Description

Eventbrite (EB)

Summary: Best-in-class event software platform for small / mid-sized events that is going to emerge from the pandemic a much better business than the market appreciates due to (1) the accelerated shift away from its full-service / direct sales model, which was 50% of sales, to 80% self-service / 20% full-service post pandemic; and, (2) significant cost reductions. While forecasting the pace of topline recovery is going to be impossible, we have a strong variant perception on the go forward margin structure that is not appreciated by the street and consequently puts our 2021/2022 EBITDA significantly above current street expectations. Biggest risks are potential of new competitive entrants from the online / virtual event space (FB / ZM); SSO business doesn’t scale – potentially due to mis-execution; and, capital allocation risk given that EB is a controlled company. At 6x sales we get to a mid/high teens IRR with additional upside optionality. 

 Background: EB is a best-in-class software platform providing an end-to-end solution for small and medium sized live / offline event creator. The pandemic has resulted in more ticketed online / virtual events on EB’s platform although they’ve historically been a LSD % of EB’s volume and are still not the key driver of the business. 

EB went public in Q3 2018. Pre-IPO it as backed by Tiger Global and Sequoia and Sequoia continues to be the lead director on the board. It was built on AWS and has APIs into all of the major cloud vendors (CRM, HUBS, Mailchimp, etc.). 

EB grows >20% organically with a long growth runway attacking a very large TAM and is a much higher quality asset than most people appreciate. 

Similar to some other ISVs / software companies that facilitate payments, a large portion of EB’s COGS are tied to payment processing fees. Below is breakdown of how gross margins would compare if we were looking at EB vs other software companies that do not process payments. 

Investment Thesis: 

We initially purchased EB on the thesis that (1) the market was pricing in a worst-case scenario for EB and way too concerned with the potential of a large liability from the reversal EB’s creator advances (referred to as the APO program balance) while EB was simultaneously burning cash (due to the large 90% drop in revenue at the time) given that EB had already secured ample liquidity to survive even the most severe of scenarios; (2) small and mid-sized events would recover faster than large scale events making EB an attractive recovery play; and, (3) that EB would emerge from the pandemic a better business than it was pre-pandemic. 

The first leg of the thesis has already played out at this point as the APO balance has turned out to be a non-event and the cash burn has come down considerably (although EB is still burning a few million per month at this point). 

The actual pace of recovery is anyone’s guess, which is why we aren’t modeling any delta vs the street on revenue (although we do think the street mis-models the components of revenue – just not an important thesis driver at this point). That being said, all signs thus far have all pointed in the right direction as it relates to small / mid-sized live events rebounding post-pandemic and EB has also started to be used for online / virtual events at surprisingly similar ASPs (vs historic 15-20% lower ASPs) so that will only help accelerate the recovery. 

• Note: one key nuance here that many do not appreciate is that a lot of the events EB creators plan are relatively small so they are likely to rebound a lot faster than the typical large-scale sports or music event. 

The second leg of the thesis is also largely priced into EB at this point and is no longer a major source of variant perception. 

That leaves us with our view that EB will emerge from the pandemic a better business than it was pre-pandemic, which is a strong variant perception given the poor communication on EB’s part and the weak sell-side coverage of EB. 

More specifically, in response to the pandemic, EB has accelerated the shift in its business from 50% full-service / direct sales and 50% self-service (SSO) to 80% SSO and 20% full-service. The street underappreciates the economic benefits of this shift as the SSO model is higher margin (2,000bp higher gross margin in 2019 @ 70% GM for SSO vs 50% GM for the full-service model), lower CAC ($4M paid in CAC in 2019 for $140M of incremental SSO sales), and SSO is much higher LTV/CAC at >30x vs the full-service/direct sales model which has been opex heavy and a poor ROIC. 

Additionally, as part of this shift in EB’s business model, EB has permanently removed >$100M of fixed costs from the business (largely through reducing 45% of its global workforce) and has committed working down its expense base to be more in line with software peers. 

• For example, EB’s G&A as a % of sales was 30% pre-C19 and they’ve committed to working it down to a low teen % of revenue over the medium term.

We’ve spent a lot of time with the company and also in our channel work to verify the SSO unit economics, growth potential of EB’s SSO channel, and the go forward cost structure (walking through fixed vs variable elements of each opex line item, etc.) and have concluded that EB’s EBITDA margins should get to MSD next year and >20% by 2022 vs street expectations for 0% margins in 2021 and 12% margins in 2022. 

Risk / Reward: $24 2-year target price. 

• EB has traded at a historic average EV/Sales multiple of 4x on Bloomberg; however, the EV/Sales multiple reported on Bloomberg understates the actual EV/Sales multiple by approximately 1x because it includes event creator funds that should be viewed as restricted cash that is not accessible to EB. As such, the correct historic average multiple for EB is 5x. Given that EB will be a better business post-pandemic with structurally higher margins (65% gross margins and EBITDA margins >20% vs historic 0-10% range and much better unit economics), we’re using 6x for our target price. 

