Calculating COA?
In the case of LVT we use (Total Opex-R&D-Product Manufacturing Cost&Operating Cost) / Growth in ARR.
(1) Total Opex is the items listed in 1.2 of the C4 ASX disclosure.
(2) We use total opex which includes internal staff (because internal staff includes sales people and the N3 contract) and includes Admin and corporate cost (overly conservative but we think that Senior management close a lot of the big deals)
(3) We look at rolling 4 quarters to strip out seasonality. In SAAS, March Q is always a higher COA, June and December are lower . We also compare yoy COA to detect earlier trends.
(4) In the March 2019 Q, you have to strip out Wizdom to avoid distortion. First you have to take out the acquired Wizdom end December ARR, then you have to take out the growth in Wizdom's ARR (because you get a full quarter of growth compared to only 1/2 quarter of costs- they bought Wizdom half way through the quarter).....then take out Wizdom opex.
Bottom line , the last 5 rolling 4 quarters look like this, March 2018 -March 2019:
March 2018 June 2018 Sept 2018 Dec 2018 March 2019
| 350.7% | 375.1% | 368.8% | 369.9% | 305.1% |
|---|
June 2018 COA was 257% (a good number) March 2018 was 614% (illustrating the seasonal factor but the rolling 4 Qs is reasonably stable and on an improving trend)
LVT management forecast Op Expenses - R&D-Product Opex of $10,550,000 for the June quarter in the April C4.
If we assume a COA of 3.05 that would imply a $3.46m increase in ARR.
If we assume a COA of 2.57, that would imply a $4.11m increase in ARR
We think/hope that the COA will be at least as good as June 2018 because
(i) Since June 2018 Karl + Peter culled cost taking out the lower 15% of producers and non producing overhead , so the remaining producers will be more efficient
(ii)There were N3 start up costs in June 2018.
(iii) We think the Wizdom acquisition has synergies and will prove to be highly accretive, albeit it may be a bit early to see this effect.
We also recognize that 2.57 is a very respectable number in absolute terms (given we include admin and overhead). If we boldly assume a COA of 2.0, that would imply an increase in ASR of $5.275m for a total ASR of $39,775,000.
As you know, Citi have just come out with a forecast $42,000,000. This explains the sudden increase in the share price. However the buy side of the market is skeptical because if the market truly believed that the June Q ASR is truly going to be $42 million, the share price would be even higher. $40 million will be a very good number and suggest that the seasonal adjusted COA has fallen below 3 to 2.9.
$42 million would suggest a COA in the quarter of 1.4 , and a seasonally adjusted COA of 2.75. It would also suggest that LVT is going to get to $100 m ASR sooner than expected, with less cash burn than we expected..
To put this in perspective, our internal range of ASR expectations was $38.25 million - $41.8 million, with 39.5 as a base case and 41.8 a "blue sky" based on pipeline and TAM rather than marketing and sales capacity.
Let us wait and see what the numbers are (tomorrow or the next day).
If the number is above $40 million and anywhere close to Citi's forecast then either:
(1) COA has continued to improve dramatically.
(2) The Wizdom synergies are coming through faster than we anticipated
(3) The Company saw a very strong pipeline and responded entrepreneurialy by increasing sales and opex (ie the expense will be greater than $10.55m)
(4) Its just a blip caused by one enormous customer win and COA will return to around 3 in the next 3 quarters.
All four would be positives, but obviously 1,2 and 3 would be larger positives. ( But a single huge customer win is not to be sneezed at)
In short, lets wait for the numbers.
Be pleased with anything north of $39 million...it marks a steady improvement in COA
Be very pleased with $40m
Be thrilled with north of $40 m.
Be aware that Citi has set up expectations with some of their clients for $42 million , but that most institutional clients are a bit more sophisticated than the sell side analyst.
