Eventbrite is ready to make its stock market debut with the growth rates and hype that typically accompany "unicorns" (private companies with $1 billion valuations or higher).

In this episode of Industry Focus: Consumer Goods, Motley Fool analysts Vincent Shen and Nick Sciple offer their first take on this event and ticketing platform. From music festivals to marathons and cultural events, find out how Eventbrite is connecting with "creators", generating revenue, and thinking about the future of the live event industry.

A full transcript follows the video.

This video was recorded on Aug. 28, 2018.

Vincent Shen: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. I'm your host, Vincent Shen. It's Tuesday, August 28th. We have a fun IPO to cover today, this time for Eventbrite, a new company and really a new industry and business for us to explore on the show. On top of that, I'm very pumped to welcome another new voice to the show -- Mr. Nick Sciple. Nick's actually going to be joining the Industry Focus team. In a few weeks, he'll be taking over for Michael Douglass on the Energy and Industrials show. But before he takes the host's seat, he's going to get his feet wet with some of the other sectors, developing his on-air persona. Nick, how are you feeling?

Nick Sciple: I'm feeling pretty good! I'm excited to get started, hopefully to share my knowledge with the listening community. 

Shen: Awesome! This is your very first appearance on a podcast, right? 

Sciple: That's correct. 

Shen: Excited?

Sciple: Longtime listener, first-time guest. Really excited to get started and be part of The Motley Fool team!

Shen: Sweet. The timing really couldn't have been better. I think it's always really fun to dig into these IPO filings and get a first look at the inner workings of a business. Before we get started, though, why don't you take a sec, tell us a little bit about yourself and how you ended up at The Motley Fool.

Sciple: A few months ago, I graduated law school, the University of Alabama School of Law. I've been really interested in investing for a long time. I found myself with some extra cash and started getting involved in investing. One of the first place I went to was The Motley Fool. I decided that I was interested in working in that field, and The Motley Fool was the first place I came, and I've loved it ever since. I'm excited to be part of the team and working to help the world invest better.

Shen: Cool. A few questions about that. Since you've been recently getting into investing and the stock market -- the first stock you bought?

Sciple: The first purchase I made was Apple. It's done pretty well for me so far, no regrets at all about that. It's a company I really love. Big Mac user, Big Apple products user. It was a really good first start to investing. I've been happy with it so far.

Shen: And what about your biggest winner so far? Do you know, off the top your head?

Sciple: My biggest winner so far as is Dexcom, it's a continuous glucose monitoring company for diabetes. It's performed really well this year. They just released their G6, product which is a no calibration CGM monitor. The price has really exploded as a result of that. 

Shen: So, you're really looking all over. You have the tech side, healthcare. Pretty well diversified, then?

Sciple: Sure. I mean, if it makes money, it's for me!

Shen: [laughs] There you go. The whole team's definitely excited to have you join us. But if you're ready, let's talk Eventbrite.

Sciple: Sure, let's do it!

Shen: The proposed ticker for the company will be EB. At its heart, Eventbrite is in the business of, as they say, "bringing the world together through live experiences." In other words, the company has a full platform for organizing live events. The company can offer what it calls creators, or its customers, everything from ticket sales to payment processing and analytics. For example, someone organizes or wants to organize a local marathon, they can turn to Eventbrite, put together a web page with race details, organize registrations and ticket sales for the race participants, and then help promote the race through social media and other channels, and ultimately, day of the event, get runners checked in and things along those lines. 

That's really a small taste, though, of the many features that Eventbrite has built into its platform over the years. That's since 2006, when the company was founded by three people: Kevin and Julia Hartz and Renaud Visage. Kevin and Julia are husband and wife, and they're the current leadership duo at the company, essentially. Kevin previously served as CEO up until 2016, when Julia took over. He's now executive chairman. Founder-led management teams always add an interesting element to these stories and their backgrounds. The Hartz family really has a clear influence on the origins of Eventbrite. 

One hand, you have Mr. Hartz. He was previously a co-founder and CEO at Xoom, a payments processing company that was ultimately taken over by PayPal a few years ago. On the other hand, you have Ms. Hartz. She worked in media and entertainment, developing TV series for Viacom and Fox. You bring together the payments processing and the entertainment sides, bring that expertise together, and you get to the core of what Eventbrite offers. 

