starting this year, Eventbrite is launching a partnership with Square whereby Eventbrite will white-label Square’s payment services. Over 90% of the paid tickets handled by Eventbrite utilize processing services provided by Eventbrite through a combination of several different partners. By consolidating all of this activity onto Square’s platform we expect that not only will Eventbrite be able to service their customers better (with potentially improved economics), but we also anticipate that it could prompt Square to acquire Eventbrite. Square is on a warpath to capture as much of their customers’ operations in the Square ecosystem as possible. Owning Eventbrite seems quite consistent with this strategy.
Facebook – With the announcement of Libra, Facebook clearly wants to become a commerce platform. Similar to the partnership with Square, we think Facebook could determine that after bringing Eventbrite in to run their Ticketing on Facebook offering (link) they may conclude that acquiring Eventbrite is a low cost way to jump start these monetization efforts.
Vista Partners – Starting in 2016 with the acquisition of conference ticketing provider Cvents for $1.65B (+7x NTM revenue), Vista Partners has been very active rolling up niche ticketing providers. Most recently they acquired an event logistics software company called Social Tables for over $100MM. There would be little doubt that Vista could drive value well beyond Eventbrite’s current valuation.
LiveNation – Any list of potential acquirers has to include Eventbrite’s biggest competitor. If LiveNation were to acquirer Eventbrite they would have a functional monopoly on ticketing around the world.

Framing Upside

We think the most reliable valuation framework for Eventbrite is to compare it to recent M&A activity. Over the last two years the velocity and valuation of software acquisitions has increased significantly. We have selected five recently acquired software businesses for our comp set. With the exception of Xactly, we diligenced and owned all of these businesses while they were public. Given the value of Eventbrite’s self-serve business and its strategic fit with many acquirers, we think that Eventbrite warrants a higher multiple than these comparables.

 

Date

Purchase Price ($MM)

Acquirer

EV/NTM Rev

EV/NTM Gross Profit

YrGrowth Est

Xactly

5/17

564

Vista Partners

6.40x

7.97x

20%

Apptio

11/18

$1,940

Vista Partners

7.10x

10.14x

20%

MindBody

12/18

$1,700

Vista Partners

5.80x

7.94x

18%

Ellie Mae

2/19

$3,300

Thoma Bravo

6.47x

10.96x

12%

Medidata

6/19

$5,700

Dassault Systems

7.13x

9.50x

17%

 

 

 

 

 

 

 

Average

 

 

 

6.58x

9.30x

17%

Eventbrite

 

 

 

3.83x

6.14x

15%

 

 

 

 

 

 

 

Target Price at Average

 

 

$25.06

$22.51

 

Upside

 

 

 

57%

41%

 

 

Risks

The primary risk that we see in Eventbrite is that they continue to throw good money after bad by pushing even harder into the more competitive parts of the ticketing market. Management has wasted significant resources on this effort to-date and continued poor capital allocation can’t be ruled out. Unlike many of our software investments, we feel the risk from competition – either from the Internet giants or tech-enabled startups – is comparatively low.

 

 

 

 

 

Disclosures / Disclaimers

This is not an offer to buy or sell a security. The ideas expressed in this posting are the views and opinions of the author of this posting (Author). Author has no obligation to update any of the information contained herein and has no obligation to update the posting to reflect any changes in the Author’s opinion on any of the companies or topics contained herein. This posting contains forward looking statements and predictions that are inherently uncertain, because the matters they describe are subject to known (and unknown) risks, uncertainties and other unpredictable factors. No representations or warranties are made as to the accuracy of such forward looking statements and predictions. Do not rely upon the information contained in this posting for making investment decisions; prepare your own analysis or contact your financial advisor. While the Author has tried to present facts it believes are accurate, the Author makes no representation as to the accuracy or completeness of any information contained in this note. Past performance is not necessarily indicative of future results, and there can be no assurance that targeted or projected returns will be achieved.

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 

$50 $47 $40 $38 Millions) $31 ( $ $30 $26 Fees Ticket $20 $20 Gross $10 $0 2013 2014 2015 2016 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

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Lapping Ticketfly headwinds 

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