Please join us this Thursday December 14th at 2:30PM ET for a Black Book call on LOGM.
Why join this call?
- Bull case is that LOGM is a cheap, SMID cap software stock, with catalysts to move revenue, margins, FCF, and capital return higher in the near term
- Bear case is that price changes on a secularly challenged product line are key to driving revenue upside in the coming quarters, and will swell exposure to this problem, bringing forward the need for the next major acquisition
Which side are we on? Preliminary conclusion: (bench) LONG
We are adding LOGM to our LONG BENCH.
The LONG on the stock is fairly simple. The stock is cheap, relatively less discovered by investors than similarly sized peers, 10% of the company will be consumed by a buyback in the next 18 months, and management are good at gradual increases of estimates in this case thanks to lingering integration positives from the GoTo merger completed earlier this year and topline re-pricing of one of the GoTo product lines. Medium term revenue estimates are supported by a subset of growth product lines in their existing markets, as well as some new product introductions that extend the addressable revenue into new territory.
The SHORT on the stock is a series of yellow flags such as exposure to some revenue challenged product lines, the fact that a re-pricing strategy fixes a short term problem but accelerates the eventual end of the demand category, and therefore brings forward the date by which management has to complete M&A to generate incremental revenue. Buysiders will also get a sense of some underlying turbulence in the model by reviewing the inconsistency of KPI disclosure, and the often changes to revenue segmentation. For a relatively small company, there is too much unnecessary complexity here, a large yellow flag.
The numbers for the SHORT side are that FCF has a tough backward looking hurdle due to on-boarded working capital cash flow in 1Q17. The Street seems to be mis-modeling that working capital jump as an annual affair, repeating in 1Q18 and 1Q19. Peaking FCF in the short term will make it tough to re-price the multiple higher, notwithstanding good-enough revenue growth.
The numbers for the LONG side are that re-pricing product today translates to juicier OCF by mid-year 2018 as enough contracts re-price, new product launches potentially open the door to filling in 2H18 + 2019 revenue holes from the fading growth of existing product, and the company has plenty of balance sheet to fund necessary M&A to bridge the gap between organic 2019 growth (we think ~3%) and promised revenue growth (+10%).
Join us on the call and we will review both sides of the debate as well as our conclusion.
