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LogMeIn Inc (NASDAQ:LOGM)

Q1 2014 Results Earnings Conference Call

April 29, 2014 / 5:00 P.M. E.T.

Executives

Rob Bradley – Director IR

Michael Simon – CEO

Jim Kelliher – CFO

Analysts

Matt Hedberg – RBC Capital Markets

Tim Klasell – Northland Securities, Inc.

Brad Sills – Maxim Group

Raghavan Sarathy – Dougherty & Company

Gene Munster – Piper Jaffray & Co.

Raimo Lenschow – Barclays Capital

Operator

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the LogMeIn Q1 2014 conference call.

(Operator Instructions)

I would like to remind everyone that this conference call is being recorded today, April 29, 2014. I will now turn the conference over to Rob Bradley, director of investor relations. Please go ahead.

Rob Bradley

Thank you, and good afternoon from Boston's innovation district. We're pleased that you could join us on our earnings conference call to discuss the results of our quarter ended March 31, 2014.

Before we get into the results, let me remind you that some of the statements made during this call may be considered forward-looking statements. These statements include the Company's financial guidance for the second quarter of 2014 and full year 2014. The Company's securities filings identify certain risk factors that could cause the Company's actual results to differ materially from those projected in any forward-looking statements made on this call. Any forward-looking statements are made as of the date hereof and are based on current expectations, estimates, forecasts and projections as well as the beliefs and assumptions of management. The Company does not undertake to update any forward-looking statements as a result of new information or future events or developments. The Company's filings are available through the Company or online.

During the call, non-GAAP financial measures will be used to provide information pertinent to ongoing business performance. Tables reconciling these measures to the most comparable GAAP measures are available in the press release or on our website. Now I will turn the call over to our CEO, Michael Simon. Michael?

Michael Simon

Thanks, Rob. Good afternoon, and thank you for joining us today as we report on LogMeIn's first-quarter 2014 results. In Q1, we reported very strong financial reports, delivering revenue and earnings per share that exceeded the high end of our guidance.

Total revenue for the quarter was $49.0 million, up 31% year over year. And non-GAAP earnings per share were $0.22, $0.01 above the high end of our guidance.

During our last earnings call in February, we identified three key growth drivers for 2014: one, fueling join.me's rise as a collaboration leader, two, boosting our value to SMB IT, and three, accelerating our IOT opportunity with Xively. We made significant progress in all three growth drivers during the first quarter.

In addition, shifting our remote access service to a premium-only product delivered results that exceeded expectations. As a result, we are raising our revenue guidance by $10 million for the full year, which would reflect 26% to 27% growth over 2013. Jim Kelliher, our CFO, will provide our detailed guidance in a few minutes.

During the first quarter, our key collaboration product, join.me, continued to gain significant traction in the market. Once again, join.me's year-over-year revenue growth was more than 100%. The steady rise in join.me's popularity is also creating larger opportunities, and we're investing in ways that we believe will help attract and grow larger join.me accounts.

Our growth strategy with join.me has long focused on the intersection of two market trends: the rise of cloud applications and the consumerization of IT. We believe this intersection is fueling the bring-your-own-app or BYOA trend.

While it is empowering to the employee, it creates new challenges for IT professionals. Mobile professionals are adopting join.me in droves, many starting with join.me's free version, and they're bringing join.me into the workplace, starting a viral adoption within companies.

This adoption creates immediate conversion opportunities for our premium offering, join.me Pro. More importantly, it has seeded opportunities for broader teamwide or companywide join.me deals.

Last week, we introduced a new enterprise version of join.me designed specifically for these larger opportunities. Join.me enterprise builds on the end-user benefits of join.me by aiming squarely at the needs of buyers with large-scale elaboration needs.

These buyers are most often IT or operations professionals, such as sales operations managers,and for this type of buyer, integration, management and control are essential in any enterprise collaboration solution. Join.me enterprise includes all of the premium features of join.me pro while adding three key enterprise features.

The first is integration with Microsoft's active directory. This delivers single sign-on capabilities for employees and simple provisioning and security for IT departments.

