Masquerading As A Concert Streaming Business, LiveXLive Stock Is Worth $2 (60% Downside)

|
About: LiveXLive Media, Inc. (LIVX), Includes: P, SPOT
by: Isla De La Plata Capital Management
Summary

10Q filings show that LiveXLive's non-Slacker business has generated just $0.4M over the last three quarters.

Slacker revenue would be down if not for the exclusive Tesla contract --there is no disclosure about when that ends.

The balance sheet cannot support investment in product or losses for much longer.

LiveXLive (LIVX) purports itself to be a live streaming video service that is building an “ESPN like” company around concerts but the company is a music streaming service that is only growing by forcing itself on Tesla customers. It continues to lose money through its concert streaming service, while it is supporting these losses by continuing to extend its working capital. This is not a sustainable model.

I argue below that I believe shares are worth only $2 (an aggressive assumption) – 2x the amount it paid for Slacker a year ago.

LiveXLive is Not a Streaming Music Service

While LiveXLive spends most of the time on earnings calls and in discussions with investors talking about its concert live streaming service, however it has generated just $0.4M of non-Slacker/concert revenue for the last three quarters.

FY1Q19 FY2Q19 FY3Q19
Slacker Revenue 7.4 8.0 8.8
Implied LiveX revenue 0.2 - 0.2
Total revenue 7.6 8.0 9.0

I believe this is because streamed music festivals have little consumer draw. The fun in being at a festival is being with a group of people all experiencing the same thing at the same time. This simply can’t be replicated in someone’s living room.

Bulls will point to sports as an analogy but concerts are different than sports. But there is analysis of sports between friends and in journalism that make watching in real time necessary. To that point, I’ve never read an article about music artists performing and how it was better or worse than their performance in a different city. In fact, music concerts are a repetition. While each concert is unique, it is not unique in the same way that each sports event is unique because the variables change so much more with a new opponent in a new city than for a new venue for the same artist.

Fiscal year to date LiveXLive has generated $0.4M.

I arrive at my $0.4M calculation for LiveX revenue after taking the Slacker revenue, which LiveXLive reports in their 10Qs, and subtracting this from total revenue. Amazingly, LiveXLive produced no revenue in FY2Q19 despite streaming 8 concerts.

Promisingly, LiveXLive is now producing concerts at its long-term goal of ~$300K per show. But this implies that they are losing money on each show. Given that these are fixed costs, it should be promising that they are broadcasting shows for so little, but the problem is the consumer proposition is not there and no one is showing up.

In short, concert streaming looks like a bad business. The problem is that LiveXLive has sold its investors on this premise, and cannot exit it without significantly hampering its promise to investors that it is a concert streaming business.

This is a Streaming Music Company

Streaming music businesses are difficult because there is a royalty payout for each song played (even if the song is not played to completion). For example, Pandora’s 2016 royalty payout was 49% (2017 was a transition year given the launch of Pandora Premium) while Spotify’s 2018 gross profit was just 26% (this includes other costs such as credit card fees, technology costs, etc.).

Impressively, Slacker reached positive gross profit despite not being at scale – Slacker has 1.4M MAU vs. Spotify’s 207M MAU and Pandora’s 68.8M MAU. Not being at scale is a significant challenge for Slacker given that most internet businesses are “winter take most” industries. Today Apple Music and Spotify are in pole position for streaming music and given their scale, this has helped them to invest in features and product to improve their user experience and gain more users – for example, Spotify plans to spend $400-500M on multiple podcast acquisitions in 2019 and spent 493M Euro on R&D in 2018. For Slacker, this presents a problem as its features and user interface fall relatively more behind the leaders in the category.