Before we get into the meat of the business, a few other things I'll mention. Eventbrite is another unicorn that's going public this year. This follows the big debuts of companies like Spotify, iQiyi, Dropbox, Xiaomi, and several others. Remember that unicorns are private companies with valuations over $1 billion. Eventbrite has previously raised about $350 million through private investments with firms like Tiger Global and Sequoia Capital, who remain major stockholders in the company, along with the Hartz family. 

Let's talk a little bit about the business, in terms of the revenue model, target market, and some other important aspects of it. What do you think here? In terms of how the company generates revenue, can you give us a breakdown there?

Sciple: Sure. Essentially, all of Eventbrite's revenue comes from ticket sales. They charge a 2.5% fee of the ticket price on every sale in addition to a $0.99 fee on each ticket sold. Now, this only applies to paid tickets through the platform -- about two-thirds of the tickets that they issue. We'll discuss this later, the free tickets. Their target market, this quote from Eventbrite is, it's the broad range of events between those where the venue dictates the ticketing relationship -- when you think about that, you're thinking of huge blockbuster concerts, pro sports -- and smaller events where there's no formal venue or event management needs. That's like small personal gatherings, having someone over to your home. They cover this broad range of the market, in that middle sector.

Shen: Well, let me add, their CEO has a great quote on this. You think about live events, this huge, multi-billion-dollar market, billions of tickets issued annually. The key thing to keep in mind for Eventbrite, you mentioned the middle of industry, the middle market, is really their sweet spot. Julia Hartz summed this up, basically saying, "Not birthday parties and not Taylor Swift at Madison Square Garden, but everything else in between." That is really where they saw the opportunity originally when they started the company. That still remains the strength of their model.

Sciple: That's exactly right. In 2017, Eventbrite, addressing this model, it helped more than 700,000 creators issue approximately 203 million tickets across three million events in 170 countries. To illustrate where that is in the middle market that that's an average attendee per event of about 68 people. These aren't huge events, but these are events that can be of some size. 

Shen: And I'll add to that, too. In terms of this pricing model that they have, they offer these different packages, they call them the essentials, to professional and premium. There's some variability there, in terms of what the creators have to pay to Eventbrite. But it does appear that the company wants to move up and help with some of these more complex, larger events with their premium package, where the pricing is created on a custom basis.

Not only with those ticket fees, I also want to mention that 90% of customers use Eventbrite's payment processing as well. That generates an additional fee for the company. Again, some of the influence there of the founder, his background at Xoom, and how that's influenced the revenue model for this company. You mentioned the scale in terms of the hundreds of thousands of creators. Just in 2017, hundreds of millions of tickets. Eventbrite, I think I saw, has processed over $10 billion in gross ticket sales since its founding. Quite a bit of volume there.

With those events, the first thing for me, generally, that comes to mind for something like this is live music -- a concert or festival. But the range of activities can also be things like fundraisers, cultural events, fitness events, other activities. If we look at some of the trends and metrics that the company cites in the prospectus, I think we get a better sense of the company's strategy for growing its business and its market share, too. Again, for 2017, they mentioned that 95% of their creators using Eventbrite sign themselves up. 

That seems pretty compelling on the surface. We will talk more about some of the challenges behind that, as well. But, what's your first take there? 95% of people going to Eventbrite. It seems like a pretty win-win situation, right?

Sciple: Sure. I mean, it's a great situation in that the company doesn't have to spend any money to attract these creators to their platform, don't have to spend dollars towards onboarding people onto the platform. It illustrates the user-friendly nature, which particularly for these smaller events, it's going to be a less sophisticated event planning professional. That really opens up the accessibility, especially for small creators, to use the platform and to get out there and plan their own events using Eventbrite. 

Shen: They definitely tout it as being very easy to use, limited support necessary for these creators. Eventbrite wants to ultimately attract these customers or these creators at the early stages of their career or business when they generate lower revenue, true, not as valuable; but gradually, as they scale and grow, the company scales with them until they present more of a revenue opportunity for the company. This relationship, this strategy, really bears out when you look at their total ticket volume and break that down, in terms of their free vs. paid tickets. You mentioned the two-thirds number for the free tickets. That means 203 million tickets in 2017, only about 71 million were paid. Something important to definitely keep in mind there. 