In addition, join.me enterprise includes group-level policy and permission management. And finally, the enterprise version includes 100 gigabytes of shared and managed cloud storage, powered by our own Cubby service, for sharing and storing recorded meetings and files.

It's important to note that the management capabilities of join.me enterprise are delivered through AppGuru. In other words, every join.me enterprise customer will have access to the AppGuru app management console. As a result, we believe these deals will feed future opportunities for upselling and cross selling other LogMeIn services.

During the first quarter, we also made the decision to discontinue our free remote-access product, LogMeIn Free. This important step in LogMeIn's evolution allows us to focus our premium top of funnel efforts on join.me, but also allows us to more effectively target high-value mobile professionals versus casual consumer users. And finally, it lets us migrate key SMB IT users of LogMeIn Free into LogMeIn Central, a better product for IT professionals.

On the February call, which was roughly 3 weeks after the change, we said the decision was already delivering results on two of those front. First, we noted that we would expect to convert more than 100,000 new premium subscribers from the initiative. Second, we noted a significant pull through to our central IT management product.

We are happy to report that both have delivered results greater than our forecast. We added more than 200,000 new premium subscribers of LogMeIn Pro, while delivering significant new sales of Central. The latter was especially encouraging as it moves these customers into a better long-term portfolio, one that has a much higher lifetime value.

Another first-quarter event designed to boost our value to SMB IT was the introduction of Cubby Enterprise. Rolled out in March, Cubby Enterprise is designed to help SMB IT professionals balance employee preferences with business needs when it comes to cloud file sync and share products.

The most file sync and share products fall into one of two camps. The first consists of intuitive consumer-grade products that employees love but fall short on IT needs. The second camp consists of complex enterprise-grade products that meet IT needs but suffer from low employee adoption.

Cubby enterprise was designed specifically to help bridge the divide. We believe LogMeIn's unique combination of deep SMB IT expertise, a large SMB IT base, and a proven track record of building wildly popular apps gives us a differentiated position in this market while helping us expand our portfolio of SMB IT.

In February, we also noted that we are actively taking steps to accelerate our IOT opportunity with Xively. The Internet of things is widely believed to be a transformative market, and accelerating our early IOT efforts is a top priority for the Company.

Last year's introduction of our Xively IOT platform helped us garner widespread attention in this emerging space while winning numerous awards. This, in turn, has helped drive early customer traction. Our early customers are interested in creating connected products, and Xively is designed to help them realize their connected product vision.

But a connected product is only the beginning. It's just one part of how the IOT can transform the way companies connect with their customers. Our IOT customers are seeking integrated solutions that tie together these connected products with people and back-office technology like salesforce.com to deliver holistic connected solutions.

In March, we acquired a solutions integrator called [Ionia] to help our Xively customers realize their full IOT vision. This acquisition has allowed us to rapidly assemble the expertise needed to deliver end-to-end connected customer experiences and to help customers plan and create comprehensive IOT business solutions.

Now integrated into our Xively services team, these experts are help us to deliver IOT solutions for companies that range from VC backed startups like Verdeva, a company that seeks to build an entire business on the IOT, to established companies like New England Biolabs, which selected Xively to scale an early IOT pilot project into mass production. Over time, we believe the team we acquired can help us create an IOT implementation template as we build out our ecosystem of future system integrators and self-service customers. While the Internet of things is still in the early days of development, we will continue to make investments aimed at helping companies create, manage and support the new generation of secure customer connected products.

Overall, it was a great first quarter. We believe we are in a very favorable position to deliver significant growth in Q2 and throughout the year. And our focus remains on the areas of our business that we believe will yield the best sustained near-term and longer-term growth.

Most notably, we will continue to transform the way today's professionals connect and collaborate to fuel join.me's rise as the collaboration leader. We will increase our value to SMB IT by giving IT departments the solutions they need to manage the devices, apps and data challenges of the bring-your-own era.

