Wow! Eventbrite said yesterday that transaction volume in March was down 90% and was still down 85% in early May, 2020.
Before we get into the analysis, here are the links:
The news they shared was simply extraordinary, and made us feel good about our tough circumstances. Let’s go through the highlights and provide some context relative to the endurance market.
Transaction Volume down 85% – Still in early May
“Paid ticket volume was down roughly 90% year-to-year in March. We’ve seen improvement off the March lows with paid ticket volume pacing 85% lower year-to-year in early May.”
This is actually about what we are seeing for traditional events. There is some registration volume either in areas of the country that believe they will be able to hold races and there is confidence on the part of participants those races will be held later this year or next year.
As we have documented in our weekly updates, the virtual events and challenge events and nonprofit donations are producing about 60% of the transaction volume we saw last year. We are fortunate that virtual events came around, and that our GiveSignup business is beginning to expand.
$3 Million Losses in Chargebacks in March, $77 Million Put in Reserve for Future Losses
It was somewhat comforting to see other vendors talk publicly about chargebacks, with the CFO talking about it and answering analyst questions in the earnings call.
They stated the general ticket market typically experiences about a 3% chargeback rate according to their investor letter. This is much higher than the endurance market, where our experience has been much less than 1% historically.
To put that number in context, the entire Gross Profit of Eventbrite was only $200 Million last year, with a net loss of $68 Million. Putting aside a total of nearly $80 Million represents about 40% of their gross profit – not something any company can easily afford.
Advanced Payouts Stopped March 11
As previously announced, Eventbrite had a policy of doing what they call Advanced Payout Option to some customers – basically paying an event operator before the event actually happened. They stopped all of that on March 11 and now hold all customer funds until an event has happened.
Eventbrite now has balances of $290 Million of Advanced Payouts (events they have paid but have not yet happened), and a total of $233 Million of “creator payables”, for events that have not yet happened and they are holding the money. Note that many of their customers use their own merchant accounts, so Eventbrite is not holding the money at all, and reserves are managed by whatever payment provider (like Square, their strategic partner, or Stripe) the event has as their merchant provider. That is a net 44% reserve they are holding. We would expect that percentage to rise as they reduce the advanced payout volume over time.
Contrasting this with RunSignup, we went to a 20% reserve requirement for races and 10% for payment accounts on March 10, and lowered that to 10% for races and 5% for payment accounts on April 15.
RunSignup has been lucky compared with Eventbrite as our target markets of endurance and nonprofits have a much lower chargeback/default rate. However, the fact that Eventbrite has had a $3M real loss from chargebacks in March against about $290 Million of advanced payouts is about 1% loss (with $77 Million in additional reserves that represents about 25% of the outstanding balance). Given that RunSignup has an outstanding advanced payouts of $75 Million in early March, it indicates our chargeback loss could have been over $750,000 (or, if their reserve ratios are correct, up to $18 Million). We currently estimate that our total chargeback loss exposure will be less than $500,000. This is due to our race director and nonprofit customers being much more proactive in communicating and offering options and proactively funding their reserves, and the participants and donors who are more understanding and supportive of the organizations who are putting on the events.
50% Expense Reduction
Eventbrite elaborated more on their previously announced headcount reduction of 50%. They expect quarterly expenses to reach a normal rate of $33-35 Million by the fourth quarter as compared with about $71 Million last year.
Last year they had transaction volume of about $4.5 Billion with quarterly gross profit of about $48 Million.
This means their new breakeven will be around 73% of previous transaction volume.
RunSignup has taken a slightly different approach to achieving breakeven. As stated above, we are lucky that we are running about 60% of last year’s transaction volume. Instead of laying anyone off, we made the decision to freeze hiring and drop employee compensation to the % of where we are compared with last year’s transaction volume. We have cut all spending outside of employee compensation – for example we have cancelled the summer Symposium, eliminated travel expenses, lowered subscription expenses to various software products, etc. As our transaction volume increases, we will incrementally increase our employee compensation to match that.
$150 Million Cash, New $225 Million Debt Financing
Eventbrite reported $373 Million in cash, of which $233 Million are payable to creators, $15 Million is creator advances and $3 Million are accounts payable. That leaves a net of $151 Million of cash compared with $190 Million at the end of Q4.
Assuming Q2 will be roughly 85% less than last year, that would be a gross profit of about $7.5 Million with an expected cash expenses of about $40 Million – using about $32.5 Million of the $151 Million cash.
To strengthen their balance sheet, Eventbrite announced a debt financing with Francisco Partners. They took $125 Million up front. They stated that they issued 2.6 Million shares – about a $26 Million value yesterday as part of the payment – over 10% of the total debt allocation, or over 20% of the initial tranche taken. In addition, they will pay an interest rate “in the low double digits”. The second tranche is available beginning December 2020 and is conditional on “certain conditions that relate to the expense structure of the business and the operating results of the business during that period of time.”
This is typical in this type of financing when the borrower has less leverage. The terms are very aggressive – well over 25% interest rate over the next one to two years, although the issuance of stock is not real cash but a dilution of existing shareholders.
As we outlined in our own internal response to Coronavirus blog, we looked at various outside financing methods. One was a debt deal that included warrants (the right to buy shares of stock in the future at a cheap price), as well as a LIBOR + 10% interest rate. It also had two tranches. Again we were lucky and our chargeback risk exposure was under control, virtual races are on the rise and we got the PPP loan which has allowed our employees to go back to full pay for 8 weeks.
Self Serve Focus
Eventbrite highlighted 3 points to their turnaround effort – the $100 million expense reduction, the $225 Million loan, and “repositioning the strategy to deliver a self-service creator experience with strong unit economics”. They used the term “self-service” 27 times in their earnings call.
“Self-service plays a significant role in our customer acquisition engine. Last year, 98% of the new creators on Eventbrite signed themselves on and began ticketing events on their own. Most of this growth is purely organic. In total, we spent approximately $4 million on SSO acquisition in 2019, a figure equal to 2% of SSO revenue last year. Over the last 2 years, the lifetime revenue of Self-Sign On creators has exceeded 30x their acquisition cost. Beyond acquisition, we are applying a self-service approach throughout our business, including all the steps from creator onboarding to product education to event marketing. The most valuable Eventbrite creators are entrepreneurial, self-sufficient, frequent event creators, and we are tailoring our product, marketing and support to provide the intuitive services these creators expect.” – Lanny Baker, CFO
Clearly, they emphasized the better gross margins of self serve, which will help them recover from the crisis sooner and better. They also emphasized the self serve customers as having a propensity to have more success and create more events over time.
This aligns well with RunSignup’s strategy from the start of having a single platform where any customer could use any feature themselves. While we are here to help customers, we also have plenty of documentation, help videos, webinars and training opportunities for customers. This enables customers to take control, and for us to keep our costs very low.
One of the points Eventbrite made on the call is they expect more low priced events. We are seeing this as well. Virtual events are being priced lower. We are also seeing a number of nonprofits turn to free virtual events that focus on donations and fundraising to keep their costs low (no swag or shipping costs).
“I want to first emphasize that this is temporary; and once we can gather safely, the demand for in-person experiences will be strong. It is a fundamental need for humans to gather as we have been doing for thousands of years, and we will be there to power that connection.” – Julia Hartz, CEO
We could not agree more.