Shares in the remote software telephony service LoopUp (LON:LOOP) were marked down over 40% in early trading today as the firm revealed that reduced customer spending would hit both revenues and profits this year. The share price has taken a large hit:
Ironically enough, this almost squares the circle for the price, as it now resides very close to the price that it entered the market at in 2017. It has been far from a flat ride though, as this was a share that really did excite investors. This time last year, the share reached an almost all-time high of 500p, which also put it on a stratospheric valuation.
This perhaps can be understood when we consider the details of the company, which is a fast growing one in the technology sector. Revenues doubled between 2017 and 2018, and it has been profitable since IPO. LoopUp specialise in the provision of the software which facilitates remote meetings and conference calling. This is by no means a new service, after all people have been able to chat over the internet almost since the beginning of it. However, there are clear network effects and as the quality of software improves, arguably the demand for such services is very high.
This comes in a trading update covering the six months to 30 June 2019. The good news is that many major contracts have been renewed, and new accounts have been won. The warning comes after as follows:
However, due to: (a) subdued revenue across its long-term customer base, which the Group believes has been driven primarily by general macro-economic factors rather than any material change in customer loss rate; and (b) more senior quota-carrying pod staff than expected being diverted into management and training activities required to accommodate the dramatic increase in the number of pod staff, the Group now expects revenue and EBITDA for the full year to 31 December 2019 (“FY2019”) to be approximately 7% and 20%, respectively, below market consensus.
A decrease in revenue is more of a shock than a decrease in profits at this stage, and LoopUp are at pains to indicate this is due to a reduced activity of the firms as opposed to anything inherently wrong it is own business. As if to compound this, it has indicated its plans to rapidly increase the number of employees within its pods and by 2021 will have more than doubled its headcount.
LoopUp is a really interesting business. Perhaps many of the historic figures are meaningless as in the past year the company acquired MeetingZone which greatly increased the scale of the business, but not at minimal cost: the headline price was £61.4m and funded mostly by an equity placing, but also a debt package. This placing looks like absolutely great business taking into account the share price then and now. This is not without risk, but there does seem to be some strategic rationale as many products can be deemed to be complimentary.
This has had an immediate effect on the balance sheet, and as a result while net tangible asset value is positive, virtually all of the assets consist of goodwill and other intangibles. Potentially in future this could be the source of writedown if things do not go as planned and a decrease in revenues would be one of these things.
One aspect to the accounts is the debt position. The £17m taken out to finance the acquisition is structured over 5 years, with half amortising and half being paid as a bullet payment. Currently this means that £0.85m leaves the accounts every six months. There is also a revolving £3m credit facility. There is headroom, but not a great deal of it.
Looking at the accounts we must be careful about the terminology. EBITDA is quoted, but the main measure used is Adjusted EBITDA. There have been many changes across the business and the previous accounts do not have a full contribution from the acquisition. The group points at this here;
It also should be noted that many costs are capitalised as development. Cash flow here is thus eaten up with high levels of capex:
Due to the nature of the product it may well be that these products continually need to be refreshed and clearly bespoke software is an intangible asset. But it does make the usage of EBITDA a little redundant, and we could say the level of profits in real terms are much lower than the headline figures they are producing. Together with the acquisition the trend is only going to go upwards: bigger EBITDA, but bigger capex.
In any case, it seems that any excess cash is being routed back into the business. The ‘pod’ aspect is certainly very interesting, which groups employees into teams of six people (sales, implementation, account managers) which seem to be fairly autonomous. This may have the advantage of allowing more agility, although the downside is that as business expands, there may be many duplicated costs and unhealthy internal competition.
It is quite difficult to value LoopUp shares, aside from saying that it was too expensive earlier on. There is a lot to like about it, but it is clearly still in a growth mode, with revenues being ploughed back into the business. There is a great deal of operational leverage, in that there is scope for revenues to jump up massively without an equal increase in costs. Yet at the moment, these costs are quite large. ‘Other administrative expenses’ jumped to over £4m in the last report, quite a material increase.
The company states that no customer generates more than 5% of revenue, so the £2.34m contract for Clifford Chance (mentioned in the RNS) would be spread out over a longer period. This seems to indicate that the product is good, and there are many recurring revenues from a large group of customers.
The RNS seems to give conflicting reasons for the drop in revenues, on one hand attributing it to ‘general macro-economic factors’ yet later claiming that diversion of senior staff out of the pods has ‘impacted revenue growth in the short-term’. It would be interesting to quantify these factors.
The biggest unknown, which always will persist is the availability of substitutes. Amazon have already produced a similar product, and arguably Microsoft and Google are in prime position (although noted that they have not done so), with their software already being in mainstream use. Staying ahead of these is not an impossible task, but definitely a tough one. With a large reduction in EBITDA for this year I am inclined to be neutral on this until further updates become available. 3/5.