Going back to that number that we just mentioned, 95% of people signing themselves up, they only accounted for 54% of revenue last year. Remember, Eventbrite is free to use when the tickets to the event are free. For that other 46% of revenue, the company has to essentially send out a sales team to target creators who are popular and big enough to be hosting events with substantial paid ticket sales. In the first half of 2018, Eventbrite paid about $6.3 million signing on these creators. That's on top of another about $9 million in 2017.

Let's also now look at how that pans out, in terms of the actual financial performance for the company. I'll run down through a few of the high-level numbers. Feel free to jump in, Nick, with any of the details that really stood out to you. Revenue for 2017 came in at $202 million. That's up 51% year over year. In the first half of this year, 2018, it was $142 million, up 61% year over year. I have to say, for 12-year-old company, those growth levels do reaffirm how large the market can be won for Eventbrite, even in this so-called middle market space. It's important to note -- this is something that you really called out to me when we were prepping for the show -- is a pretty substantial part of the growth has also been driven by acquisitions, right?

Sciple: Yes, that's correct. Over the past five years, Eventbrite has made nine acquisitions. The most significant of those acquisitions was acquiring Ticketfly from Pandora about a year ago, in June of 2017. They acquired the company for around $200 million, which is significant in that, a little less than two years prior to that, Pandora had acquired Ticketfly for about $335 million. Pandora had overpaid a little bit, but Eventbrite was able to get what amounted to their largest competitor in that middle market space. By acquiring Ticketfly, Eventbrite has really become the largest player in the middle of the market. In addition, what they got through that acquisition of Ticketfly is, Ticketfly as a subsidiary of Pandora for those two years had built some partnership relationships and some integrations with Pandora. That has come over with the Eventbrite acquisition. Not only has it allowed Eventbrite to solidify their control of the middle market space, but it's additionally gained them a partnership with Pandora to attract users to use their platform to attend events. 

Shen: With the various buyouts that Eventbrite has gone through -- I think I saw seven deals since 2015. They're pretty acquisitive. How that pans out, in terms of the growth, and the caveat there -- I mentioned 61% top line growth in the first half of 2018. Only 60% of that expansion was organic. The remainder was driven by, for example, the Ticketfly and ticketea acquisitions.

Looking at the bottom line, profitability is also definitely improving. That was something that the CEO mentioned was a so-called requirement before they wanted to take Eventbrite public. On a GAAP basis, the net loss shrank in 2017. On an adjusted EBITDA basis, it more than doubled year over year to positive $10 million for the first half of 2018. I'll also mention that free cash flow is strong, $21 million for 2017. If you look at the balance sheet for this company, Eventbrite has $260 million of cash on hand, less than $70 million for debt. Pretty strong, especially for a company at this stage, and one that's growing at this level. I like those numbers more than some of the other IPOs we've seen, in terms of how they're trending in profitability. 

Before we move on to our takes -- what we like, what we don't like about Eventbrite -- anything else you want to cover?

Sciple: I would just say, from a balance sheet perspective, we're seeing a significant portion of their assets are good will. That's being reflected from those acquisitions we talked about. They're seeing pretty substantial international growth over the past year. Revenue outside of the United States was up to 30% in 2017, up from 18% in 2012. That shows it's really pushing abroad and gaining that market share overseas. In addition, their paid tickets for events outside of the U.S. were 36% of their overall paid ticket volume. That, again, reflects that internationally, they're doing very strong, as well as in the United States.

Shen: There's something interesting there, in terms of the international paid ticket sales. It's interesting to note that, with the international markets growing, making up 25-30% of revenue, it presents a stronger option, in a way, for the company in this realm. A lot of those regions charge lower fees, in terms of the payment processing. As the company scales globally, we might see even better profitability because of that. 

