I am expecting a lot of criticismfor my faith in DM and management after this 4C and it would have been easy notto make a post at all. But after thinking about it, I believe I need to make anunemotional, rational post to counter those who are understandably very angry.
No question, this is a massivelydisappointing quarterly based on the guidance that was given. With the risk ofbeing called delusional and one eyed, it is still $34m revenue yoy in a periodof restructuring and a global economy uncertainty that has seen almost allretail business contract significantly during the trade war, both online and bricksand mortar.
So what happened to miss guidanceby such a margin?
This assessment is my opiniononly. I am not looking to make excuses for DM and his expectations of the (1-3)deals landing and saving the day with regards to all 3 of his guidance. ( FWIWI believe 2 of the deals will land in February and the coy will have a seriousre rating higher.) IMO, DM was unfortunate to be required by the ASX todisclose in the cleansing statement to the market that the US utility order wasimminent. It didn’t land in the time he expected. He now needs to explain whatfactors have resulted in it being pushed back 6-9 months. Question 1 for thewebinar.!!
Breaking down the numbers for thequarter, there are positives and negatives.
(1)Negative are obviously a lowerthan expected revenue number and only profitability in December. (due in partto Cyber Monday falling so late in Nov).
(2) The fact that massive orders were onceagain turned away is unacceptable aside from those unable to be filled atunrealistic time constraints. Although the finance facility did take much longer than expected, they did used their cash on hand to build up inventory, ---- therefore , if the rejection of the orders was not finance related what was it? Question 2 for the webinar. I suspect something else is going on with this manufacturer.
There are several positiveshidden in the data, but let’s just focus on LIFX and say that the commercialbusiness did better than expected with 2-3 one off payments and QRR is now over$640k ( >$2.5m pa growing 5% monthly compounding or >100% pa. ) withexpenses flat. Further progress anticipated without rising expenses in2020. Airstream and the Eastfield licenses are both yearly payments for work and continually building MRR from monitoring.
(1) Lifx CYQ4 2018 revenue was$17m vs $12.3m ( down 27%) in 2019. However, what is now obvious, in order to get 2018 revenue tothis level, discounting and selling product for significant losses had tooccur. ( IMHO this was a beef up by the Chinese and previous CEO Tim Peters aspart of the business sales process). This resulted in current assets falling$4m in q4Cy2018 vs a $2m increase this year with the lower q4Cy2019 revenue numbers. Thisis smart business. Also unit prices of the most popular mini white lights fellfrom say $35 to $25. So even if unit sales numbers where the same (without theextreme discounting) revenue would have been 28% lower.
(2) In 2018 LIFX launchedsomething like 10 new product lines, in 2019 there was only the candle and thatwas in the last few weeks of the CY. I guess the question is why this was thecase? Was it difficulties with the manufacturer, organising the debt and tradefacility or restructuring and moving personnel or something else? Recently theyannounced they will discontinue the Tile product and it sounds like they mightbe discontinuing a few other unprofitable products, but will introduce thefilament ( which is Philips hue second largest selling light by revenue) willbe available in coming weeks. Also they have worked on having weather proofingthe lights so they can move into exterior lighting. They have told us theyexpect 10 plus new lines of products in 2020 and revenue from new products isall growth.
(2) Cash and receivables rose $2min the quarter with inventory approx. the same.
(3) Product manufactured for thisperiod was prior to the negotiated 25% reduction in costs and expected furtherreductions in manufacturing costs. This will result in either higher margin ora lower cost to customers and therefore greater sales volume and revenues in2020. DM has said in the last webinar that dropping a product 20% in price ledto a more than doubling of sales. Clearly dropping the price drives growth, butthe reverse is true too - if they can’t drop the price then they’re going tosell fewer units, which is what appears to have happened in this quarter.
(4) Renegotiating contracts with retailers what were previously unprofitable will alter the profile of the quarters in 2020. More quarters can now be profitable with a big kicker in the final. If best buy or home depot or the likes are charging too much for the shelf space to turn a profit in each quarter, it makes little sense to continue with them. This is a massive positive and an easing on the cash flows. Commercial ( switch ) will also aid with the cash fluctuations of the past.
(5) European expansion is expected to be all profitable and add directly to revenue.
(6) During 2019, Sengled andMirabella flooded the market with cheap smart lights. Google and Amazon had acrack at bundling with them at the expense of Lifx who refused to sell for aloss. Amazon and google now have learnt from the high amount of returnedproducts, that partnering with cheap Chinese lights is NOT the way forward andtoo expensive as the Alexa and google home also get returned.
(7) IMHO, the most positivepart of the 4c was regarding SWITCH. I read that there was over 8000 new videocameras alone promoted at CES. To a achieve “ best of ” top 5 at CES vs so manyproducts, in such a short time period is exceptional. This is the highestmargin product they have. Nine months ago this product didn’t exist. Now theyare expanding to US switches also, and UK/EU can’t be far behind.
I remain very optimistic of bud in2020. IMO, DM has zero upside in announcing deals that aren’t going to happen.He is not selling stock. In fact, he and the board have been buying in everyraise. Last thing he wants is an aware letter. To what end would he have toannounce an imminent deal and then it is not happens. The ASX have to approveevery release that he/coy makes. They require to see some factualinformation/communications/emails/contracts from potential deals/ partnerships.Yes, there have been timing issues with his guidance. Longer term investorshave the right to be sceptical. OHM failed in 2018. It wasn’t what the marketrequired. We all remember the coy walking away from Telstra deal. We rememberwalking away from Noveda and Zentri ( a great decision in hindsight asboth have gone broke) OHMWW been changed and appears to be gaining tractionwith specific clientele. I would like to hear more about the Cushman/Wakefielddeal and the Central American ATM deal when it lands. For those who claim thatDM can’t close a deal in the last 12 months, well he negotiated the LIFX deal,debt and trade finance, Wattwatchers and Wattics patnerships, Dixons, AppleJapan, DIY blinds, Razor, Qantas FF, Umps health, manufacturing cost reductionsand the employment of Donald Hicks from Ring/Amazon. Ring's $1b revenue in door bells/cameras in 2019. The market for switches and lights has to be many many times larger than that. If the average price of a light was $34 then Lifx sold 1m lights. The market for the product globally is eye watering and what is clear from 2019 awards that Philips and Lifx are really the only two worth partnering with.
IMHO, the coy has never been inbetter shape to move forward. Sequoia are out of all there selling and thepipeline is very positive. Only wish I was starting from here and not 2016!!But I guess that is the nature of start ups and small caps.
Holding tight and looking forwardto the next few weeks for more deals to land and to proving the naysayers wrong.