We will accelerate our Internet of things opportunity to providing companies with products, services and solutions they need to transform the way they connect and engage and support their customers. At this time, I will turn the call over to our CFO, Jim Kelliher, for more detail about our results and outlook.

Jim Kelliher

Thanks, Michael, and thanks to all of you for joining us. I will discuss our performance on a GAAP and non-GAAP basis. Non-GAAP excludes stock compensation expense, patent litigation related expense and acquisition related costs and amortization.

Our non-GAAP results are more representative of how we internally measure the business and are reconciled in the tables attached to our press release. All non revenue metrics I will discuss will be non-GAAP unless I state that the metric is GAAP.

We are very pleased to report another quarter of financial results above the outlook we provided in February. Total revenue for the first quarter was $49 million, $1.7 million greater than the high-end of the outlook we provided last quarter. Adjusted EBITDA margins was 20% of revenue, and our operating margin was 17% of revenue.

Net income for the first quarter of 2014 was $5.5 million, exceeding the high end of our outlook, and net income per share for the first quarter was $0.22, $0.01 above the high end of our guidance. Net income excludes $5.4 million in stock compensation expense,$63,000 in patent litigation related expense, and $1.1 million of acquisition related costs and amortization. Operating cash flow for the first quarter was extremely strong at 50% of total revenue or $24.7 million, and GAAP net income for the first quarter was $1 million or $0.04 per share.

For further details on our performance for the first quarter, total revenue increased 31% over the first quarter of 2013 to $49 million from $37.4 million. This increase was driven by sales of join.me in our collaboration cloud, strong performance of Central in our IT management cloud, and as Michael described, the shift in our remote-access service to a premium only service.

On the geography basis for the first quarter, international revenue was 34% of our total revenue, consistent with previous quarters. All of our major geographies saw quarter-over-quarter and year-over-year growth.

Year-over-year revenue from North America and Europe both increased greater than 30% while Latin America continued to be our fastest-growing region with growth of greater than 40%. On a product line basis, in the first quarter, collaboration cloud revenue was 26% of total revenue, an increase by more than 60% year-over-year. The increase was driven by the greater than 100% increase in join.me and increased sales of LogMeIn Pro.

IT management cloud revenue was 33% of revenue, an increase in by more than 35% year over year. The increase was driven by strong sales and renewals of our Central product.

Service cloud revenue was 41% of revenue, an increase by more than 10% year over year due in large part to increased revenue of BoldChat, our online chat product. Across all our product lines, gross renewal rates were approximately 80% on an annualized dollar basis, consistent with previous quarters.

Net income in the quarter was $5.5 million or $0.22 per share, $0.01 greater than the high end of our guidance. This overdelivery was due to exceeding our revenue guidance.

Gross margins in the first quarter were 90%, consistent with prior quarters. Operating margins in the quarter were 16.8%, in line with the outlook we provided and up from 15.1% operating margins reported in Q1 2013. Our adjusted EBITDA margins of 20.1% of total revenue, an increase of approximately 2 percentage points from the 18.5% EBITDA margins reported in Q1 of 2013.

With regard to our operating expenses, sales and marketing expenses were $25.7 million or 52% of revenue. The increase in absolute dollars and as a percentage of revenue from Q4 2013 was primarily due to an increase in headcount and personnel related costs, increased costs associated with higher sales, and increased marketing program costs.

Research and development expenses in the first quarter were $5.9 million or 12% of revenue, a decrease of $200,000 from Q4. G&A expenses were $4.1 million or 8% of revenue in the first quarter.

Quarter-end headcount was 675, up more than 60 net new employees from the 613 reported at year end. The majority of the headcount increases occurred in sales, marketing and development. Our effective income tax rate was 34%, 2 percentage points less than our guidance of 36%.

Now turning to the balance sheet, operating cash flow for the first quarter was extremely strong at $24.7 million or 50% of revenue. Free cash flow for the first quarter was also very strong at $22.4 million, 46% of revenue. Overperformance in both the operating cash and free cash flow was driven by our increased sales in Q1.

