Ann: Appendix 4C - 131% growth in ARR and record cash receipts, page-64

Our take from the 4C and the Investor Call

In contrast to the ARR announcement earlier this month, the 4C was mildly pleasing..

• The cash burn was lower than expected. This was a net effect of higher customer revenues than expected and somewhat higher expenses.
• September revenues have historically been lower than June due to the seasonal nature of annual fees . September 2018 customer receipts were $1,000,000 lower than June 2018. Since revenues recur on the same payment dates, both quarterly and annual recurring fees in September 2019 start $ 1 million behind June 2019. However, it appears September 2019 revenue got a nice boost from the Growth in ARR in March 2019 which appears to have a greater number of quarterly subscription terms than prior years and thus a smoother revenue flow. Again, a slight positive in terms of a smoother revenue pattern.
• The higher expenses were purportedly driven by a number of one -offs but they were matched by a lumpy government grant receipt.

So overall the information in the detail of the 4C was ahead of expectations.

From a share price point of view, this does not compensate for the disappointing growth in ARR announced earlier in the month , because naturally most investors are looking ahead. Thus the snippets from the investor call are worth noting.

Investor Call

• There has been a steady shift within the internal sales team to chasing larger customers and offering a larger , higher priced bundled product. The value of these customers is significantly greater but there are two effects (i) The contact wins for these larger bundled contracts will be lumpy so that 3 or 4 customers falling either side of a quarter will affect the quarterly ARR growth (ii) The sales cycle is significantly longer.
• This effect is more pronounced in the September and March quarters which are smaller quarters for software sales in USA and Europe so two or three contracts can have a bigger effect.
• The CEO Pointed out that the pipeline of customers in September 2019 is significantly larger than the pipeline was in September 2018 and the win rate (the number of customers they win per number of customers they pitch to in the pipeline) is as good as it has ever been, including as good as September 2018. So the volatility in ARR growth is not because they are pitching to less customers nor is it because they are winning less customers when they pitch.......it is due to closing dates not falling in the quarter.
• There is a renewed emphasis on the partner channel (presumably to deliver mid sized clients, altho they didnt say this). Investors should not expect to see an increase in the number of partners , but instead a more effective partner chanel with existing partners doing more sales and less effective partners being replaced with more effective partners. The newly promoted President of LVT addressed this strategy in some detail and for those interested in DYOR, it is interesting to look up on Linked In where he came from. I would have liked someone to ask more questions about the partner channel but they did not.
• The December quarter has started well. (Obviously its too early to call but they said it, so I pass it on).
• They are determined to be cost effective ( all companies say this)
• There was some fluff comparing their valuation to other SAAS companies. Frankly, I dont usually care what management think their company is worth but it does demonstrate that the management of LVT are frustrated by their share price , which is probably a good thing.
• The growth path to $100 m ARR is on track. It will be back loaded into 2021 because 60% growth in 2021 will be a much larger number than 60% growth in 2020. As they grow in absolute terms, it will allow them to reinvest in further growth. In other words dont take the difference between now and June 2021 and divide by 8 and expect 8 equal installments. As revenues grow it will fund more marketing and the growth in revenue per quarter will be ;larger in 2021 than 2020

Summary of our take:.
1. The C4 was reassuring on the cash front.
2. Septembers ARR growth was disappointing . This is the first quarter where they missed expectations but the timing after the cash raise heightened the market impact..
3. The jury is out with regards to Managements explanations of ARR growth and it will take the next ARR/C4 to reassure investors that the company is on track to achieve $100 million
4. In the meantime, the market valuation is assuming a sub 15% growth rate which is probably why the stock has bounced off the bottom at these levels. ,






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