The last thing that I'll mention, in terms of the financials and what we're looking at with this deal is the use of proceeds. There's no final number on the size of the initial public offering yet and how much they're going to raise. But use of proceeds, the company cites that they want to pay down some of their debt. They also want to have some flexibility going forward, not surprisingly. Potential future acquisitions, but also other investments. 

Looking at our takes now, in terms of the bullish/ bearish points on this company, what we like and don't like, I'll let you start. What is something that you feel more bullish about with Eventbrite? 

Sciple: I think their customer acquisition is something that's very bullish for the company. 70% of the creators that come onto the platform for Eventbrite site either prior experience as attendees at Eventbrite events, or word of mouth from other creators, as their mode of getting onto the platform. That signals that Eventbrite isn't having to do a lot of active marketing to acquire these creators. Just the quality of the platform is bringing people on. And then, once these people get onto the platform, they tend to stick around. In 2017, the retention rate for Eventbrite was 97%. That means almost every creator who came onto the platform in 2017 remained with the platform going forward. They have relatively low cost to bring people onto the platform, and once they get on, they tend to stay. And those revenues stick around, as well. From the cohort of creators who came onto the platform in 2013, 78% of their revenue is still going to Eventbrite in 2017. So, you have a low cost to acquire these customers, and those customers stick around and keep paying dividends for the company over time.

Shen: I forgot to mention this when we were looking at some of the line items on the income statement. Because of these low-cost avenues, like these word of mouth referrals, and how they're building up their new creators, the company says that sales marketing support costs will decrease over time as a percentage of revenue. That's thanks to these options, essentially, that they have. It proves out in some of the latest numbers that we've seen. That line item has declined from 36% to 27% of revenue in 2017. I think that will only become a smaller line item or expense as we go forward. 

Something else that I liked, we've talked about the fixed fee, the percentage per ticket, the payment processing fees the company's also getting. This is still a small part of the revenue, less than 5% of the top line. But they're also starting to branch out and look at things like day of event and on-site services, branding and web development, and event administration, marketing -- additional services, for example, that creators might need as they scale their businesses. That's just another source of potential revenue as the company grows. 

The trends overall, we've talked about the breakdown of free vs. paid tickets. Paid tickets grew, the volume was up 59% in 2017, up another 54% in the first half of 2018 to 47 million, just in terms of broad volume. We're seeing, again, a solid trend in growth for the creators and the events that are actually generating revenue for the company. 

You talked about retention rate. The last thing I'll mention with that retention rate, and the trajectory of these creators, is what I call the path to revenue generation. Since 2015, the company sites about 17% of creators who held a free event went on to offer a paid one within 12 months of that first free event. Again, I think that speaks to how Eventbrite hopes to catch these creators when they're first starting out, and then grow and scale with them, hopefully, as they become more and more successful. That means it's a win-win for the creator and Eventbrite, as well, in terms of the platform. 

Beyond that, though, there are definitely some red flags, some risks for the company that we want to cover. The big one for me, it comes in terms of competition. Before we get there, though -- are you concerned at all, in terms of some of the talent or the creator retention, some of the signing fees that we mentioned earlier? Does any of that stuff worry you? Or does that all get wrapped into the gorilla in the room we haven't mentioned yet, which is Live Nation, which dominates the high-end of the live events? What do you think?

Sciple: From my perspective, I'm not very concerned about those kind of retention fees they're paying to their creators. It seems to be just par for the course for the business, something you have to do. Once a creator gets to a certain size, they get that leverage and can play off different services against each other. 

But, as you alluded to, I think the big concern is, are these creators going to start out from the free perspective at Eventbrite, grow, and then eventually get too big for the platform, grow out of that middle market event space? And that is concerning. The top end of the market is heavily dominated by Live Nation and other operators that really control the large event venues across the country and the world.

Shen: That's a big part of it. As you become more and more successful, if you're a musician, your audience grows to the point where you want these biggest venues. Now, you're basically leaving the realm where even Eventbrite has control, because the venue has its own requirements for how the ticket sales work. That's the challenge here. We talked about all these different numbers, about the 5% or so of creators making up 46% of revenue, and how Eventbrite can scale with the creators as they grow. But is there a natural ceiling where people essentially break out of the platform? And how will the company address that?