We ended the quarter with cash and cash equivalents and marketable securities of $204 million, an increase of $14.4 million from the prior quarter. The increase was due for a strong free cash flow and possibly offset by a $7.5 million payment associated with the acquisition of Ionia.

Additionally, during the quarter, we repurchased approximately 150,000 shares under our share repurchase program at a cost of approximately $4.9 million. Total accounts receivable was $11.7 million, down from $13 million reported in the prior quarter.

And accounts receivable days sales outstanding decreased to 21 days versus 26 days last quarter. Driven by increased sales, total deferred revenue in the fourth quarter was $140.6 million, an increase of $19.4 million over the prior quarter and an increase of 41% over Q1 2013.

Now I will finish with our outlook for the second quarter and our full-year 2014. For the second quarter of 2014, we expect total revenue to be in the range of $52.2 million to $52.7 million. We are targeting adjusted EBITDA for the second quarter in the range of $10.4 million to $10.9 million, which represents an adjusted EBITDA margin of 20% to 21%.

Our net income per diluted share is expected to be in the range of $0.23 to $0.24 per share. Our GAAP net income per share is expected to be in the range of zero to $0.01 per share.

For the full FY14, we are increasing our full-year revenue run by $10 million. Accordingly, we expect total revenue to be in the range of $209 million to $212 million, which represents year-over-year growth of 26% to 27%.

We expect adjusted EBITDA for the full year to be in the range of $44 million to $47 million, representing an adjusted EBITDA margin of 21% to 22%. Net income per diluted share is expected to be in the range of $0.96 to $1.04, and GAAP net income is expected to be in the range of $0.10 to $0.17.

For both the second quarter and full fiscal year, net income assumes an effective tax rate of approximately 34%, and GAAP net income assumes an effective tax rate of 40%. All per-share amounts are based on an estimated 25 million fully diluted weighted average shares outstanding. With that, I will now turn the call back to the operator to take any of your questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now conduct a question and answer session. (Operator Instructions). One moment please for your first question. And your first question comes from Matt Hedberg from RBC Capital Markets. Please go ahead.

Matt Hedberg – RBC Capital Markets

Thanks for taking my questions, and first of all, congratulations on the quarter, very nice to see the strength. When looking at the results, there are certainly a lot of positives that stood out to us. I'm wondering if you could help us reconcile the upside to deferred revenue.

How much of that was due to the conversion of LogMeIn Free versus the overall business? What's really embedded into your 2Q revenue guide for LogMeIn Free conversion?

Michael Simon

Thanks for the question. Essentially if you were to look at the full-year guidance increase of roughly $10 million from our February earnings call, basically about half of that, $5 million of that, it would be to overperformance of LogMeIn Free.

The other half would be – the other thing particular, join.me, continued strength and strong performance. Overall if we look at the year, we would expect that converting the LogMeIn Free product to paid only contributed about $11 million total of the $209 million to $212 million revenue. I think what's probably also worth noting, if you were to look at the Company's growth independent of that change, the standalone business would have still grown north of 20% year-over-year.

Matt Hedberg – RBC Capital Markets

That's great. And then Xively, a lot of commentary on the prepared remarks for that. Can you guys give us a sense of maybe how many customers or nodes are live today?

I imagine the pipeline is quite large. You guys are certainly, it's one of your three key drivers you're focusing on. Any more color there on the general magnitude of size?

Michael Simon

Essentially the early customers for Xively are quite large. The numbers are fairly small. I think in the past, we had talked about we would have a potential energy to generate maybe up to even $5 million of bookings this year on Xively.

We believe the we're still progressing towards that number. It's not necessarily fully in our guidance, but that gives you an indication of what we would expect in bookings around the IOT opportunity. The customer count is relatively small, it's in the sort of double digits but small double digits as opposed to our typical businesses where you might expect to have thousands of customers.

Matt Hedberg – RBC Capital Markets

Thanks again, and congrats.

Operator

And your next question comes from Tim Klasell with Northland Securities. Please go ahead.

