LivePerson by the Numbers: Valuation Not Compelling

Following my previous article on the business model of LivePerson, Inc. (LPSN), I now present a financial analysis of the company.

In 2007, LPSN had revenues of $52.2 million, and the last quarter of that fiscal year includes revenues from the Kasamba acquisition. Of that revenue, $49.4 million is from its SaaS business, and $2.8 million is one quarter’s worth of revenue from Kasamba. This suggests that annual revenue from Kasamba will come in at $10 million, which agrees with the estimates in this article.

Gross profit on the software business is $20.8 million, which is a gross margin of 42%, while gross profit on the Kasamba business is $0.29 million, with a margin of around 10%. While these are healthy margins, the company spent approximately $9 million on R&D, and $9 million on SG&A, bringing operating income down to $3.2 million. Adding interest income of $0.9 million and a tax benefit of $1.7 million brings net income to $5.8 million for 2007. Therefore, it is apparent that the company doesn’t have enough scale to offset its research and administrative expenses.

Historically, LivePerson's revenue has increased at a torrid pace. Revenue in the first quarter of 2008 increased 30% from the 1st quarter of 2007 (stripping out Kasamba’s earnings), and 3% from the last quarter of 2007, suggesting a revenue growth rate of 10-30%. However, for the 2008 fiscal year, management projects an EPS of $0.04-$0.05 and a full share count of 51.5 million, for a net income of $2.5 million. This effectively means that management expects that revenue will not grow in 2008. The share price has collapsed with this revised estimate of revenue growth.

In the past, LivePerson has always acquired companies by issuing more shares. To this day, LivePerson remains debt-free, and has some $21 million of excess cash on hand. However, with the collapse in its share price and the current credit crisis, achieving scale through additional acquisitions is very unlikely in the near future. With the current recession, it is also more likely than not that revenue growth will be low to none. While the company will probably survive the recession, its share price is not likely to go anywhere in the near future. The most optimistic (but unlikely) scenario is that LivePerson gets acquired by a larger CRM company. The acquisition will make sense for a company such as Oracle (ORCL) or SAP (SAP) since they have a far larger client base, thereby giving LivePerson the necessary scale.

A price multiple of 15 is appropriate for a company experiencing no growth coupled with a substantial amount of uncertainty. With an EPS of $0.05, and a cash value of $0.50 per share, I consider a share price of $1.25 to be a fair short-term share price. At this price, I would be comfortable buying the stock and waiting for a possible acquisition by a larger company, or for the resumption of revenue growth.

Disclosure: None

Comments

[Phreakonomist]

In what magical financial world does a company without growth command a P/E multiple of 15?