Alpha Exposure

About the Author Alpha Exposure

Alpha Exposure writes about long term fundamental investment ideas, and invests in them as well. This author has substantial investment research experience.

SFX Entertainment: The Music’s About To Stop


We wrote last month that we believed SFX Entertainment (NASDAQ:SFXE) was a house of cards headed towards imminent collapse. This past quarter only further strengthened our viewpoint, and we continue to believe SFXE is a compelling short. Our price target remains $0 but our timeline has accelerated.

SFXE significantly missed consensus estimates

We would first like to point out that SFXE just missed FactSet consensus estimates for both revenues and EBITDA by a very wide margin. SFXE reported Pro Forma Revenues of $151 million, which was 9% below consensus estimates of $165 million. Pro Forma Adjusted EBITDA was $15 million, which was more than 50% below consensus estimates of $31 million. To repeat, SFXE missed EBITDA estimates by 50% during its seasonally strongest quarter.

This is not the picture of a healthy and strongly performing company. SFXE has now missed consensus EBITDA estimates four quarters in a row.

On the quarterly earnings call, SFXE management noted they had made $11 million of additional investments, which impacted EBITDA during the quarter. Even if we give them credit for the full $11 million of additional spending, SFXE would still have missed consensus EBITDA estimates by 20%.

“Adjustments” account for the vast majority of Pro Forma Adjusted EBITDA

Putting aside the large reported miss, we were shocked at the size of the “Adjustments” that SFXE added back to reported Pro Forma Adjusted EBITDA. Third quarter’s Pro Forma Adjusted EBITDA of $15 million includes $12 million of “Adjustments.” A full 80% of SFXE’s PF Adjusted EBITDA came from Adjustments, which they refuse to break out. EBITDA excluding the Adjustments would have only been $3 million.

According to the Company, “Adjustments” include, “transaction costs, non-recurring expenses (principally severance), cost savings, insurance recoveries related to cancelled festivals and adjustments related to content expenses.”

Without a full breakdown, it’s hard for us to judge what is really one-time and non-recurring. For example, transaction costs, content expenses, and cancelled festivals may just be a cost of doing business for SFXE. Furthermore, SFXE’s definition of “Adjustments” has changed several times every quarter.

We do, however, know that SFXE has had Adjustments in every single quarter since its IPO and that the total Adjustments eclipse EBITDA by a significant margin. In the five quarters since its IPO, SFXE has reported PF Adjusted EBITDA of $13.9 million. However, that definition includes $48.9 million of Adjustments that were added back.

If we do not give them the benefit of the doubt of the Adjustments (which happen every single quarter), then EBITDA have been massively negative since the IPO.

Cash burn even more alarming

In our last article, we highlighted SFXE’s significant cash burn. It appeared to us that SFXE was headed to a liquidity event. Since then, SFXE has burned even more cash and increased net debt even further.

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It’s important to note that the third quarter is SFXE’s seasonally strongest period, as the major festivals occur during the summer. We can clearly see that Cash Flow from Operations have been negative every single quarter and the most negative in the third quarter. If SFXE cannot generate cash during its strongest quarter, we strongly question SFXE’s ability to generate any meaningful cash flows.

Conclusion: SFXE price target of $0

We continue to believe that SFXE will go bankrupt and that the equity is worthless. There is simply too much debt at the company; cash burn is high and net debt levels have been increasing. We believe the risk of default is high and increasing by the day.

In addition, we believe SFXE is trying to hide the truth from investors. Its touted “Pro Forma Adjusted EBITDA” includes multiple adjustments, which are large and recurring. Furthermore, Pro Forma Adjusted EBITDA has no correlation to actual cash flows.

Every single quarter that passes, SFXE gets closer to our mid-term price target of $0.

According to TipRanks.com, which measures analysts’ and bloggers’ success rate based on how their calls perform, blogger Alpha Exposure has a total average return of 43.9% and a 86% success rate. Alpha Exposure  is ranked #139 out of 3993  bloggers.

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