Who is to say that cheap can't get cheaper?
We tried again to get Long LOGM, and instead found that we are again below Street in revenue.
The GOOD news:
- JiveC will help obscure an estimate cut
- JiveC adds a 3rd major technology inside LOGM
- ~6% FCF yield at the current price and management defended ~$110 using the buyback through 2017
The BAD news:
- Street estimates for revenue in 1H18 still imply an acceleration of fundamentals from 4Q17 y/y levels. Applying 4Q17 growth rates for LOGM and GoTo properties to 1H18 would imply ~3% below Street revenue for 2Q18.
- The potential areas of acceleration in 1H18, GoToMyPC price increase (1Q18) and new features for GoToMeeting (2Q18), seem likely to net out to sustaining existing growth rates rather than accelerating them.
We want to be Long. It is so cheap. Decent GAAP cash flow. And P/E companies could do worse than to lever up and buy this thing for $150/share (in fact, we know they have done worse in buying ugliness like ADT). But our work still indicates a soft core business. It is hard to get excited about a bolt-on acquisition as an inorganic driver of revenue while the core continues to soften. We also continue to be frustrated by the gamesmanship around estimates, this time with Jive Communications.
THE JIVEC GAMES
The most incomprehensible part of Logmein's current strategy is to keep JiveC as a standalone entity for one year before driving product, R&D, and go-to-market. Why are they keeping it separate? LOGM wants to demonstrate that their own management team can accelerate the growth of the acquired entity. Jedis, jedis.
You see the trap, right? Step 1: tell the market some low # for JiveC revenue expectations. Step 2: beat the # and claim you are a genius.
Evidence: In September 2017, JiveC told the media (HERE) that they were on track for $100MM+ of revenue in 2017. Sometimes startups exaggerate. But this is a communications services company where customers pay monthly, and Jive has a decent amount of near-term forward visibility. The late year gap between hoped-for revenue and reality was not likely $20MM+. If anything, we’ll accept some mid-point of thinking, such as that the company was already at a $100MM+ run-rate of revenue at the time of the interview. Regardless, it shows that LOGM provided excessively silly guidance for JiveC for 2018 ($96MM) just so that they can finish the year closer to $120-125MM and show the Street how awesome they are. Small win. In the meantime, they are missing the bigger opportunity to integrate telephony into the core GTM platform and drive an integrated product roadmap into the enterprise telephony/UCaaS market with a uniquely LOGM go-to-market motion, which is a much more important and serious goal. The delay in integrating the two companies likely means LOGM will not have an integrated go-to-market product in the market until 2020. Big miss.
Baking in JiveC = Street won't see the 2Q miss
If we take our below Street LOGM #s and add-in the true JiveC revenue for 2018 ~$120MM+, we get ~$1,220MM for combined pro forma revenue for LOGM in 2018. Guess what? Management has already been on the road moving people toward that expectation! Free and clear. The Street won't see the estimate cut. Phew! Management may have to hurry up and make the next acquisition in 2Q18 in order to help 2H18 revenue growth. See what we mean about the gamesmanship? It is short term thinking.
Growth & Valuation
LogMeIn's organic revenue growth has been slowing while FCF has been rising. Slower revenue growth has driven a declining fair value multiple for the stock. The real reason to get excited about LOGM is the attempt to enter large new markets, such as UCaaS. But simply bolting on revenue from an acquisition won't get the company all the way there. They have to integrate telephony features with the core GTMeeting product and come to the market in some unique way that will change the direction of organic revenue growth from decelerating to accelerating. If they are successful in integrating telephony and core video conference solutions, with a uniquely LOGM go-to-market, the company will move from the value heap to the growth pile. The vision - the holy grail here - is the organic acceleration of revenue as LOGM products gain traction in larger markets. If they succeed the stock will go from ~15x FCF to ~25x+.
For now, the Jive bolt-on acts simply as better #s against a rich FCF yield, with management likely to continue defending the ~$110 line in the stock (2017 average buyback) which limits near term downside. Perhaps this sets up for a trade, but the valuation attraction on the one hand is offset by soft estimates on the other. If investors believed that LOGM had ~6% organic growth which would accelerate to ~8% with Jive, they will be disappointed to see LOGM + Jive = ~5-6% in 2019.
The bull v. bear as we see it now
BEAR
- We dislike the gamesmanship with estimates
- We need to see evidence of improvement in the positioning of the core products (mainly GTM)
- Customer churn / loss is worryingly greater than revenue churn
- R&D is slow to get new features into the market
- Newest, most important technology asset will not be integrated and released into unified product until likely ~2020
BULL
- Produced $50MM out of thin air by selling Xively which was probably about two quarters from a write-down and worth $0, this type of action is either really lucky or very talented
- JiveC adds an accelerator
- Management has successfully defended $110 in the stock with the buyback (last year's buyback average)
- Not a lot of stocks out there now with 5-6% FCF yield growing 3-4% organically
- The LMI Pro team can produce some cash flow surprises applying their strategy to GTMPC
Conclusion: too tough to buy it into an implied estimate cut, even if the cut gets masked by a bolt-on acquisition.