Tim Klasell – Northland Securities, Inc.

Toss my hat in the ring to add as well for congratulations on a great quarter. I wanted to dive into a little bit on the join.me side. You had some new bundlings and what have you around join.me.

How do you feel the pricing on join.me is? Do you think there's some elasticity of demand that maybe you could lower the price and drive greater revenues or up the price or – tell me how you see the join.me business going forward since that's fairly new.

Michael Simon

Thank you, first of all, for the congratulations. Essentially in pricing for join.me, right now what we're focusing on is what we call business grade teamwide or companywide deployment of join.me. We launched, last week, join.me for enterprise, and join.me enterprise is actually at a significant premium to join.me pro.

Specifically join.me pro, an individual license ends up being about $149 per year per user, where join.me enterprise is $228, $19 a month if you will. And we feel like the market values the enterprise feature set that's included, the manageability, security, integration into active directory.

Right now, we would say yes, there is some value to be created by differentiated pricing. To answer your specific question, we are really focused currently on delivering value to sort of mission-critical online meeting and collaboration solutions.

Tim Klasell – Northland Securities, Inc.

Great, and then one quick follow-up. AppGuru, how is that tracking? You had some brief comments in your prepared remarks. That one strikes me as it could accelerate fairly quickly. How are you feeling about that product set?

Michael Simon

Yes, so, I think we're really happy with AppGuru's rollout thus far. It's an integral part of join.me enterprise. If you think about AppGuru as being a product that addresses multiple parts of the cloud adoption life cycle, one important part is app management.

Another part is app monitoring and discovering. And so essentially, AppGuru starts commercial rollout is actually part of join.me for enterprise. You're actually, if you are a customer of join.me enterprise, you do get the app management module.

We think, one, is very, very valuable and part of the reason we can command a higher price for join.me enterprise, but particularly and specifically valuable for IT managers. It's really allowing us to expand our footprint into some type of customers we wouldn't have necessarily monetized in the past.

The other thing is that we look at our core cash and existing SMB IT base. We did learn during the beta phase of AppGuru that we could improve the packaging and pricing of AppGuru. What you see this year is that AppGuru will continue to rollout through the year in different configurations, both as a standalone product and as a bundle with other products for enterprise or business class IT departments.

Tim Klasell – Northland Securities, Inc.

Great. Thank you very much.

Operator

And your next question comes from Brad Sills from Maxim Group. Please go ahead.

Brad Sills – Maxim Group

Thanks for taking my questions. Congratulations as well, great quarter. Just one on the Ionia acquisition. Are you finding that this firm has fraction in certain verticals or even applications around Xively that you think you can kind of roll Xively into given the existing pipeline?

Michael Simon

Very much so. Thanks for the question and comment, Brad. If you look at – Xively has been developing something called Xively Services, which as we talked to the professional services group, to help actually onboard our earlier customers.

Ionia, on one level, is kind of what people refer to in the industry as an acqui-hire. It allowed us to very rapidly assemble a team that would be faster than try to build up organically. We actually are bringing in a great team together all rapidly to serve what we feel is a rapidly emerging opportunity for us.

But to your specific question about their, if you will, Ionia as a standalone company, was a particularly strong customer in serving those companies that wanted to connect, have connected customer solutions, and particularly integrating sales force into IOT products. It's an important piece of the puzzle.

As we are serving our customers, what we have learned as Xively has been out on marketplace, connected products are super important, but it's just a piece of a bigger puzzle. Ultimately, we want to capture that puzzle or solve the puzzle effectively for our customers so that we can't just help them deliver a connected product, but basically, transform their business by tying together customers, back-office systems and products together.

It's a very nice complement to two important franchises that LogMeIn has. One is certainly our service delivery platform, Gravity, and that's an obvious fit of why we would aspire to play a prominent role in the Internet of things. We also have, long had, a service cloud that allows some of the largest technology companies in the world to interact in real time with their customers for support, education, care.

