Introduction and Recap of 2015 Financials
LogMeIn (NASDAQ:LOGM) announced the results of its fiscal Q4 that ended 12/31 and its 2015 year after the market closed on February 11th, 2016. The results were a significant beat on both the top and the bottom line. Revenue growth for the quarter came in at 27%, significantly faster than any other quarter during the course of 2015 and a strong result when compared to Q4 2014 when revenues were up by 33%. Some of the growth increase was the result of LOGM purchasing LastPass October 9, 2015. LastPass probably added about 7%-8% of revenues incrementally - it is a bit difficult to determine because of the impact the acquisition had on the company's legacy identity management solution.
EPS was $.51, a beat of $.04 from prior expectations and up by almost 50% from the prior year. Operating cash flow was $14 million, mildly disappointing when compared to cash flow of $15 million in Q4 of 2014. Deferred revenues of $137 million were flat compared with Q3 but up 30% compared to Q4 of 2015. The acquisition of LastPass added about $7-$8 million of deferred revenues - the organic growth in the metric was about 23%. Historically, deferred revenues growth for LOGM is greatest at the start of the year in the wake of strong contract renewals that are signed at the end of each year. This tends to seasonally weight cash flow as well into Q1 when it has been significantly greater than 50% of total revenues.
Cash at the end of the quarter was $208 million, down from $246 million at the end of Q3 but up from $201 million at the end of the prior year. All of the decline was a function of the LastPass acquisition which cost the company $110 million at the time of the closing in October. LastPass is a crucial component of the company's strategy in the identity management space. There had been some concern expressed by a cohort of LastPass users that LOGM would hike the price which had stood at all of $12/user/year or $120/for a 10-year deal. It is likely that over time, LastPass will be integrated into other LOGM offerings, and that its new pricing will eliminate some of the anomalous pricing the company had been offering. The fact is that LastPass remains dramatically cheaper than most of the alternative solutions and users who like the functionality are going to pay for the revised pricing.
Obviously the company achieved strong results for the quarter exceeding expectations for most critical metrics. The company does not provide an explicit bookings metric and given the nature of most of what it sells, the revenue attainment provides a realistic view of the company's business during the quarter. The fact that Q4 revenues grew significantly faster than any other quarter during the past year is significant - there was no evidence that the momentum of the company's remote meeting product, Join.me has abated - it apparently grew about 40% during the quarter and the company has apparently enjoyed some renewed traction from its remote access maintenance products. Concerns voiced by some that the company's price increases and its tweaks to the" Fermium" model might have a negative impact on users seem to be ill-founded at this point.
Margins both for the year and the quarter were reasonably strong. EBITDA margins for the quarter, which is what this company focuses on, reached 27.5%, a bit above the guidance range. GAAP cash flow for the year was 25% of revenues.
Guidance - An Old Story in Slightly Different Clothes!
The headline from Briefing.com shouts that LogMeIn issued mixed guidance for Q1 with revenues guided above the consensus and EPS significantly less than prior expectations. The company is guiding to EPS of $.30 - the consensus forecast had been $.38. For the full year, revenue guidance is slightly above prior expectations with EPS close to prior expectations. Revenues at the mid-point of guidance are expected to be $324 million with EPS at $1.74. I think it's worth pointing out that at this time last year the company forecast 19% full-year revenue growth, 22% EBITDA margins and $1.34 in EPS. The company printed EPS surprises every quarter last year with Q1 EPS reaching 22% above guidance, the greatest surprise of the year. As a result of the guidance, the shares are down about 12% this morning and that is in the wake of their 38% drop since the start of the year.
I think that it's a mistake to take any company's guidance as gospel. Obviously, no one outside of a company has the ability to look at internal forecasts and evaluate the sources of those forecasts but there are such things as testing for how reasonable the forecasts are in the context of what is actually known. For one thing, this company has had a history of significantly underestimating EPS, sometimes by extreme amounts. The divergence, for those with memories of the intermediate past, was greatest in 2012 which destroyed the stock at that time until the consensus finally caught up to the numbers that the company was achieving. But it would be prudent to simply dissect some parts of guidance and test for likelihood.
The company is forecasting growth of $53 million in revenues for the year and yet it is going to enjoy more than a $20 million bump from the acquisition of LastPass. The business area that it calls Collaboration Cloud, which is one-third of total revenues, grew 40% last quarter and there were no acquisition - that was all organic growth and was greater than any other quarter in the year. Even the company's laggard business area, Service Cloud, was up 9%. Self-evidently, and even taking a small amount of FX headwind into account, the numbers just don't seem to add up. If the Collaboration Cloud grows at 30%, which would be down considerably from 2015 growth rates, it would mean that the rest of the business was growing at negligible rates - and that seems quite inconsistent with management commentary about the success the company was having with some products such as Rescue and BoldChat. It would be really difficult for the company to double revenues over the next 3-4 years, which is the CEO's reaffirmed goal, if the first year was to have organic revenue growth of barely 10%.
