Vivid Seats Inc. quarterly report, Q1 FY2023

Vivid Seats Inc. — Q1 2023 Form 10-Q

Reporting period: Three months ended March 31, 2023; comparison is the three months ended March 31, 2022. Vivid Seats operates an online secondary ticket marketplace through its Marketplace and Resale segments. Figures are unaudited; dollar amounts below are in millions unless otherwise stated.

Financial performance

Approximate operating margin rose to 20.8% from 10.5%; approximate net margin rose to 18.8% from 2.4%. Segment contribution margin, as defined by the company, was $68.5 million versus $44.4 million, or approximately 42.5% versus 33.9% of revenue. Basic and diluted EPS were $0.16 and $0.15, respectively, versus $0.02 for both measures in Q1 2022. Class A earnings exclude income allocated to redeemable noncontrolling interests, which received $18.1 million of Q1 2023 net income.

Liquidity, debt and balance sheet

• Cash and cash equivalents were $303.3 million at March 31, 2023, up from $251.5 million at December 31, 2022. Management stated that cash and expected operating resources were sufficient for liquidity needs over the next 12 months.
• Long-term debt was $272.3 million gross, or $267.1 million net of issuance costs and current portion; current maturities were $2.8 million. The $100 million revolving facility had no borrowings outstanding. The term loan matures February 2029, bears interest at SOFR plus 3.25% with a 0.5% floor, and had an 8.34% effective rate at quarter-end. The company reported compliance with debt covenants.
• Operating cash flow benefited in part from a $56.8 million increase in accounts payable, which management attributed primarily to seasonal fluctuations. Investing cash use was $2.6 million; financing cash use was $10.8 million, including $7.6 million of share repurchases.
• Current assets were $408.0 million and current liabilities were $430.6 million. Shareholders’ deficit was $397.3 million, and redeemable noncontrolling interests were $901.9 million.

Changes and management commentary

• Revenue and order activity increased with more live events and substantially fewer cancellations. Marketplace orders grew 13%; Resale orders grew 28%. Marketplace GOV was negatively affected by $12.1 million of cancellations, compared with $34.8 million a year earlier.
• Q1 2022 had been affected by the Omicron variant and unusually high cancellations. Cancellation charges reduced revenue by $3.6 million in Q1 2023 versus $16.0 million in Q1 2022.
• Marketing and selling expense was nearly flat at $54.8 million: offline advertising rose 29%, while online advertising declined as the company pursued efficiencies. General and administrative expense increased 11%, primarily from personnel costs.
• Net income growth also reflects the absence of Q1 2022’s $4.3 million debt-extinguishment loss and a favorable year-over-year change in warrant fair value. These items make the reported earnings comparison less indicative of underlying operating growth.
• The $40 million share repurchase authorization expired March 31, 2023. Cumulatively, 5.3 million shares had been repurchased for $40.0 million; Q1 purchases were approximately 949,000 shares for $7.6 million.

Outlook, risks and unusual items

• The filing provides no quantified revenue, profit or EBITDA guidance. Management’s stated 12-month liquidity assessment is not a performance forecast.
• Management said there was a reasonable possibility that, within three to six months, positive evidence could support release of a significant portion or all of the valuation allowance against deferred tax assets. Timing and amount remain uncertain; any release could create an income tax benefit.
• Disclosure controls and procedures were not effective at reasonable assurance levels at March 31, 2023 because of a material weakness in financial reporting controls, including segregation of duties, defined roles and finance-team technical accounting and SEC-reporting expertise. Remediation was underway but not complete or yet demonstrated effective.
• The company faces a lawsuit alleging violation of the Illinois Biometric Information Privacy Act; it denies the allegations and said it could not reasonably estimate potential losses. Other disclosed matters include settled customer-fee and cancellation-related class actions, with related liabilities recorded.
• Floating-rate debt creates interest-rate exposure: a hypothetical 1% rate change would affect quarterly interest expense by approximately $0.7 million, assuming rates exceed the floor. Other risks include event cancellations, discretionary spending, marketplace competition, seller and distribution-partner relationships, cybersecurity, and regulatory and litigation exposure.

Most important facts for investors to verify

• Whether revenue, Marketplace GOV, order growth and operating profitability persist beyond a comparison period affected by unusually high prior-year cancellations.
• How much operating cash flow reflects recurring earnings versus seasonal increases in accounts payable and other working-capital movements.
• The path of floating-rate interest expense and debt repayment, along with available liquidity and covenant headroom.
• Progress and testing of remediation for the material weakness in internal controls.
• Potential valuation-allowance release, cancellation/customer-credit estimates, and outcomes or exposure from the biometric privacy and other legal matters.
• The impact of redeemable noncontrolling interests and potential dilution: diluted weighted-average shares were 195.8 million versus 77.4 million basic shares in Q1 2023.