Essentially, what were finding is our early Xively customers, they want that capability as well. It immediately brings them the need to tie ERP, CRM connected products and the data that is generated and the data that is the currency of Xively together. We feel that it's a really good fit for what we're trying to do.

Most of what we're doing in Xively and IOT is organic, but we have now made two acquisitions in the space. One back in 2011, we acquired a company called Patchbay to get a team who was early pioneers in certain part of IOT, and now this is our second acquisition which is really to accelerate our professional services expertise.

Brad Sills – Maxim Group

And I just one on join.me enterprise, great to see guys going into larger opportunities and the progress there. Can you comment on just the go to market there?

This is, I wouldn't say a big shift, but I am assuming more reliance on your direct sales force. How do you feel about the sales organization in place today and the go-to-market approach going forward?

Michael Simon

So, so far we're quite pleased with the response. As you know, join.me is important engine of growth for LogMeIn this year and going into the future. While it is what we call a tough sale, it involves a sales person, it's typically not a self-service sale, it is still very much a high velocity inside sales approach.

A lot of our products, whether it's AppGuru or Central, Cubby for Enterprise, Rescue, we have a lot of experience and, if you will, large top of funnel exposure bringing in trials and quality leads and then complementing that with an inside sales teams to convert them, really to educate them to understand how they can use it as a companywide solution rather than an individual solution. It's not a dramatic change from what we have done, but it involves slightly more sales touch and exposure than one of our self-service products.

Operator

And your next question comes from Raghavan Sarathy with Dougherty and Company. Please go ahead.

Raghavan Sarathy – Dougherty & Company

Thanks for taking my questions. Just a few questions from my end. The first question is for Simon, you talked about the conversion of free to pay, and then in your prepared remarks, you said you added more than 200,000 customers…

Michael Simon

200,000 subscribers.

Raghavan Sarathy – Dougherty & Company

I was wondering whether that's largely behind you or if you're expecting a significant conversion in the second quarter?

Michael Simon

We will have a long tail, but we expect the bulk of the conversion to have already happened. As we indicated that it will add, we believe, roughly $5 million more to 2014 revenue than we had originally forecast. Yes, there is something of a tail. We believe the bulk of the conversion has a ready happened.

Raghavan Sarathy – Dougherty & Company

And then in terms of, if I recall, you had a similar model to last year to Central, and at that time you offered the 50% discount. I would think that that's probably an automatic price increase looking at this quarter. What renewal rates you have seen on the Central customers, and what kind of impact should we expect on P&L?

Jim Kelliher

You saw that in our SMB IT business the Central business was strong both for new sales and renewal rates. We certainly saw some of that uptick for the price increase and at the same time continued very strong renewal rates in that product. We were very pleased with the results we got from that.

Raghavan Sarathy – Dougherty & Company

And then just two questions for you, Jim. I noticed gross margin was down [200 basis year on year], so I was wondering if there's anything on time costs or expense on that.

And then the second question is, you had a significant bead on the top line, and we didn't see that on the bottom line. I see the sales and marketing expenses ticked up significantly, so can you give us some color and what we should expect on sales and marketing?

Jim Kelliher

First on the cost of the revenue, one thing that's starting to come and along that line, as Michael talked about, the Iona acquisition, that service costs is coming in as cost of revenue. That's what largely drew the slight decrease on a year-over-year basis in gross margin.

We made that out underneath in the operating margins, but there was a slight decrease in gross margins. We would expect that going out to still stay very strong, but probably to decrease to 89% as we look at the models going forward as we absorb all of the cost of Ionia into the P&L.

The second question you asked, the second part of the question, was around that we added revenue, but no margin expansion. We increased – EPS was delivered at a penny stronger.

We continue to see great strength opportunities to invest our incremental spend, if you want to call, in areas of development, sales, marketing and those headcount and programs. And we will continue to go do that throughout the year. That's what leading to the increased revenue growth and increased sales and bookings.

Particularly within sales and marketing areas, you start increasing those costs quarter over quarter. January is typically the period where we line up all sales guys for the rest of the fiscal year so that they're onboard, they're trained and they're carrying a full quota. That's certainly happened, and you saw that in headcount and expense line.

