On April 29, 2014, LogMeIn (NASDAQ:LOGM) reported $49m in revenue and $0.22 EPS for the March quarter vs. the consensus estimate of $47.1m and $.21, respectively. They also upped guidance for the full year by roughly $10m. This resulted in the share price shooting up 12% to $44. We strongly believe that management will report another strong result for the June quarter and will up full-year guidance again on July 24. This should result in the share price just crossing the $50 mark. At the time this was written, the stock price was at $40, representing an appreciation of 20%. The detailed reason for our thesis is given below.
Management's underestimation of the monetizing potential of the installed join.me base will result in a continuing positive surprise.
LogMeIn is the most popular remote computer access software/app available in the market. It is the most preferred application among IT managers compared to other services such as GoToMyPC and TeamViewer, which are more popular among personal users. There were an estimated 6-9m users of LogMeIn Free when the company decided to discontinue its free service at the end of January 2014. This resulted in 200,000 users migrating from free to paid subscriptions by the end of March. This was an exceptional success by any standard. The management in their earnings call mentioned that they believe that all the likely conversions have already happened. We disagree with this slightly early assumption based on the following facts:
- Most IT managers (including me) do not actively keep track of their subscriptions. They "discover" that they have run out of a subscription when they actually use the service in a time of need. The same thing happened to us in the month of April and we simply proceeded with the necessary payment (around $70/year) without a second thought. It is unreasonable to assume that all IT professionals would have discovered the need for paid subscriptions by the last week of March.
- The need for remote sharing increases when employees and IT staff prefer working from home. We believe that such incidences would have increased in June due to the World Cup effect. June-August is also the season for school summer holidays, when employees take vacations and require the ability to log in to their office domains from home or while traveling. We believe that only at the end of August most free users would have finally converted to the paid subscription.
- LOGM has received a lot of criticism from free users discontinuing the free service. Many users have indeed migrated to the free service offered by competitors. We believe that almost all such leaving users are personal users. For a professional user, the cost of conversion to a paid user ($70 to $80 per year for a five users/two computers license) is too low given the critical nature of day-to-day user support and maintenance work. For personal users it is easy to switch vendors, vs. professional users who almost inevitably sit behind firewalls. Configuring a new remote desktop application around the organization's firewall is a harrowing experience, and most IT managers would like to avoid it any cost. For this alone, an IT professional would gladly pay many times more than LOGMs subscription fee. We believe that post-Aug. 14, the company will continue to see healthy new subscriptions from IT managers as the product is undeniably superior to most competitors, enjoys a good word of mouth reputation among IT professionals, and is priced to lie comfortably within their spending discretion.
The Xively Internet of Things project has started to deliver results.
We can't think of another company that has so quickly taken the IOT (Internet of Things) platform from a mere conceptual stage to that of actual revenue-earning projects. While others are still talking about how in the future IOT will enable one's refrigerator to reorder milk and eggs, LOGM's Xively platform is already delivering that service to all the refrigerators of the New England BioLabs. (Though I must clarify that those refrigerators do not store milk and eggs, but rather enzymes for molecular biology applications and genomic research!)
We believe that Xively's results will be better than expected and will contribute in management's upward revision of the annual guidance for the following reasons:
LOGM declared the acquisition of Ionia on May 7. Ionia has delivered close to 300 cloud/IOT-based solutions prior to the acquisition. The June quarter will see revenues from the Ionia portfolio be included into LOGM's revenues. Also, with the greater sales and marketing reach of LOGM, it is likely that Ionia consultants would have won more contracts for this quarter vs. what they would have being on their own.
The Xively platform is also being used to monitor professional stormwater management, air quality across Europe, and atomic radiation levels across Japan. Apart from the above projects, the biggest opportunity for Xively is for it to be used as an integrating platform by other vendors active in the space of remote monitoring and control. The Xively website lists four such vendors (Verdeva, Eelektron, Turbid and CurrentCost) as their existing customers. We believe that in the past management had slightly underestimated the growth of Xively platform. The IOT trend is certainly heating up, and Xively's success with their initial projects would mean that more prospective customers see them as a market leader in this space and will reach out to LOGM proactively for solutions.
Appeals court upholds the non-infringement ruling in the 01 Communique Patent Litigation Case.
In Sep 2010, Communique Lab, Inc. filed a patent infringement lawsuit against LOGM in a U.S. district court. The court eventually ruled in favor of LOGM, in June 2013. Communique then filed an appeal in the U.S. court of appeals. On June 3, 2014, even the court of appeals reiterated that there is no patent infringement by LOGM. With this ruling, we believe that the case is finally put to rest. In the past, patent litigation related expenses have weighed heavily on the P&L statements, so therefore there is reason to believe that with this expense going away the June quarter should be positively affected (though I must admit that this effect would be rather small).
A robust research pipeline pays off with better-designed products.
A simple look at Google's patent search shows that LOGM has close to 25 different patents filed with the U.S. Patent Office in areas such as network, storage, file/object transfer, and remote access. The company spends close to 15% of their revenues on R&D and is committed to continue investing in it. This is clearly reflected in the superior design of their products and is likely to continue paying them dividends in years ahead. LOGM's products are essentially user apps, where intuitive usability and superior design directly translates to market share.
A short call by a hedge fund has temporarily depressed the price.
On July 9, 2014, independent research firm Off Wall Street rated LOGM as a "sell" with a target price of $30. Their rationale is twofold: OWS believes that the market for remotely accessing computers is saturated, and IT firms are switching to other providers. We instead believe that the research firm is mistaking personal users switching as a proxy for IT firms switching, which is a gross error as we explained above. The research firm has also completely missed the existing revenue and potential growth of the Xively platform, as discussed above.
LOGM's response, on their corporate blog, to the short thesis has been along expected lines, where they have reiterated the current performance and growth potential of their existing platforms. However, the important takeaway from is that LOGM clearly declares that join.me is expected to grow in the triple digits in 2014. This leads us to believe that it's not just the earlier free customers who are converting to Pro, but also a very healthy rate of new customers.
Post the short thesis, Steven Cohen's Point72 Asset Management (known as S.A.C. Capital before SEC-related issues brought about a name change) has disclosed a 5.2% stake in LOGM.
We believe a significant number of new users opted for the paid LogMeIn PRO service in the June quarter. Revenues from the Xively platform could also contribute significantly in the June quarter. A positive impact from the favorable outcome of the patent litigation case is also likely.
Continuous investment in product design and development makes the company a good long-term investment. Before the short call by Off Wall Street, the stock was trading at around $47 and now trades around $40. We expect the stock to trade around $50 after the June quarter results on July 24.
Disclosure: The author is long LOGM. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.