Vivid Seats Inc. quarterly report, Q2 FY2023

Vivid Seats Inc. — Q2 2023 Form 10-Q Summary

Reporting period: Three and six months ended June 30, 2023. Figures are in U.S. dollars; financial statement amounts are unaudited. Vivid Seats operates an online secondary ticket marketplace through its Marketplace and Resale segments.

Financial performance and key metrics

• Q2 basic and diluted EPS were $0.36 and $0.20, respectively, versus $0.12 for both measures in Q2 2022. First-half basic and diluted EPS were $0.53 and $0.35, versus $0.14 for both measures in 2022. Diluted EPS reflects assumed conversion of noncontrolling interests and is not directly comparable with basic EPS.
• Q2 Marketplace revenue rose 7% to $139.2 million; Resale revenue rose 48% to $26.2 million. Marketplace GOV increased 17% to $953.7 million, and Marketplace orders increased 9%. For the first half, GOV rose 16% to $1.81 billion.
• Q2 segment contribution margin was $57.6 million, compared with $55.9 million a year earlier; this is a company-defined measure of segment revenue less cost of revenue and marketing and selling expenses.
• Q2 operating income was nearly flat despite revenue growth, as cost of revenue rose 31%, marketing and selling expense rose 10%, and general and administrative expense rose 6%.

Liquidity, debt, and balance sheet

• At June 30, cash and cash equivalents were $306.2 million; restricted cash was $0.7 million. Current assets were $427.8 million and current liabilities were $429.1 million.
• Gross first-lien debt was $271.6 million, with $266.6 million net of issuance costs, including $2.8 million current maturities. The $100 million revolving facility had no borrowings. The loan’s effective rate was 8.71%; the company reported compliance with debt covenants.
• First-half operating cash flow was $82.7 million, investing cash outflow was $5.6 million, and financing cash outflow was $22.5 million. Management attributed much of the operating cash inflow to seasonal changes in operating assets and liabilities, particularly accounts payable.
• Management stated existing cash was sufficient for liquidity needs over the next 12 months. The company’s shareholders’ deficit was $293.3 million, and redeemable noncontrolling interests were $790.4 million.

Material changes and unusual items

• A $24.5 million Q2 income tax benefit materially boosted net income. It primarily reflected release of a valuation allowance on U.S. tax attributes; $25.3 million was recorded as a discrete tax benefit during the quarter.
• A May–June secondary offering sold 18.4 million Class A shares for a selling stockholder at $8.00 per share. Vivid Seats received no proceeds. In connection with the exchange of units, it recorded a $99.0 million Tax Receivable Agreement liability and a $52.8 million deferred tax asset, with a $46.1 million reduction to additional paid-in capital. Payments are expected to begin in 2025 and depend on realizing tax benefits.
• The fair-value change in warrants shifted from $8.8 million of income in Q2 2022 to $1.0 million of expense in Q2 2023, affecting the year-over-year comparison of pretax income.
• At June 30, accounts receivable included $9.9 million due from marketplace sellers for cancellations and replacement-ticket costs, versus $1.0 million at year-end. The allowance for credit losses on those balances rose to $3.0 million from $0.1 million. The company also reported higher reserves and recoveries related to future customer compensation as future-event sales increased.

Outlook, risks, and contingencies

• The filing provides no full-year numerical revenue, earnings, or cash-flow guidance. Management said Taylor Swift’s “Eras” tour was expected to contribute to relatively higher Marketplace GOV in the first half of 2023 than normal seasonal patterns.
• Management cited demand, event cancellations, discretionary spending, competition, seller and distribution-partner relationships, regulation, litigation, cybersecurity, and access to capital among risks that could affect results. The company’s floating-rate debt exposes it to rate changes; a hypothetical 1% rate change would alter interest expense by $1.4 million based on first-half debt balances.
• Disclosure controls and procedures were deemed ineffective at June 30, 2023 due to a previously identified material weakness involving segregation of duties, defined finance roles, and personnel with appropriate technical accounting and SEC-reporting experience. Remediation was underway but not complete.
• The company is defending an Illinois biometric privacy lawsuit and said it could not reasonably estimate a possible loss. Other disclosed matters include settled class actions and potential sales-tax obligations; management did not consider historical unremitted sales-tax exposure probable based on its analysis.
• Subsequent events: in July, the company invested $6.0 million in a convertible note. On August 4, it agreed to acquire a Japan-based online ticket marketplace for approximately $77.2 million, expected to close in Q3 subject to customary conditions; the company planned to use cash on hand and acquired cash to fund it.

Important facts for investors to verify

• How much of the reported earnings increase is sustainable apart from the tax benefit and fair-value changes in warrants?
• Whether the material weakness remediation is completed, tested, and operating effectively.
• Whether seller and distribution-partner receivables, cancellation reserves, and customer-compensation estimates develop as expected.
• The ultimate timing and amount of Tax Receivable Agreement payments and the cash impact of the planned acquisition.
• How floating interest rates, event demand and cancellations, and seasonality affect future cash generation and operating margins.