Something else to keep in mind here is, the company has a lot of integration with, for example, creators on the website, but also other platforms like Spotify. There's always the potential there for some of these companies that are on the discovery side for whatever these creators are working in -- whether it's music, whether it's fitness events, things along those lines -- for the companies that are nascent to those industries to decide, "Hey, this is a high-growth space." I don't know if we mentioned this earlier, but we're seeing a lot of consumer spending shift to the growth in experienced-base spending. That's growing faster than for material possessions. There's always the potential, especially when you have a big platform like Spotify, to decide that they see an opportunity here, and they can move in and present challenges for the company. 

Anything else jump to mind for you? 

Sciple: I wanted to further flesh out your point that you had about Spotify, which is one of the key partners for Eventbrite. Currently, Spotify and Eventbrite are integrated together. If you go to an artist's page on Spotify, it will show all the events or concert that the artist participates in that are Eventbrite events. If Spotify were to get into the ticketing market, it would not only add a new competitor against Eventbrite in the ticketing space, but also would take away one of their key partnerships and key drivers for bringing new attendees to Eventbrite concerts. This is significant, too, because based surveys that Eventbrite has done, 42% of people who discover a new artist do so through a streaming platform, of which Spotify is one of the largest. If they were to lose that customer acquisition or attendee acquisition channel, that would be very harmful to Eventbrite as a company.

Shen: They're losing that exposure, essentially.

Sciple: Correct.

Shen: Alright, we have a couple of more minutes. I want to wrap up with some of our final takeaways -- basically, things to keep an eye on with this deal as the company goes public, and generally, our advice for how to approach IPOs. 

With this deal, just keep in mind that, again, founder-led company. The Hartz family, after the company goes public, will still have about 35% ownership. Some of those private investors from the initial funding rounds from several years ago -- like Tiger Global, Sequoia Capital -- they're also going to be major owners, I think about 20% stakes each. 

Next steps. Our advice among the Industry Focus cast, with IPO deals in general, is to give it some time. Especially because this is a unicorn deal, and we've seen how well some of those deals have performed in their debuts this year, we always recommend with that initial hype in the beginning, give it a few months. See how the company does with its first two, three, four quarterly reports, that first year, and how consistent the growth is -- especially here, where it is very much a growth story.

Beyond that, things that I'm definitely watching. The growing portion, in terms of their total ticket volume, how much of that is made up with paid tickets. The other services that they're offering and how they're branching out and expanding their revenue opportunities with creators. Anything else that you think that investors who are interested -- because this is a really cool business -- should watch? Whether it's an opportunity or a red flag.

Sciple: I think the biggest thing to watch with this company is that risk factor we talked about earlier of people growing out of the platform and getting too large for that middle market space. I would pay attention to, of the paid tickets, if the company decides to break out these metrics. What segment of their creator population is contributing, and how much is it contributing to their overall revenue? I think we need to keep an eye on, as the company grows, do it, does anybody grow out of the platform? How does that affect revenue growth over time? I think that's the most important things. Are they retaining their big money creators on the platform?

Shen: Yeah, who proved to be the highest value and most profitable. That is a nice lead-in to our topic for next week. This is a really cool industry this deal is turning us on to. I don't think we've covered one on IF before. We're going to look at the currently public company Live Nation, which is very dominant, in terms of these big creators. We talk about 2017, Eventbrite served 700,000 creators. Live Nation served something in the low thousands, in terms of events, but huge, huge ticket volumes and revenue from that. We're going to look at that company next week, as a matchup for Eventbrite, and we'll have updates once the company prices its deal. Nice, awesome having you on, man! Thanks for joining us!

Sciple: Thanks so much! I really enjoyed it. Looking forward to talking with you more going forward.

Shen: Sweet. Thanks everyone for tuning in! People on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell anything based solely on what you hear during the program. Fool on!

Nick Sciple owns shares of Apple, DexCom, and PayPal Holdings. Vincent Shen owns shares of iQiyi and PayPal Holdings. The Motley Fool owns shares of and recommends Apple, Pandora Media, and PayPal Holdings. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends iQiyi and Live Nation Entertainment. The Motley Fool has a disclosure policy.