What you need to know about Eventbrite's IPO

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The eventbrite online ticketing platform (EB) will go public on Thursday, 20 September. At a price of $ 23 per share, the company plans to raise $ 230 million with an expected market capitalization of $ 1.8 billion. At the IPO price, EB is currently gaining our unattractive rating.

The IPO of Eventbrite reminds me of Dropbox (DBX). Both platforms:

• Succeed with low-end and / or low-paying / free users, but now need to target a more profitable customer base
• Operate in relatively unmarked businesses with low margins
• Have dual class share structures that give public shareholders virtually no control over corporate governance.

The purpose of this report is to help investors view Eventbrite's financial documents to understand the fundamentals and valuation of this IPO.

The losses are not as bad as they

Eventbrite generates revenue by charging a combination of percentage and fixed fees to event promoters ("creators" in the company's terminology) for each ticket sold on its platform. In 2017, more than 700,000 creators issued 203 million tickets on Eventbrite. The company generated $ 202 million in revenue from these ticket sales, up 51% from 2016.

At first glance, EventbriteGAAP losses have remained stable over the last two years, at – $ 40 million in 2016 and – $ 39 million in 2017. However, Figure 1 shows that the economic benefits, the true cash flows of the activity , have increased significantly. The company's economic losses increased from – $ 38 million in 2016 to – $ 20 million in 2017.

Figure 1: Eventbrite GAAP Net income and economic gains since 2016

Overestimated off-farm items EventbriteGAAP losses in 2017, which masked the fundamental improvement in activity. The adjustment to eliminate these non-operational items reveals that the company has reduced its losses.

In 2017, Robo-Analyst[1] non-operational elements discovered, such as:

• $ 21.9 million (11% of revenues) in expenses related to the tax reform
• $ 7.3 million (4% of sales) in acquisition costs
• $ 2.7 million (1% of sales) in impairment

As a result of these adjustments, I eliminated non-operating expenses of $ 26.6 million in 2017, which resulted in economic losses 49% lower than those recorded under GAAP.

With only two years of history, it is difficult to draw definitive conclusions about the evolution of the business, but our adjustments show that the company has made significant progress towards profitability in 2017.

Unprofitable customers are a long-term problem

Eventbrite managed to attract creators by word of mouth, 95% of its creators registering directly on the platform. However, 95% of creators represent only 54% of revenues, which means that the remaining 5% of creators Eventbrite Registrations through direct sales efforts account for 46% of its business turnover.

Similar to Dropbox, Eventbrite has built a large but not particularly profitable customer base. The majority of its creators organize small events, many of which are free. Only 71 million (35%) of the 203 million tickets issued by Eventbrite in 2017 generate revenue.

Eventbrite states that it will generate significant earnings growth by (a) converting existing free creators into pay systems, and (b) increasing revenues generated by existing creators, but has not yet done so . In 2017, the turnover of existing creators decreased by 3% year on year. For EventbriteFor the sales strategy to be successful, revenue growth must be significantly positive and not negative.

EventbriteThe other growth strategy is to move upmarket and recruit larger creators. This strategy requires it to compete with well established and powerful companies such as Ticketmaster (LYV) and StubHub (EBAY). Ticketmaster, as part of Live Nation, also has the benefit of vertical integration, as it hosts events and sells tickets for them.

Growth through acquisitions destroys value

Acquisitions have been a key element of EventbriteGrowth strategy. Over the past two years, the company has spent $ 239 million (121% of invested capital) on acquisitions. These significant acquisitions add significant goodwill to the balance sheet and expose the company to future write-downs. Goodwill represents 80% of EventbriteInvested capital, the 20^e highest percentage of the 2,867 companies we cover.

These acquisitions mask the actual costs of acquiring customers Eventbrite copes with this problem by transferring these costs from the income statement to the balance sheet. In the first six months of 2018, sales grew faster than sales and marketing costs, to 61% versus 54% year-on-year, respectively. However, much of the revenue growth came from acquisitions and organic revenue growth was only 39%. EventbriteThe customer acquisition strategy is no more effective than others When investors consider the money Eventbrite pays to acquire smaller competitors as part of its customer acquisition cost, this business seems much lower.

