Livetiles Q4 FY20 Analysis

Livetiles released their Q4 results today and the stock market did not like what they read, the share price fell ~11% (at time of writing).

At first glance of the results, things look good and there are lots of nice words like “positive cashflow” and “record quarter” and “Annual Recurring Revenue (ARR) is up 45% on the year”. However, it was immediately clear to me what went wrong.

I’ve talked before about Livetiles having achieved their growth inorganically via Capital Raises (CRs), and I think that it is this is the crux of the problem with this results announcement. If we look at this quarters’ growth of $3m, it represents 5% growth on the previous quarter or 20% annualized. Sounds great, but when we consider that there were only 24 new customers for the quarter and the average ARR per customer is $53.3k, this is only $1.28m of new customer growth – which is 2.2% growth or 8.8% annualized. Given that new customers typically spend less to start out, then spend more once they see the value of the platform and build acceptance in the organisation, it’s possible that growth is actually a lot less than this.

I feel that Livetiles shareholders are really waiting to see some significant organic growth and proof of profitability (ability to pay a dividend) before this stock will get re-rated. That said, it’s actually not a bad result when you consider the effect of COVID19, which must have had a negative effect on the ability of the sales staff to get out and do their job, despite whatever Livetiles might suggest. Still, I suppose that COVID19 is looking as though it will prevail for a long time in the USA, so one might expect more quarters of low single-digit percentage organic growth in new customers alongside a subdued share price.

What Are Livetiles Shares Worth?

The answer to this is very simple. A company trading on multiples of ARR is worth at least 4.3x ARR (assuming that there’s nothing threatening the business).

Livetiles ARR is $58.2m, putting their Market Capitalization (MC) at $244m. No prizes for guessing what the current MC is for this company (I’ll give you a clue, it’s between $243.5m and $243.7m).


Livetiles – Quick Look

Livetiles (ASX:LVT) make and sell intranet software which is targeted at large companies. It seems as though shareholders have gone through a phase of excitement at the lofty $100m ARR the company has targeted, followed by frustration and disappointment in the company’s inorganic approach in reaching the target (by Capital Raise [CR] funded acquisitions), lack of confidence in reaching the target and displeasure at the sight of last years high costs (containing large budgets for entertainment, and the like). This caused the share price to drop heavily over the last year, from multiples of ARR in the region of 8x to a level of 4.3x, which is pretty much the minimum you’d expect for a listed company with an ARR model.

Looking at the current Market Capitalization (MC) and Share Price (SP), it seems that they’re still in the region of about the mid 4’s in terms of a multiple of ARR valuation. This in my view is a fair price (but not a price I’ll be buying at for the reasons below), though some might see this as cheap due to the potential upside.

Potential Upside

I guess someone’s been complaining, because since the SP took a hit following last years announcement, Livetiles have made a few announcements inferring that they aim to cut costs and work towards profitability. To that effect they recently announced reconfirmation that they have “…no requirement to raise further capital to fund operating cash burn”.

My Opinion

Personally I’m not that excited by this and won’t be increasing my holding.

Livetiles have always been honest in their forecasts and have done what they say they will so far, which makes it difficult to suggest that they won’t achieve their targets (though my personal guess is that they won’t).

However, this is not my quarm. What I don’t like is the way they’ve worked around the words of their target. Instead of growing the company to an ARR of $100m, they did CR’s (diluting shareholders) to buy their way to their target. Admittedly it certainly makes sense that if your company is valued at a multiple of ARR of 8x, you should do a CR and buy another company at 4.3x ARR. Unfortunately the higher multiple for their valuation was based on their ability to grow the company, not their ability to buy companies (that’s the investors job). That said, they have made good purchases at good prices. Adding to that, their purchases seem to have enabled them to access additional space in the market for their other products.

This brings me to what I’m not excited about in this announcement. They’ve said that they have “…no requirement to raise further capital to fund operating cash burn”. I suspect (in combination with looking at at recent organic growth rate) that they will (do as they say and) not do CRs to fund operating cash burn, but they will do CRs for more acquisitions to reach their targets.

Therefore, given their MC is based on a low multiple of ARR, the only real growth to enjoy from Livetiles is either a change in market sentiment (which will occur if they start making profit by cutting costs) or if organic growth is significant.

Finally with all that said, recently Livetiles have been making cost savings (in the form of letting people go, and possibly other changes), which I see as the real potential upside to the value of this stock (despite not being happy about people being fired – my personal preference is to not hire people in the first place, though I guess this is the risk they took to grow).

Despite this potential upside in profitability, I do worry that these changes have been forced upon them and that this may affect organic growth and product development (which leads to customer retention issues).

For now, investing in Livetiles all seems like too much of a gamble, as there is no clear path to profit and a bunch of risk factors (which I see as economy, poor organic growth, product development and customer retention); hence, I believe the current share price is fair value, but I won’t be buying any more unless I see favourable profitability or an increase in organic growth.


Livetiles Limited (ASX:LVT)

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