SFX Entertainment looks suspiciously optimist in its first earning release

SFX Entertainment, Inc. founded in New York, 2011 by Robert F. X. Sillerman, produces concerts and live events, especially Electronic Dance Music festivals.The company has published its first earning release as a public company earlier this year saying that the “revolution has begun.” SFX Entertainment states that attendance is growing by 40% in its pro forma, due to several acquisitions this quarter.

According to Brian Smith Jr., a full time investor, the press release sets an alarm along with the footnotes. The information provided is based on EBITDA (Earning Before Income Taxes, Depreciation, and Amortization) adjustments without fulfilling the GAAP (General Accepted Accounting Principles). The author suspects that these fixed numbers come from investment banks that made this company go public.

SFX Entertainment’s first pro forma showed $12,844 million of EBITDA. The GAAP pro forma gross profit was $11,334 million with $62 million in SGA (Selling, General, and Administrative expenses). The footnotes adjust the expenses with “no recurring and transactional expenses, and the elimination of cost associated to the Electronic Zoo Festival due to insurance matters.”

With all their questionable margin adjustments and profile, SFX Entertainment’s profit in 2013 sounds extremely doubtful due to the nature of the industry. Analysts backing the information provided by the SFX press release are irrationally optimistic, projecting a return of 3.3x compare to Live Nation (0.68x), and a Brazilian company T4F Entretinimento (0.39x). Live Nation and T4F, however, have an advantage over SFX due to their participation in the ticketing business where the profit margins are much higher; they have more control of the venue assets and they do much more promotion.

Live Nation is a perfect example for comparison. Let’s exclude the ticketing business (where Live Nation is a leader, owning Ticketmaster). The margins for SFX are still debatable and the projections for 2015 are even more unbelievable. The company bases its valuation in several acquisitions from last quarter, as well as, the continuous raise of EDM (Electronic Dance Music). The question is, did the EDM come to stay? Consumers change their music taste over time and perhaps SFX has yet to pay attention to this matter. 

Combined with the uncertain margins in this report, issues with drug safety have disturbed the performance of the company this year. Two kids died at the Electronic Zoo Festival in New York City and this incident forced SFX to close the third day of the festival due to “serious health issues,” New York City Government said.

Live Nation is increasing the number of festivals and EDM events faster than SFX demonstrating that the report by SFX doesn’t seem too accurate. SFX states that they will be increasing the sponsorship and advertisement business in a massive way. For 2017, the company is expecting to increase the budget to $273 million from the actual $7,7 million. These numbers mean a growth of 3,400 %, which sounds absurd for the author (and for many more). Live Nation worked with a budget of $200 million in advertising and sponsorship this year with rate revenue of 16x in comparison to SFX.

Consistent with the above statement, Brian Smith Jr. has a strong suspicion that investment banks that took the company public may have played an important role behind these report inaccuracies. The excess in adjustments in the footnotes and astronomic positive projections should generate concern in the investors. SFX Entertainment’s next step should be to maintain investors encouraged with the growth of the company and revenues. Future reports would show more realistic results, and therefore, SFX could generate real trust.