Do not trust the declared cash flows

Eventbrite claims positive free cash flow as an important selling point for investors. According to his deposits, Eventbrite $ 21 million in free cash flow in 2017

This free cash flow does not include significant costs, including stock-based compensation and cash payments for acquisitions. Our models show that once these costs are accounted for, EventbriteFree cash flow is – $ 104 million and its free cash flow yield is the lowest for all of the SIPs we have hitherto covered in 2018.

Figure 2: Free Cash Flow Performance for 2018 IPOs

Yes Eventbrite plans to use acquisitions as the primary driver of growth, it can not exclude the money they earn from free cash flow.

The share class structure leaves no real power to investors

Eventbrite plans to list stocks using the double class structure that has become the default for recent IPOs. I have shown how the two-class structure that prevents investors from holding managers accountable contributes to the dysfunctional and falling stock prices at Snap Inc. (SNAP).

EventbriteThe governance structure at least does not give total control to the founders. Venture Capital Fund Tiger Global and Sequoia Capital both hold significant Class B shares to defend the interests of shareholders. However, Class A Shares sold at the IPO will only have a 1.5% voting interest in the Company. Why investors by shares who are dispossessed of the fundamental right of shareholders to vote?

Our discounted cash flow model reveals Eventbrite is overvalued

When I use my dynamic DCF model to analyze future cash flow forecasts related to the stock price, I find that Eventbrite is overvalued at the price of its IPO.

Because of its position as an intermediary in the commodities sector, Eventbrite has little margin effect and will have to develop rapidly to justify its valuation. To justify its introductory price of $ 23 per share, Eventbrite must immediately reach 2.5% NOPAT margin (comparable to LYV) and increase its turnover by 40% per year over the next 10 years. See the math behind this dynamic DCF scenario.

In this scenario, Eventbrite would generate revenue of $ 5.8 billion in the tenth year, representing approximately $ 41.9 billion of tickets paid at the current monetization of $ 3 per ticket. Eventbrite With 1.1 billion paid tickets as its total addressable market, it must develop its 75% addressable market – either by penetrating new geographic markets or by diversifying its services – and gain market share to justify its valuation.

If EB reaches the same margins as above, but only grows by 20% a year for 10 years, the stock is worth about $ 4 / share today, 84% less than the price of $ 20 / share today. ;Initial Public Offering. See the math behind this dynamic DCF scenario. In this scenario, Eventbrite would generate revenue of $ 1.2 billion in year 10, equivalent to 415 million notes and 38% market share.

Critical details found in financial records by my company Robo-Analyst Technology

As investors become more focused on fundamental research, research automation technology is needed to analyze all the critical financial details in financial documents. Below are details about the adjustments[2] I'm basing myself on the Robo-Analyst findings in Eventbrite's S-1:

Income statement: I made adjustments of $ 34 million, which had the net effect of removing $ 27 million of non-operating expenses (13% of revenue). You can see all the adjustments made to EventbriteThe income statement here.

Appraisal: I made adjustments of $ 336 million to calculate the invested capital with a net decrease of $ 149 million. The most notable adjustment was a mid-year acquisition adjustment of $ 22 million to reflect acquisitions made later in the year. This adjustment represents 7% of the reported net assets. You can see all the adjustments made to EventbriteThe balance sheet here.

Valuation: I made adjustments of $ 339 million, which had the effect of reducing shareholder value by $ 62 million. No adjustment had the effect of increasing shareholder value. In addition to total debt of $ 113 million, the largest adjustment to shareholder value was $ 79 million in stock options for employees. This option adjustment represents 5% of EventbriteThe proposed market capitalization.

Disclosure: David Trainer, Kyle Guske II and Sam McBride receive no compensation for writing on a specific title, style or theme.

[1] Harvard Business School presents the powerful impact of research automation in the case of New Constructs: disrupting fundamental analysis with Robo analysts.