Second thing is we have some increased marketing program spend in there. And then third, the increase in the Free conversion was largely – a big part of that was an eCom play, and the eCom play resulted in increased transaction fees around those transactions. Those also reflected in the sales and marketing line.

Credit card fees, if you want to call them that. Those are the reasons – I think you will see us continue to maintain very strong EBITDA margins, strong operating margins. Still what we think are some of the best in the staff industry, and we continue to invest that incremental revenue or margin into lines that we think are going to pay off in the future.

Raghavan Sarathy – Dougherty & Company

Just one final question. I know you used to disclose the premium subscribers before, and I think the last quarter or so you stopped disclosing. I was wondering if you can give us some ideas on the premiums that you have. I know it's going to get skewed by the 200,000 –

Jim Kelliher

We didn't disclose the specific number. We did say that we added more than 200,000. As we talked about in the past and on a go-forward basis, that metric doesn't become a good indicator in the quality of the business.

A better metric is going to be the growth in our topline revenue, the growth in our deferred revenue, and really the cloud performance that you're seeing and the growth in those clouds. We won't be disclosing a subscriber or customer account number as we go forward because we don't think it really is a meaningful measure of the business. Particularly, as we move into the IOT business, the mix of those customer bases really – is not a quality metric.

Raghavan Sarathy – Dougherty & Company

I appreciate you taking my questions.

Operator

And your next question comes from Gene Munster from Piper Jaffray. Please go ahead.

Gene Munster – Piper Jaffray & Co.

Good afternoon and congratulations. Michael, if you could talk a little bit about the impact of the shift to pay has had on the top of the volume. You mention in prepared remarks about how that has always been part of the strategy, and I know in previous quarters you have talked about join.me is kind of taking the baton, essentially, from pro.

Is that the way to think of it? There has been a natural shift, and a few months into this, has there been any sort of longer-term either positive or negative impact on how the funnel performs shifting from free to paid?

Michael Simon

Thank you for the comment. Gene, we have continued to see very good performance with join.me if you, the vast majority for the last couple of years of our free users, new free users have gone to join.me and now virtually all of them are going to join.me. It is performing well.

We feel that a large vibrant space that is still poorly served, and we anticipate continue to focus on driving not just volumes of numbers to join.me, but really targeted specialized business grade users to join.me, top of the funnel. Essentially we've seen the conversion rate of new free users of join.me to paid users continue to increase. So we feel like the quality, our ability to qualify and attract high-quality trials has increased as well.

I think many of the people on this call may have noticed increased presence of join.me whether it be online, on radio and in some outdoor and transportation facilities, et cetera. We feel like we're starting to get visibility and recognition, and already, fairly early, join.me compared to the duration of LogMeIn, but a significantly higher brand recognition already at this point. Higher than LogMeIn itself, so we're pleased at the results we're getting from the marketing standpoint.

Gene Munster – Piper Jaffray & Co.

Got it. That's helpful. And then previous quarters you talked about the order of importance being join.me, AppGuru and Xively more near term over the next year.

Is that still the case? Is that still the rank order of how we should think about these, and I guess two years from now, where do you see that list?

Michael Simon

I think the whole world is starting to realize that IOT is becoming very, very important. A sample, one, you had Microsoft this last month talking about the IOT market is much larger than the PC market.

My belief and our highest priority of the Company as we look at a strategy, is to take advantage from our service cloud, our Xively platform, and it's good to see our customers are feeling that they understand the need for machine or device interaction with human beings. They're looking to things like Cubby and join.me for that, interestingly enough.

I think short-term if we look at 2014, we focused very much, in 2015, for that matter, the absolute dollar growth of join.me is important and a great opportunity for the Company. I believe as we go over the next 36 to 48 months that I would expect that the IOT opportunity becomes increasingly important to us.

Gene Munster – Piper Jaffray & Co.

Excellent. Thank you.

Operator

And your next question comes from Raimo Lenschow from Barclays. Please go ahead.