Margin of Safety: 

• Organic growth: >20% organic grower

• Business quality: high business quality – particularly now given the shift to SSO given the >30x LTV/CAC and attractive margins

• Competitive positioning:

• EB’s self-service business, which is the reason to own EB, faces very limited competition today as there are no other scaled players. 

• EB’s full-service business is mediocre and faces a lot of competition. 

• Management: mixed and they have control 

• EB is a controlled company (45% voting shares held by husband/wife Chairman/CEO). 

• Current CEO was fiancée of Chairman in 2006 when they co-founded business and she was president for 10 years from 2006-2016 pre-IPO and then she took EB public as CEO.

• Chairman, Kevin Hartz, has impressive resume though as founder of Xoom and early PayPal, AirBnb, Pinterest investor. He stepped down from the CEO role pre-IPO for health reasons.

• EB’s management has done a good job investing in the business to foster innovation / organic growth; however, they’ve sucked at capital allocation (e.g. Ticketfly), been poor communicators with investors, and they have historically run with a bloated cost structure (which the new CFO is working on changing). 

• Finally, our checks have indicated the Kevin & Julie Hartz are tough to work for which has resulted in a bit of a revolving door 

• Capital Allocation: Weak

• Bought TicketFly in Sept 2017 for $200mm ($150mm cash) from Pandora, was a poor acquisition that dragged down growth post IPO

• On the other hand, EB recently acquired a small marketing software add-on to its SSO business that does seem like a good fit with the business and where it is headed

• Cyclicality: historically not very cyclical but clearly high C19 cyclicality 

• Capital intensity: very low

• Leverage: net cash, although they took on $125mm of very expensive debt from Francisco Partners earlier this year (which they plan to pay back) and also issued a dilutive convertible note in the early stages of the pandemic to secure their liquidity position when they were concerned about the cash impact 

• Valuation: reasonable for software, see risk / reward discussion 

• Optionality: strategic asset at a reasonable valuation that could be a takeout candidate

• Technical dynamics: controlled company, but ample liquidity at this point 

Key Risk Factors: 

• Management (including control rights, capital allocation, and communication)

• Weak capital allocation + control creates an overhang and potentially poor decisions 

• As mentioned above, EB is a controlled company with husband / wife founders that have majority voting power and a mixed history with regards to capital allocation. While it seems as if they’ve learned their lesson on the failed Ticketfly acquisition, the weak capital allocation history and their control will always create an overhang on the stock. 

• Weak communication can negatively impact short term stock performance

• While I don’t think this is a long-term risk to an investment, management has a spotted history of communication and does a poor job managing the street, which already doesn’t cover EB very well given the smaller market cap. This is likely to result in very volatile earnings for EB as the investor reaction is usually sell first, think/digest later. 

• The best recent example of this miscommunication is the past couple earnings releases whereby EB’s net revenue per ticket, based off their reported revenue, significantly negatively surprised vs street expectations as a result of refunds incurred for previously issued tickets and changes in the reserves held for future refunds (i.e. contra revenue items that have nothing to do with the ASPs of the tickets sold in the given period). EB did not warn sell-side ahead of time about this issue or explain it to investors as part of the earnings release / call causing the stock to initially sell off sharply before people came to their own conclusions on the underlying fundamentals being fine. 

• This specific issue is still a problem today and will ultimately end up favorably benefiting EB in 2021 as it laps the abnormally low rev / ticket. 

• New Competition

• While there are no major / scaled competitors to EB’s SSO business today, one of the bigger long-term concerns is that new virtual / online event players such as ZM and FB move into offline events which ultimately limits EB’s ability to grow

• SSO business either doesn’t scale to be as big as we expect or isn’t able to scale with the same attractive unit economics 

• One question we’ve debated a fair amount is whether EB would end up being a smaller, albeit much more profitable, business post recovery. We don’t believe this will be the case and we’re already starting to see some confirmatory proof points (per Q3 20 earnings) with parts of the world such as New Zealand, Australia, and pockets of Europe (UK / Italy) already back to 100% of pre-C19 levels but with the overwhelming majority of the business mix now coming from the SSO channel in those regions (meaning the SSO business in those areas is now significantly larger than it was pre-C19 and already at the company’s 80% mix target). 

• We’ve researched this extensively and, given EB’s strong competitive positioning, relatively small revenue base today and the large size of the addressable market, we don’t think there’s any external reason to believe EB will not be able to continue profitably grow. The biggest reason this risk would materialize is mis-execution. 

Catalyst

Post-covid normalization in live events