[2] Ernst & Young's recent white paper entitled "Getting ROIC Right" shows the link between an accurate calculation of ROIC and shareholder value.

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The eventbrite online ticketing platform (EB) will go public on Thursday, 20 September. At a price of $ 23 per share, the company plans to raise $ 230 million with an expected market capitalization of $ 1.8 billion. At the IPO price, EB is currently gaining our unattractive rating.

The IPO of Eventbrite reminds me of Dropbox (DBX). Both platforms:

• Succeed with low-end and / or low-paying / free users, but now need to target a more profitable customer base
• Operate in relatively unmarked businesses with low margins
• Have dual class share structures that give public shareholders virtually no control over corporate governance.

The purpose of this report is to help investors view Eventbrite's financial documents to understand the fundamentals and valuation of this IPO.

The losses are not as bad as they

Eventbrite generates revenue by charging a combination of percentage and fixed fees to event promoters ("creators" in the company's terminology) for each ticket sold on its platform. In 2017, more than 700,000 creators issued 203 million tickets on Eventbrite. The company generated $ 202 million in revenue from these ticket sales, up 51% from 2016.

At first glance, EventbriteGAAP losses have remained stable over the last two years, at – $ 40 million in 2016 and – $ 39 million in 2017. However, Figure 1 shows that the economic benefits, the true cash flows of the activity , have increased significantly. The company's economic losses increased from – $ 38 million in 2016 to – $ 20 million in 2017.

Figure 1: Eventbrite GAAP Net income and economic gains since 2016

Overestimated off-farm items EventbriteGAAP losses in 2017, which masked the fundamental improvement in activity. The adjustment to eliminate these non-operational items reveals that the company has reduced its losses.

In 2017, Robo-Analyst[1] non-operational elements discovered, such as:

As a result of these adjustments, I eliminated non-operating expenses of $ 26.6 million in 2017, which resulted in economic losses 49% lower than those recorded under GAAP.

With only two years of history, it is difficult to draw definitive conclusions about the evolution of the business, but our adjustments show that the company has made significant progress towards profitability in 2017.

Unprofitable customers are a long-term problem

Eventbrite managed to attract creators by word of mouth, 95% of its creators registering directly on the platform. However, 95% of creators represent only 54% of revenues, which means that the remaining 5% of creators Eventbrite Registrations through direct sales efforts account for 46% of its business turnover.

Similar to Dropbox, Eventbrite has built a large but uneconomic customer base. The majority of its creators organize small events, many of which are free. Only 71 million (35%) of the 203 million tickets issued by Eventbrite in 2017 generate revenue.

Eventbrite states that it will generate significant earnings growth by (a) converting existing free creators into pay systems, and (b) increasing revenues generated by existing creators, but has not yet done so . In 2017, the turnover of existing creators decreased by 3% year on year. For EventbriteFor the sales strategy to be successful, revenue growth must be significantly positive and not negative.

EventbriteThe other growth strategy is to move upmarket and recruit larger creators. This strategy requires it to compete with well established and powerful companies such as Ticketmaster (LYV) and StubHub (EBAY). Ticketmaster, as part of Live Nation, also has the benefit of vertical integration, as it hosts events and sells tickets for them.

Growth through acquisitions destroys value

Acquisitions have been a key element of EventbriteGrowth strategy. Over the past two years, the company has spent $ 239 million (121% of invested capital) on acquisitions. These significant acquisitions add significant goodwill to the balance sheet and expose the company to future write-downs. Goodwill represents 80% of EventbriteInvested capital, the 20^e highest percentage of the 2,867 companies we cover.

These acquisitions mask the actual costs of acquiring customers Eventbrite copes with this problem by transferring these costs from the income statement to the balance sheet. In the first six months of 2018, sales grew faster than sales and marketing costs, to 61% versus 54% year-on-year, respectively. However, much of the revenue growth came from acquisitions and organic revenue growth was only 39%. EventbriteThe customer acquisition strategy is no more effective than others When investors consider the money Eventbrite pays to acquire smaller competitors as part of its customer acquisition cost, this business seems much lower.

