Company Overview: LiveTiles Limited (ASX: LVT) is engaged in the development and sale of digital workplace software through subscription agreements with its clients. It provides software and solutions to organisations and workplaces that help them to drive productivity and employee communications. It has its presence in North America, Europe, Asia, and Australia, and provides its services to over 1,100 Enterprise customers.

LVT Details

Rise in ARR Levels Aided by Key Contract Wins: During Q3FY21, the company has reported a decent rise in average Annualised Recurring Revenue (ARR) per customer, despite the impact of the COVID-19 pandemic on the economy. It has been witnessing a gradual shift of customer mix towards large enterprises, which augurs well in terms of revenue stability in the future.

Strategic Deal with Nestle:

On 2 July 2021, LVT has announced that it has signed a strategic licensing deal with Nestle.

• The agreement is for a three-year period for an employee experience solution across Nestle’s global workforce.
• The deal has been valued at $2.1 million and is the largest licensing agreement for LiveTiles EMEA.
• LVT’s service offerings are initially expected to be rolled out to ~125,000 users and with a plan to cover entire workforce of more than 300,000 users within the second phase.
• The company was chosen ahead of other RFP participants, given its packaged solution offering based on cutting edge architecture.

Increased Traction in LiveTiles Reach:  During Q3F21, the company has witnessed strong demand for the product, with sales pipeline growth of +139%. The mobile version of its desktop application has been developed with the ability to plug in with third party apps. Given the potential of the product, the increased R&D investment will further develop the functionality of LiveTiles Reach application.

Recent Business Highlights: The company seems to be well-positioned to withstand the ongoing uncertainties with regards to the COVID-19 pandemic and has reported decent performance and accomplishments in the past few months.

• Award of Certification: It has been awarded the ISO27001:2013 certification, which will help it to speed up the sales cycle.
• Strategic Collaboration to Increase Sales: It has collaborated with Nasdaq listed ServiceNow global partner program in order to diversify its sales pipeline strategy with expanded platform integration touchpoints.

Key Highlights of Q3FY21 Results: During the quarter, the company delivered a decent performance with growth in ARR and the number of customers.

• Growth in ARR: The ARR stood at $66.7 million on a constant currency basis as of 31 March 2021, reflecting growth of ~21% on the previous corresponding period. Average ARR per customer increased by ~16% to $59.9k, when compared to pcp on a constant currency basis, and increased by ~2.3% to $52.8k on a reported currency basis.
• Surge in RFPs: It has reported a surge in the number of RFPs in the sales pipeline during the period. The RFPs stood at 21 for CY21 with an approximate value of $15 million.
• Decent Cash Receipts: LVT has collected cash receipts of $12.2 million during the quarter.
• Improvement in Operating Cash Outflow: Net operating cash outflow improved by over 74% to $1.6 million, when compared to the previous corresponding period.
• Decent Cash Position: It ended the period with a decent cash balance of $16.8 million as of 31 March 2021, providing comfort for executing the operations in a seamless manner.
• Increase in Customers: Customers grew to 1,114 as of 31 March 2021, from 1,068 in the prior corresponding period.

Increasing Trend in Average ARR/Customer (Source: Analysis by Kalkine Group)

Change of Director’s Interest: As per a recent update, the company’s director Jesse Todd has undergone a change of interest in the company and has acquired 175,900 fully paid ordinary shares via on-market trade.

Top 10 Shareholders: The top 10 shareholders together form around 37.28% of the total shareholding, while the top 4 constitute the maximum holding. Redenbach (Karl) and Nguyen-Brown (Peter) are holding a maximum stake in the company at 9.97% and 8.57%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics:  In H1FY21, the company reported an increase in asset turnover to 0.17x. The current ratio of the company stood at 0.99x during the period. There was a substantial improvement in the cash cycle to 79.9 days in H1FY21, compared to 115.4 days in the previous corresponding period. It reported total debt of $3.5 million as of 31 December 2020, which primarily consists of capital lease obligations.

Growth Profile and Liquidity Profile (Source: Analysis by Kalkine Group)

Key Risks: The Group is exposed to the following risk factors –

• Credit Risks: It is prone to credit risks and has risk exposures in Australia, Asia, North America, Europe, and the Middle East with respect to total receivables.
• Foreign Currency Risks: The company is also exposed to foreign currency risks given the presence of projects and clients on a global level.
• Technology Risks: LVT’s line of business is dependent on its technology to deliver seamless performance to its clients. Any material impact on technological trends or business needs might impact the operations of the company and hence its top-line performance.
• Profitability Risks: Though there has been an improvement in the revenues of the company, it has been reporting continued losses over the past few years on the back of increasing operating expenses.

Outlook: LVT will continue to focus on a prudent cost management approach in order to invest in its product portfolio and grow its customer base. Its strategy to invest in direct sales and marketing has contributed to a growing pipeline, and the recent customer wins stand testimony to its impressive performance. It has reported 21 RFPs to be in motion in CY21. The induction of Fione Le Brocq and Jesse Todd as Non-Executive Directors will further enhance the organisational governance and help in consolidating the company’s position as one of the leading players in global employee experience facilitation.

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

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:  In Q3FY21, the company has signed a contract with United Healthcare with over 325,000 employees. It is valued at ~$3 million and is valid for a period of three years.  As per ASX, the stock of LVT is trading below its average 52-weeks’ levels of $0.145-$0.305. The stock of LVT gave a negative return of ~20.93% in the past three months and a negative return of ~14.99% in the past nine months. 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). We believe that the company can trade a slight discount to its peer median EV/Sales (NTM trading multiple), considering the continued losses, negative margin performance, prevalence of COVID-19 volatility and presence of stiff competition, etc. For this purpose, we have taken peers such as rhipe Ltd (ASX: RHP), Class Ltd (ASX: CL1), to name a few. Considering the expected upside in valuation and current trading levels, continued growth in ARR & customers, comfortable cash position for growth initiatives, deal with Nestle and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.165, down by ~5.715% as on July 09, 2021.

LVT Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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