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 experience. On 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 time. Not 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 industry. This 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 satisfaction. We 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.

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.

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” business. In 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 organization. The 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 company. The 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 Ticketfly, Eventbritesvaluation 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 Visage. The 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 Trulia. Until 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 2016. Randy 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 Officer. Our 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.

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.

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

Catalyst

Lapping Ticketfly headwinds 

sale of company