Do not trust the declared cash flows

Eventbrite claims positive free cash flow as an important selling point for investors. According to his deposits, Eventbrite $ 21 million in free cash flow in 2017

This free cash flow does not include significant costs, including stock-based compensation and cash payments for acquisitions. Our models show that once these costs are accounted for, EventbriteFree cash flow is – $ 104 million and its free cash flow yield is the lowest for all of the SIPs we have hitherto covered in 2018.

Figure 2: Free Cash Flow Performance for 2018 IPOs

Yes Eventbrite plans to use acquisitions as the primary driver of growth, it can not exclude the money they earn from free cash flow.

The share class structure leaves no real power to investors

Eventbrite plans to list stocks using the double class structure that has become the default for recent IPOs. I have shown how the two-class structure that prevents investors from holding managers accountable contributes to the dysfunctional and falling stock prices at Snap Inc. (SNAP).

EventbriteThe governance structure at least does not give total control to the founders. Venture Capital Fund Tiger Global and Sequoia Capital both hold significant Class B shares to defend the interests of shareholders. However, Class A Shares sold at the IPO will only have a 1.5% voting interest in the Company. Why investors by shares who are dispossessed of the fundamental right of shareholders to vote?

Our discounted cash flow model reveals Eventbrite is overvalued

When I use my dynamic DCF model to analyze future cash flow forecasts corresponding to the course of action, I find that Eventbrite is overvalued at the price of its IPO.

Because of its position as an intermediary in the commodities sector, Eventbrite has little margin effect and will have to develop rapidly to justify its valuation. To justify its introductory price of $ 23 per share, Eventbrite must immediately reach 2.5% NOPAT margin (comparable to LYV) and increase its turnover by 40% per year over the next 10 years. See the math behind this dynamic DCF scenario.

In this scenario, Eventbrite would generate revenue of $ 5.8 billion in the tenth year, representing approximately $ 41.9 billion of tickets paid at the current monetization of $ 3 per ticket. Eventbrite With 1.1 billion paid tickets as its total addressable market, it must develop its 75% addressable market – either by penetrating new geographic markets or by diversifying its services – and gain market share to justify its valuation.

If EB reaches the same margins as above, but only grows by 20% a year for 10 years, the stock is worth about $ 4 / share today, 84% less than the price of $ 20 / share today. ;Initial Public Offering. See the math behind this dynamic DCF scenario. In this scenario, Eventbrite would generate revenue of $ 1.2 billion in year 10, equivalent to 415 million notes and 38% market share.

Critical details found in financial records by my company Robo-Analyst Technology

As investors become more focused on fundamental research, research automation technology is needed to analyze all the critical financial details in financial documents. Below are details about the adjustments[2] I'm basing myself on the Robo-Analyst findings in Eventbrite's S-1:

Income statement: I made adjustments of $ 34 million, which had the net effect of removing $ 27 million of non-operating expenses (13% of revenue). You can see all the adjustments made to EventbriteThe income statement here.

Appraisal: I made adjustments of $ 336 million to calculate the invested capital with a net decrease of $ 149 million. The most notable adjustment was a mid-year acquisition adjustment of $ 22 million to reflect acquisitions made later in the year. This adjustment represents 7% of the reported net assets. You can see all the adjustments made to EventbriteThe balance sheet here.

Valuation: I made adjustments of $ 339 million, which had the effect of reducing shareholder value by $ 62 million. No adjustment had the effect of increasing shareholder value. In addition to total debt of $ 113 million, the largest adjustment to shareholder value was $ 79 million in stock options for employees. This option adjustment represents 5% of EventbriteThe proposed market capitalization.

Disclosure: David Trainer, Kyle Guske II and Sam McBride receive no compensation for writing on a specific title, style or theme.

[1] Harvard Business School presents the powerful impact of research automation in the case of New Constructs: disrupting fundamental analysis with Robo analysts.

[2] Ernst & Young's recent white paper entitled "Getting ROIC Right" shows the link between an accurate calculation of ROIC and shareholder value.