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Investing

What’s Going On With LiveTiles?

I’ve had a bit of a job catching up with the state of play for LiveTiles (LVT); since exiting my position last year there has been a lot to read and a fair bit gone on. It’s taken me about a day’s worth of reading all the reports and announcements for the past few years, and checking financials where necessary. Honestly, I’m still at a loss to be sure of the future of LVT.

Historically the stock looked very promising with significant growth and reported outlook of reaching $100m ARR within a few years. This was not delivered, and capital raises were used to grow the company inorganically at the additional cost to the shareholders. Shareholders were not happy. It was at this point that I sold my position at a loss (albeit mainly as part of a portfolio restructure to make my tax returns simpler).

Since then COVID happened and has been (rightly or wrongly) used as an excuse for underperformance. Significant cost cutting has happened in the company and customer numbers have gone from 1092 in July 2020 to 1114 in March 2021. Since average customer value per year is about $53k, that growth is arguably worth $1.17m. That’s about 2% growth attributable to new customers over the year, and the remainder due to increasing fees. LVT reported 7% growth (by usual measures, disregarding currency fluctuations) since last year.

Personally, I’m not sure how I feel about those numbers. On one hand, the aim of a software (SaaS) company is grow by investing in developers to improve the product, add new features and charge their customers more as well as acquire new customers. 7% growth in this respect is pretty good given the COVID situation in (especially in America). That said, 7% growth is too little to justify anything more than a 4.3x multiple of ARR.

On the other hand, there are a number of people on internet forums stating that the company has harped on about what a big pipeline of sales they have in the works, which just isn’t materializing. People seem to not trust the forecasts that LVT management are putting out there and are jaded from historic issue of mistrust in forecasts due to lack of organic growth, and this is heavily reflected in the share price.

Regarding the share price, there is also a possibility that there could be another capital raise in the coming year, since cash on hand has gone from $37.8m in June 2020 to $16.8m in March 2021, which is a difference of $17.8m. If things keep at this rate, they’ll have no money within a year. It’s difficult to be sure if they’ve cut costs enough since July 2020 to avoid another capital raise. I think another capital raise could smash the share price, and given the low interest rates at the moment, the company would be better off issuing bonds if possible.

If I still owned LVT shares, would I sell them now?

Well, that’s a difficult question to answer because investors have different requirements for their investments (different investment timeframes, dividend requirements, growth requirements, risk levels, etc.). Also there’s a matter of opinion involved here, and this stock could (rightly in my opinion) be considered a gamble. The gamble is: whether you believe that COVID is responsible for the lack of growth.

There has been talk of LVT failing to perform when other software companies have enjoyed massive growth from Work From Home (WFH) initiatives due to COVID19. In LiveTiles’ defence, an intranet (which is essentially what LiveTiles is) is not a WFH solution, despite LVT touting it as an employee collaboration tool (which it is). Additionally, I imagine that due to the layoffs and uncertainty in America, companies would have reduced spending on IT projects, and had less IT staff to implement such projects. Also a new way of working (through LiveTiles intranet) would require a lot of staff retraining and would present significant staff performance risks.

People do not like change (especially in their IT systems) and will often use IT as an excuse not to do their jobs. Years ago I worked at a place where the developer changed the background colour of some software. This was the only change. When the software was deployed, the staff using the software refused to work because they didn’t know how to use the software because it had “completely changed”. They needed “retraining” to show them that nothing had changed, and all the buttons they couldn’t find were still in exactly the same location.

People are extremely resistant to change, and I have many stories like this, with many different people in different companies.

Lewis Hurst

I think if I still owned LVT shares, I would probably keep holding to see how they performed in a post COVID world, then consider my position after 6 – 12 months of performance. However I would be deeply concerned about the prospect of a future Capital Raise (CR) because the share price is already very low – the CR would likely mean raising money at a very low share price to undercut the already very low market rate. This means accepting a lot of dilution or forking up more money to invest in a company that I wasn’t happy with. Not a great situation.

On the other hand, I would have significant concerns that the share price could half again, then fall further if the company fails to grow or fails to cut costs enough to turn a profit (so even if growth is immaterial, there is a way to garner return on the investment) and continues year on year to go back to its shareholders for more money through capital raises.

Any investors’ decision to sell might be based on their belief in whether COVID19 is the real reason for lack of growth in customer numbers, but also their willingness to risk losing half the money they currently have invested. Nonetheless, selling at such a low price (2.56x ARR [$150.54m / $58.9m]) is quite punishing.

Such a low price is almost worth waiting for a further drop to buy in again as a gamble. I don’t think LVT will ever get back to it’s lofty heights of 8x ARR, but good performance post COVID19 should see this stock nearly double it’s value and go back to 4.3x ARR (future share value being less 20% for a CR, plus a little for the increased value of future ARR).

Good luck to anyone who decides to hold. You stand alongside shareholders of a2 Milk (myself included) who are in a similar situation with COVID sales stats and a falling share price.

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Investing

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).

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Investing

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.

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ASX

Livetiles Limited (ASX:LVT)

More information about Livetiles…