Raimo Lenschow – Barclays Capital

Congratulations from me as well. That is a great start to the year. First question, when you think about the IOT opportunity, can you help us understand how do you see the competitive field as far as IOT, Microsoft IOT and PTC open Boston with you just had a peak acquisition.

What is the natural competitors for you guys? That's my first one, and I have a follow-up.

Michael Simon

Thank you as well. Basically when we think about Xively, we think it ultimately will actually be highly differentiated from a pure cloud platform whether it but Azure or AWS. It's a huge opportunity so we've long suspected there will be competitors in the spaces as anyone would expect.

At the same time, we are trying to engineer unfair advantages or distinct advantages in a competitive landscape. For us, what we're really looking at, is Xively to be the ideal platform for companies to really manage connected products.

You can all imagine that Gravity's exceptional reliability, scalability, security, play an important role in making actually successful connected product. Our customers see that, and we think that will be important as we're going forward.

I think the part of LogMeIn's competitive advantages that are maybe underappreciated if the importance of our domain expertise and how our service cloud and our ability to connect people to companies, to their human beings are customers, to their products that are in their customer's hands, to the data that is generated by those products and devices, I think is a very, very important part of the role. Part of the solution. And our goal is to simply help people realize their visions when it comes to connected products.

It's usually more of a business transformation than just simply a user experience. It would be great if we could use for example an iPhone app to interact with the device or schedule a device or something like that, very quickly turns into how can we engage the customer, how can we sell a service contract to them that's valuable to them and profitable for us? How can we analyze that data and, whether for learning purposes or for optimizing product decisions, et cetera?

It's way beyond just hauling byres from one point to the other or storing those bytes. It really is about how you create a solution that effectively allows the company to meet its business goals.

So we're, I think we've been somewhat ahead of the curve in terms of starting to create a platform that made it technically possible long ago, long before the IOT was fashionable. And we're learning with our customers very rapidly what we need to do not to just make the platform successful, but what we need to do to make their businesses successful?

I feel like we have a good team. I think our acquisition of Ionia to accelerate the ramp of our Xively services is an important part of that. And I think we will continue to pursue very ambitious goals of being a mission-critical partner for our Xively customers.

Raimo Lenschow – Barclays Capital

Okay. Perfect. Thanks for that. The other question I have was like, you did two transitions like away from a fringent to a peat model.

And join.me is in the earliest stages, really adding nicely to the funnel. What is the criteria you learned from the first two to say like, if I'm reaching a certain level or something, help us to understand – the question before was on strength and what's next how do you think about that after your experience from the last few transitions?

Michael Simon

We probably, as LogMeIn can legitimately claim to be premium modeled pioneers, we introduced LogMeIn Free in 2004. We've had on almost a decade, and sort of pioneering into that, we are also pioneering what is the right way of winding those down.

We feel like the lessons we've learned are somewhat invaluable and, frankly, something we're not that keen to disclose publicly. But I would say with join.me, it's still, is a very poorly served market.

The opportunities to improve business class real-time interactions that are quite significant, and we feel that as long as you're in an environment where you're trying to change adoption patterns, accelerate people to change the way they behave, a free product can play an invaluable part in that. In a mature market where that is widely understood, it may or may not be valuable. And for us, we felt like it was time to fund set that product.

Operator

There are no further questions at this time. Please continue.

Michael Simon

Thank you for your questions tonight. We are extremely pleased with our Q1 2014 results.

We will continue to take steps to accelerate the performance of our key 2014 growth drivers: building on join.me rapid success, increasing our SMB IT and accelerating the Internet of things for LogMeIn. We believe our focus on these opportunities has positioned LogMeIn to deliver strong near-term and longer-term growth.

We look forward to sharing our progress on these fronts when we reports our Q2 results in July. Thank you again for your time this evening.

Operator

Ladies and gentlemen, this concludes the call for today. Take you for your participation. Please disconnect your lines.

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Source: LogMeIn Inc 's CEO Discusses Q1 2014 Results - Earnings Call
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