ValueSearch, I always enjoy your passion for doing a deeper dive and asking the hard questions.
May I respectfully challenge two of your conclusions:
#1
Cash Collection trails ARR by more than 1 year.We do not agree with this conclusion. It is important when compering ARR with quarterly revenue receipts to compare Annualized Recurring Revenue (ARR) with Annualized Quarterly Receipts . Alternatively you can compare Implied Quarterly Recurring Revenue with Quarterly Receipts.
You wrote:
* ARR -> Cash - Cash collection now trails ARR by more than 1 year. This was not the case last Q. I can't figure out why there is such a lag especially when LVT keep saying that Livetiles doesn't require much deployment. The lag should only be 6 months at best per other posters. I have some ideas though will not share.If we go back one year, the ARR in December 2018 was $22.9 million. If the receipts trailed by a year, you would expect the quarterly revenue receipts in December 2019 to be 1/4 of $22.9 million = $5.73 million. The actual revenue receipts were $10, 4 million.
We have to adjust the 10.4 million to reflect the fact that subsequent to Dec 2018, LVT acquired $8m of ARR ($2m per quarter) via Wizdom. Thus an approximate adjusted Revenue receipts of LVT would be $8.4 million or Annualized receipts(excluding Wizdom acquired ARR) of $33.6 million (4 x 8.4), which is still significantly greater than $22.9 million of ARR trailed by one year.
If we compare like with like. The Annualized Quarterly Receipts in Dec 2019 quarter are $10.4m x 4 = $41.6 million
ARR in June 2019 was $40.1 million ARR in Sept 2019 was $42.9 million. So arguably receipts lagged ARR by 1.5 quarters (4.5 months). We believe the lag is closer to 6 months than 3 months but less than 6 months...
The error you made was comparing Trailing 12 month revenue (looking back 4 quarters) with Annualized Recurring Revenue (a point of time). Mathematically this gap will increase the faster a company is growing , so it can be very misleading. If we want to test your 6 month or 12 month lag hypothesis using trailing 12 month receipts, we need to compare the12 months of trailing receipts with trailing ARR. We can test this with a 3 month, 6 month and 12 month lag.
- The total trailing cash receipts revenue over the 12 months ending in December 2019 was $31,965,000
- Trailing ARR for 4 quarters lagged by 3 months to Dec 2019 = $35,100,000
- Trailing ARR for 4 quarters lagged by 6 months to Dec 2019 = $29,025,000
- Trailing ARR for 4 quarters lagged by 12 months to Dec 2019 = $16,075,000
Thus using you methodology of using 12 month trailing revenue receipts, we can only conclude that cash receipts lags ARR by approx 6 months.
LVT's annualized revenue cash collection tracks approximately a 6 month lag after ARR. #2
LVT lost about 50 partnersWe follow your math , but all you have deduced is that LVT churn amounted to approx 50 subscribing customers. If you follow the math through a bit further you can guestimate that each customer was $10,000 of revenue or less.
You cannot conclude that LVT has terminated 50 partner agreements.
(i) All of LVT's early small customers were sold through a direct sales force. We know that the direct sales force is very stretched and has been directed to focus on larger bundled customer sales. I speculate that customer satisfaction teams have not given small clients the attention they need and that the churn comes primarily from direct sales customers. This is no credit to LVT and frankly it illustrates the importance of getting a partner channel established. Nevertheless I suspect that many of these small customers were loss leaders for lVT that were just not worth
servicing.
(ii) A partner earns an annuity from its sales (eg. 15% of revenue in perpetuity). It is very unusual for a partner which has made a sale to quit. Partners who have not made a sale (inactive partners), you dont care if they quit. There is an 80/20 rule to partners. 80% of partner revenue comes from 20% of your partners.....but the remaining 80% of the partners rarely quit and walk away from the annuity. Sometimes the under-performers are replaced in a territory or vertical, but that is not a luxury that LVT currently enjoys.
The upside surprise in the December quarter all came from direct sales. We do not think we can conclude anything about the partner channel from the December numbers.
We maintain our view that if the Partner Channel initiative is successful, the earliest it will have impact is a mild impact in March and more significant in June.
(20min delay)