Slacker’s lack of consumer draw can be seen given Slacker’s marketing strategy. Slacker is using an exclusive agreement with Tesla and bundling agreements with carriers to drive growth. Not surprisingly as the exclusive integrated streaming music service for Tesla in the U.S., Tesla vehicles have been the biggest growth driver. In fact, Tesla has been greater than 10% of revenue since it was acquired by LiveXLive (per company 10Q and 10K filings) and has therefore had to disclose its share of revenue each quarter. To that end, if you subtract Tesla revenue from total revenue, non-Tesla revenue has been shrinking the last two quarters – again showing the strength of the concert streaming business…

FY1Q19 FY2Q19 FY3Q19
Tesla revenue 2.2 2.9 4.0
% of total revenue from top customer 29% 37% 45%
Non-Tesla revenue 5.4 5.0 4.9
% of total revenue 71.0% 63.0% 55.0%
Total revenue 7.6 8.0 9.0

I cannot find LiveXLive’s Tesla contract in any of its filings. However, this seems like a significant risk to me given how important Tesla is to LiveXLive’s financial profile today. In fact, I’d expect Tesla to remove this exclusive contract at its next opportunity given its focus on customer experience and the number of Slacker complaints on Tesla message boards (example 1, example 2, example 3). You could surmise that Slacker would have been worth more than $50M to Spotify or Pandora if it could be the exclusive partner to Tesla. This makes me believe that the contract could be up in the next year or two.

An Upside-Down Balance Sheet Supported By Working Capital

Given LiveXLive’s operating losses, it has been quite the management feat that they have actually increased cash over the last nine months ($10.3M at Mar. 31, 2018 to $14.3M at Dec. 31, 2018). While the company’s debt from March 31, 2018 to Dec. 31, 2018 increased from $8.7M to $14.6M, the cash flow bridge has been predominantly working capital. Accounts payable and accrued royalties (the money Slacker owes for playing licensed music) has ballooned from $19.9M as of March 31, 2018 to $29.5M as of Dec. 31, 2018 while restricted cash, accounts receivable, and prepaid expenses has declined from $8.4M to $5.1M, for a working capital benefit of ~$13M. LiveXLive will eventually need to pay their partners and given the losses in the business, this will be increasingly difficult to do.

Importantly, its lack of balance sheet strength hurts its live streaming concert business. Given LiveXLive’s precarious balance sheet it cannot do a deal with labels for its live streaming business. LiveXLive has talked about launching a recorded version of its library of concerts but this requires a licensing deal with labels – a library would turn live streaming video into a recorded performance, which is subject to different royalty payouts and requires a deal with labels. When Pandora launched its on-demand service, Pandora Premium, it prepaid $120M of prepayment royalties to the labels. A deal a quarter of that size, is not even in the realm of possibilities with LiveXLive’s balance sheet today.

The Company Has Published Going-Concern Warnings in 10-Q

A going concern is “accountant speak” for whether the business is financial solvent – in other words, can it pay its bills? LIveXLive has been listed as a going concern in its last 3 10Qs. This is not new information but should not be glossed over by investors.

What should the Company be Worth? I foresee a $2/share Valuation

LiveXLive is largely a call option on the streaming live video concert business and Slacker business.

I believe Live Video is a zero. I would never watch a live concert (I don’t think other consumers would either), they are losing money on a per unit basis (they are not getting back the ~$300K to produce each show), and in my view, music is an on-demand activity. While their contracts with show producers (AEG, Rock in Rio, etc.) have some worth, strategically an acquirer does not to pay up for an asset that will ultimately shut its doors.

Slacker is the better business. Its contract with Tesla is highly valuable and LiveXLive has done a good job adding bundling from telecom carriers (though the non-Tesla business has shrunk the last two quarters). That said, we have a perfect comp for what a company will pay for Slacker: $50M – what LiveXLive paid for the company a year ago. Given we are likely towards the end of the Tesla contract, this amount should be lower, but to be fair, let’s double this and say Slacker is worth $100M. Adjusting for net debt of $0.3M, this implies shares are worth $1.92 (This does not include the 167,363 warrants outstanding, 5.1M options outstanding, 673,408 RSUs outstanding, 2.7M of common stock underlying the convertible notes and debentures.

Disclosure: I am/we are short LIVX.