The company's margin expectations also seems to be a bit more conservative than seems reasonable from other management commentary. The company had full-year EBITDA margins of 22% in 2015. It is forecasting that Q1 EBITDA margins will be 18%-19% and that "EBITDA margins will grow considerably during the year." And yet full-year earnings guidance, at the top of the range, is just 7% above the level that was achieved in 2015. Not to put too fine a point on it, but it seems as though the company is really expecting to grow EBITDA margins and that is simply not consistent with an EPS forecast just 7% greater than was achieved in 2015.
I think it would be very easy to put together a scenario that suggests that the company achieves 20% organic growth for the year plus $20 million of growth from its acquisition of LastPass which would bring total revenues to $335-$340 million, and if margins do no better than maintain their levels of 2015 that would presumably yield EPS of greater than $2.00 with concomitant improvements in cash flow and free cash flow. No one would ever publish those kinds of numbers and given the format for my articles, neither will I. But I think investors ought to expect that LOGM will achieve dramatically better financial performance this year as it has much of the time in the recent past, particularly when compared to what are likely to prove to be modest consensus expectations.
Some Comments on the Comments
When I wrote about this company a few weeks ago, I tried to cover many of the key product initiatives that were likely to animate growth. I will just focus on a couple of specifics that were highlighted during the conference call. The company's hottest product continues to be Join.me which is software that facilitates remote meetings. Join.me is now 10% of total LogMeIn revenues and has apparently maintained growth above 40%. Last year the company added a video capability and it has just added a new operator's console. Obviously video is a huge boon if a user wants to conduct a remote meeting. Most remote meetings feature charts and graphs and being able to see them on video is a substantial benefit for most users. I can't really speak about the benefits of a new console but one assumes that LOGM incorporated lots of suggestions from its users in an effort to improve ease of use and enhancing intuitive capabilities.
But underlying everything, the fact is that facilitating remote meetings is simply a strong market opportunity and will be so for years into the future. The savings in both cost and time of holding remote meetings that eliminate travel and allow the economical engagement of more users is hard to quantify. But it has been seen as enormous almost from the time it was pioneered a few years ago. I'm really not qualified to evaluate the benefits of Join.me vis-à-vis either Cisco's (NASDAQ:CSCO) WebEx or Go to Meeting by Citrix (NASDAQ:CTXS). I'm sure there are those who use the different products who have strong preferences one way or the other. But one fact is hard to challenge and that is that Join.me is dramatically cheaper than either of its two competitors and given its current market share the idea that either of them is going to launch a price war to squash this company does not seem well grounded. I might also suggest that with the impending split of the Citrix, the parent of Go to Meeting, it seems unlikely that the company is likely to take any significant competitive initiatives in the near term.
The company CEO also highlighted its Bold software and BoldChat products. I think most readers have had interactions with customer service representatives over the web and in real time. No one really enjoys talking to a machine - even the most intelligent voice response systems are still based on speaking with non-humans. The specifics of the paybacks for using Live Chat are startling according to industry analysts. There is supposedly some huge increase in conversions, a dramatic decrease in transaction costs and a substantial increase in transaction size. The major competitor in the space is a company called LivePerson (NASDAQ:LPSN). The latest results for LivePerson suggest that it has essentially stopped growing, so it seems likely that BoldChat is a market share gainer of some magnitude. LOGM plans to introduce video this year, which I think will make Chat more useful for many consumers like this writer and the CEO talked about the integration of Bold with mobile devices which is clearly an important market trend. Again, it is hard for me to do much more than comment on the numbers - LivePerson revenue growth has stalled and LogMeIn revenues in the space are growing smartly.
Whatever else is true, it is evident that almost all companies with cloud products and companies that had high valuations have seen much of those valuation premiums melt as quickly as an ice cream cone under a July sun. I'm going to use the current price of about $39/share as I write this in most of my calculations and I won't try to go off the reservation by talking about what I think are a more reasonable set of expectations. For the record, the company's shares are now selling at 3.1 EV/S with a P/E on forward earnings of 22X. The company is forecasting adjusted EBITDA of about $78 million. At that level, the ratio of adjusted EBITDA to enterprise value is less than 10X which is quite low for a company growing at 20% or more on the top line. I would guess that under the scenario that can be projected relatively to top growth and margins, that cash flow from operations would be in the order of $99 million although a significant part of that is coming from stock-based compensation.
Overall, with the recent profound stock price haircut, the shares are selling at exceptionally reasonable levels, particularly if the company can maintain the level of top line growth that management spoke to during the conference call.
LogMeIn printed another solid quarter that actually saw an acceleration in growth from the levels achieved earlier in 2015. The company offered guidance that some find displeasing and the shares have declined noticeably in today's trading. It is my belief that the guidance will prove to be quite conservative based on my deconstruction of company revenue trends and some look at the company's historical performance. The company continues to make progress in its IoT initiatives that it hopes to integrate with the offerings of 3rd parties such as Dassault (OTCPK:DASTY) as well as its own Rescue and Bold set of solutions. The company has many opportunities to rationalize pricing and packaging in order to enhance revenues and deliver a better congruence of value versus price to its customers. I think that the balance of risks and rewards clearly favors investors significantly in the wake of an almost 40% share price pullback in the first six weeks of 2016.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.