The art of the pro forma cash flow analysis, an Eventbrite example

Eventbrite released some somber news last week: in order to better position the company to weather the impact of COVID-19, the company will reduce expenses by an annualized $100 million including a 45% reduction in its global workforce (see the full press release here). The situation Eventbrite finds itself in is by no means unique: many tech companies have announced hiring freezes, furloughs, and staff reductions in order to reduce expenses.

While this sad news, as creators and users of financial statements it is useful to understand how to adjust and project pro forma financial figures based on these types of decisions/announcements. Below I provide a step-by-step approach to do just that. Remember, pro forma analyses done using imperfect information can sometimes be more of an art than a science. It can be useful to keep in mind the desired use for such an analysis: here understanding the need for additional capital and/or expense reductions might be a key use of our work.

Outputs: P&L, cash flow, and liquidity

Steps to create this pro forma analysis

1. Aggregate historical financials. First bring in all historical data such as annual and quarterly financial statements and any published KPIs. I like to use Bamsec.com for this as it makes this process quite easy.
2. Understand historical trending & line item drivers. Next lay out the company’s historical KPI metrics and key line items. Get a sense for how key line items and metrics have trended historically. Read the financial statement notes to see which costs are fixed and which are variable.
3. Make assumptions P&L and cash flow performance. Given this is an “outside-in” analysis I decided made very high-level assumptions for 2020. For example:

a. 2020 revenue down 54%, in line with previously reported Airbnb numbers

b. 2,000 bps of gross margin % erosion, from 60% to 40% due to fixed costs in COGS (note: fixed vs. variable segmentation in COGS not clear in filings)

c. I estimated the $100 million annualized expense reduction comes in starting early Q2 (so 75% in-year impact), and $85 million of the $100 million is in opex (vs. COGS).

d. I zeroed out many of the cash flow line items given lack of visibility into the discrete drivers and decisions being made. That said, I acknowledge these items could be a substantial swing factor in the analysis. As an example, Eventbrite has “creator signing fees” and “creator advances” whereby creators are sometimes paid in advance for shows. The language in the 10-k indicates they can get this money back in the event the show does not proceed but there are likely very complicated underlying dynamics that will play out behind the scenes.

4. Calculate free cash flow and compare to available liquidity. After using your own assumptions to get to cash flow, compare against the company’s liquidity. For Eventbrite I subtracted “amounts due to creator” from cash balance as this is essentially a contra-account. I also assumed a $50 million minimum cash balance, indicating that this amount cannot be used to fund negative cash flow balances.

5. Add sensitivity analysis to flex key variables. Two of the key assumptions in this analysis are 2020 revenue and 2020 gross margin %. Therefore I decided to show a sensitivity of cash flow outcome to various revenue amounts and gross margin % to contextualize how changes in those assumptions impact 2020 cash flow. Sensitivities are great for showing ranges of important assumptions.

6. Interpret the results. The ultimate goal here is to provide a usable insight that will inform the operation of the company. Here I used a “years of liquidity remaining” variable to show that under the modeled base case, Eventbrite has ~1.5 years of liquidity remaining. Taking this one step further, we might assume that given our range of error in revenue, gross margin %, and cash flow items, Eventbrite may opt to raise outside capital if the crisis continues for more than 6 more months and they dip to ~1 year of cash remaining.

See below for key outputs and a link to the excel analysis here. Feel free to play around with it or try one yourself from scratch.

Outputs: Cash flow and “years of liquidity” sensitivities

Happy modeling! If you have any questions please comment below or shoot me an email at harry.macinnis@gmail.com.