Cash flow positive and no raise are common themes investors seem...

Cash flow positive and no raise are common themes investors seem to want but I don't think people are seeing the big picture.

We know revenues lag increases in ARR and that obviously there is a certain COA to acquire revenue. At the marginal level, if the LTV of revenue is greater than the COA, it is in our interest for LVT to go after that revenue even if it is lagged into the future.

LVT if they are completely future value optimisation oriented are more interested in growing ARR than keeping costs smaller than quarterly revenue because of their incredible retention and upselling ability. In turn, revenues would continue to grow with costs - thus not necessarily cash flow positive. However, on an operational basis, if they were to turn off non base costs like advertising, marketing and r&d their underlying cash flow (Base CF) will continue to improve as they invest in future revenues. I have a basic model below trying to show this. As we know models are heavily reliant on assumptions and this is to show the point I'm trying to make - so don't think this is exactly the direction LVT will go in as it almost 100% isn't. Calculations are based off past COA values and targeting a fixed growth rate in ARR such as to meet $100m target at expected time. Assumption is that Base Costs remain relatively stable while growth opex increases to target higher ARR through COA. The important line is light blue, showing the cashflow should LVT 'turn off' growth costs. Even though they continually spend more and more to aquire revenue in the future - potentially remaining as a non-breakeven cashflow business - their underlying recurring revenues increase quickly giving the characteristic cash on tap that is so special about SaaS companies. This model doesn't even account for an increase in COA.



I know VMK shares the view that LVT is a growth story - capital raises and cash flow aren't a problem so long as CAC and LTV mean growth dollars are profitable in the long-run - it's in the best interests of shareholders for LVT to (so long as operationally profitable in longrun) scale like hell. You need to remember the first mover advantage etc as well. These are huge factors in surviving in tech industry. Investors in XRO are very aware of the value of scaling before profitability.

While I'm at it I'll also show the other extreme - LVT keep their growth opex constant as of next quarter such that they linearly increase ARR but still reach $100m target by June 2021. Again, this is unlikely what LVT will actually do as they will not suddenly increase growth opex next quarter then hold it constant etc but I just want the shape of the curves to be apparent. (It shows cash going negative before inflection but don't fret over this as again this is an extreme case model which isn't what I see happening at all, merely an illustration of the nature of cashflows in different scenarios). Note in this case Cash Balance is a beautiful quadratic due to revenue from the past catching up and continually being recieved regardless of present spend. We want something in between the two because the Base CF, eg the value LVT would get if they were to turn off their growth opex (proportional to scaling, first mover advantage, market share, ARR etc) is higher in the first example purely because they spend more marketing dollars in the present to generate longer term benefits. So despite cash going negative in the first example, we have a better underlying client base value that could very quickly pay off debts/shareholder equity after lowering growth opex.

My aim is not to disregard the fundamental importance of profit, but to show that LVT has a great future which is exponentially greater if they continue investing in future revenues, not holding back to leave cash on the table by keeping marketing costs stable.

PS VMK thanks for help with understanding LVT a bit more. Regarding what you said about COA, I seem to have a different result for March qtr 2018 where you said COA was very high. Indeed, it seems almost none of my COA match yours despite using the same formula I trust yourself more than me, but I have no values above COA of 4. Maybe I am reading data wrong from 4C but that shouldn't be the case, here is my data for others to use of they wish and for factchecking. Thanks all (ignore June19 numbers on mine, wait for 4c soon)