Company Overview: LiveTiles Limited (ASX: LVT) is a software-as-a-service (SaaS) technology company that provides products and services designed to boost productivity and connectivity in the workplace. The company sells its products through a direct sales team of over 40 sellers globally, as well as through its more than 200 transacting channel partners which include the likes of Deloitte, PwC and Avanade. It generally targets enterprises with more than 500 employees. LVT leverages Microsoft technology foundations and connects to other applications like Salesforce, Dropbox, SAP, Canva, etc., and is deployed to customers via Microsoft Teams, Microsoft Office 365 or Microsoft Azure. It has mainly four product portfolios: LiveTiles Intranet; LiveTiles Reach; LiveTiles Everywhere and LiveTiles Quantum. The company operates its business in multiple locations such as North America, Europe, Asia, and Australia. LVT provides services to more than 1,000 Enterprise customers in over 30 countries.

LVT Details

Increase in Demand & Product Launches to Drive Growth: LiveTiles Limited (ASX: LVT) is engaged in the development and sale of digital workplace software via subscription agreements. The market capitalisation of the company as on 22 January 2021, stood at ~$207.51 million. The company has launched a new smart video solution, targeting Microsoft Teams and Zoom customers in the enterprise and education space. The LiveTiles smart video is expected to witness increased traction from enterprises, as organisations are focussing on improved productivity in the midst of the COVID-19 pandemic.

The company has the potential to be a major play in the sector, given the strategic business model it has in place to leverage on growth opportunities. It plans to sell more licenses to a greater number of employees within the existing customers and leverage existing customer relationships to enhance value across its product suites.

The company delivered a decent performance in FY20, with an increase of ~109% in revenues to $37.79 million, from $18.09 million in FY19. The Group had 1,092 paying customers as on 30 June 2020, reflecting a growth of 19% on the previous corresponding period. This was on the back of focussing on the enterprise segment, where the potential of its products is gradually being discovered. There was an improvement in the bottom-line with a reduction in net losses to $31.6 million. The cash position of LVT grew by 154% to $37.8 million, aided by $55 million in capital raising. The annualised recurring revenue (ARR) grew by 34% to $53.8 million in FY20, compared to the pcp. It recorded a significant growth of 255% in the last two fiscals.

FY20 Performance (Source: Company Reports)

Robust Performance in Q1FY21: LVT reported record cash receipts of $12 million in the first quarter and the average ARR per customer was at $55.3k. It delivered a total ARR of $57.1 million. The cash position was at $34.6 million as on 30 September 2020. The number of customers of LVT stood at 1,116 as on 30 September 2020.

Business Strategy Aligned with Microsoft: The company continued to align its objectives with Microsoft and extended its outreach in FY20. LVT has a clear strategy to target the ~400,000 organisations that use the Microsoft Office 365 platform. The market size of the industry is estimated to be at ~$17 billion annually. There is the scope of increasing the recurring revenue too, by increasing the proportion of customer employees under subscription and also increasing the number of product offerings to the same customer base.

ARR Driven by Organic Growth: The company has seen increased traction for its products over the past few years, and the onset of the COVID-19 pandemic has accelerated the demand for its products amongst enterprises, in order to stay connected and increase productivity. This has led to an increase in the ARR of the company, with a CAGR growth of ~138% from $4 million to $53.8 million over the FY17-20 period. The rise is primarily driven by organic growth, reflecting the interest which LVT’s products have created across the organisations.

ARR Growth in the Past Four Years (Source: Company Reports)

Increase in Demand Across Regions: The company has doubled its pipeline in the past 60 days in the Americas region. It has been witnessing increased demand since September, with customers seeking tools to enhance productivity while working from home. In the EMEA region, LiveTiles was announced as Microsoft Technology Partner for tech for social impact. It saw an increased demand for its products on the back of customer advisory initiatives. The company is planning to pursue growth in the markets of Germany & UK in FY21.

Details of Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 36.70% of the total shareholding. Redenbach (Karl) is the largest shareholder in the company, with a percentage holding of 10.09%. Nguyen-Brown (Peter) holds the second maximum interest in the company at 8.67%.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: During FY20, there was an improvement in the EBITDA margin to negative 50.4%, when compared to negative 229.6% in FY19. Net margin stood at negative 83.6%. There was an improvement in the current ratio of the company to 1.73x in FY20, compared to 0.94x in FY19. The cash cycle days decreased to 100.3 days from 167.6 days during the same period under consideration. The assets to equity ratio improved to 1.60x in FY20, compared to 1.82x in FY19. The company had a comfortable cash position of $37.79 million as on 30 June 2020. Net cash position stood at $34.6 million as on 30 September 2020.

Key Margins (Source: Refinitiv, Thomson Reuters)

Key Risks: The company is exposed to foreign currency volatility as it deals with business transactions globally. It is also vulnerable to credit risks with respect to its trade and other receivables, as on a geographical basis it has credit exposures in Australia, Asia, North America, Europe and the Middle East. The Group operates in a sector where there is stiff competition among the players to retain customers and add on new clients. Any technological lag or malfunctioning of the IT solutions might impact the ARR of the company, thus hindering its profitability. LVT has to keep track of the latest communications trends and keep itself updated with the changes and needs of customer preferences, to stay relevant in the business.

Outlook: The company is upbeat about its business performance going forward and expects accelerated pipeline growth in 2021. It sees significant opportunities in the remote workplace digital software space on the back of global COVID-19 recovery. LVT has witnessed positive signs on the recent customer buying patterns and expects to return to pre-COVID levels soon, particularly in the markets of EMEA & USA. It has also experienced strong traction for the LiveTiles product suite, with customer interests inclined towards its product offerings, and in particular LiveTiles Reach.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: Given the global market penetration is only 1.5%, there is a significant opportunity for the company to expand its market share and grow its business across different regions. As per ASX, the stock of LVT is currently trading below its average 52-weeks’ levels of $0.110-$0.385, proffering a decent opportunity for the investors to enter the stock. The stock of LVT gave a negative return of 9.99% in the past three months and a positive return of ~15.38% in the past nine months. On a technical analysis front, the stock of LVT has a support level of ~$0.191 and a resistance level of ~$0.256. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). For the purpose, we have taken peers such as rhipe Limited (ASX: RHP), Class Limited (ASX: CL1) and Over The Wire Holdings Limited (ASX: OTW). Considering the current trading levels and valuation upside, significant growth in ARR, robust financial performance with a decent balance sheet and a mix of reputed channel partners, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.225, down by 2.174% as on 22 January 2021.

LVT Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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