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Acquired Growth Keeps LogMeIn Inflated

|About: LogMeIn, Inc. (LOGM)
Summary

Revenue base is shifting towards communication and collaboration, that to GoTo's acquisition.

Most of the current growth is acquired growth amid recent acquisition.

Organic growth doesn't support current valuation multiples.

LogMeIn Inc. (LOGM), a cloud-based connectivity provider, recently reported its second-quarter results, beating earnings consensus and missing on revenue. The company posted revenue of $257 million, up 208.6% on a year-over-year basis. Analysts were projecting revenue of $265.08 million. EPS came ahead of consensus as earnings grew 106.1% to reach $1.01 per share on a year-over-year basis. However, there are certain red flags associated with the company.

Organic growth is not rosy

It is vital to note the first-half revenue consolidates $267 million from the GoTo acquisition. This indicates organic growth for LogMeIn was around 8.5% during the first half of 2017. Since growth was acquired, the company will not be able to replicate this kind of growth in 2018. As a result, analysts are projecting only 13% top-line growth for fiscal 2018.

Non-GAAP earnings growth was backed by acquisition costs and amortization

Nevertheless, non-GAAP earnings grew to reach $92.5 million in the first half of the year. Non-GAAP earnings were backed by exclusion of high stock-based compensation along with acquisition-related costs and amortization.

High amortization indicates the company acquired considerable intangible assets. Although intangibles entail non-cash expenses, they are among the critical expenses in technology businesses. Therefore, excluding amortization from non-GAAP earnings can distort the company's reported performance.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.