LVT - Valuations

I think it’s timely to review the valuation metrics for LVT as we head into 2020.

LVT has set a target (I’ll call it a goal) of $100m arr by 30 June 2021. We already have a clear line of sight to the $50m hurdle (with arr of $42.9m at 30 September 2019). To hit their goal, the Board and management are focused on continued investment into their products, partners and sales and marketing channels.

The recent fall in SP appears to have been driven by a lack of investor confidence in their goal. With a current MC of c. $210m the company trades on an attractive 4.9x psr multiple off Q1 figures. This is despite 114% organic growth from a total of 167% in FY19 and being right on the cusp of $50m arr in under 5 years.

As @Vmk Research has eloquently explained in the past, a growing SAAS company goes through three stages: 1) early stage growth, with increasing cash burn 2) the inflection point whereby growing revenues catch up to costs and we see cash burn hit a peak and start to decrease 3) cash burn continues to decrease until the company reaches break even with organic self-funding achieved.

Normally a valuation will rise significantly when a company reaches Stage 2 (LVT is between stage 2 and 3). There are examples of valuations ranging from 10x all the way up to 35x and beyond. But this hasn’t really be the case for LVT yet and I’ll come to that below.

In CY2018, the SP peaked at an intra-day high of 75.5c on 8 August (the day LVTs announced the successful $25m raise at 59c). In CY2019, the SP peaked at an intra-day high of 61c on 10 April 2019 (the day of initial Q3 FY19 results). These two highs did represent upwards of 20x and 11x multiples respectively but were not maintained for long.

LVT has publicly pursued a growth strategy to become the largest and most sustainable provider of intranet solutions. This is important with approximately 300,000 potential customers supporting a yet to be penetrated TAM of $13 billion. Each 1% market penetration therefore equals c. $130m arr.

This strategy has supported the company in claiming the early mover advantage. By taking early market share they are building the strongest defensive position that will become hard to beat. The CEO has said that they keep a close eye on competitors and will continue to do so. We know that complementary acquisitions knocks out competitors or simply hinders them from sourcing their own growth.

LVT is also focused on growing its partner network. This is important because it will ultimately reduce costs into the future. A strong partner network that delivers LVT products directly to their underlying customers are effectively free sales. This is all strongly enhanced by the Microsoft relationship.

But the question for LVT right now is how far they will push growth at a costs expense. I think this is the crux of the SP decline in 2019. The CFO has said that they can easily return a profit by “switching off” some expenses but ultimately that would not be in the interest of shareholders. It would be remiss to not give their goal a roaring go before deciding on their next growth path.

A pathway to more fiscally conservative management is via reducing costs on sales, advertising and marketing. Operating expenses have been relatively flat through 2019, with growing receipts and improving net operating cash flow. I think it is more important for the market to see this trajectory continue through CY 2020.

If LVT hits their goal by 30 June 2021 then a MC of $850m (c. 99c SP) would be a conservative estimate. A MC of $1 billion would be seen under a 10x multiple (c. $1.16 SP).

Future updates will determine whether LVT’s management is able to control cash burn and ultimately achieve self-funding. I’ll be watching the next 18 months closely.

Suggest we keep this thread for a constructive debate about valuations moving forward. Keen to hear from all of our bulls and bears.