Thoughts on LOGM

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Thoughts on LOGM

Someone, I couldn’t find the post and I can’t remember who, but I remember it was someone usually sensible, recently posted enthusiastic remarks on LOGM’s results. In fact, after results were announced they shot up from about $65 to $72. I don’t understand this as it seems like everything is slowing down for them. Please tell me what I’m missing.

First their price is $72.20 and their trailing earnings are $1.35, which gives them a PE of 55.5, which is pretty high. Trailing earnings are up 67% so they have a 1YPEG of 0.80, which is not one of the best, but not bad either.

However, here are their last five Earnings comparisons:


June 2014 - 29 up from 13 =  up 123%
Sept 2014 - 32 up from 14 =  up 128%
Dec  2014 - 35 up from 16 =  up 109%
Mar 2015  - 33 up from 22 =  up  50%
Jun 2015  - 35 up from 29 =  up  21%

That sure looks like massive slowing of earnings growth, so what’s all the celebrating about?
Well, how about Revenue?


June 2014 - 55 up from 41 =  up  34%
Sept 2014 - 58 up from 43 =  up  35%
Dec  2014 - 60 up from 45 =  up  33%
Mar 2015  - 61 up from 49 =  up  24%
Jun 2015  - 65 up from 55 =  up  18%

So revenue growth is slowing quite rapidly too. How are they going to grow into that 55 PE ? I’m just wondering what I’m missing?

Saul

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Saul - it may have been me posting on LOGM…

Ok the quant and qual factors you may be missing from looking at the growth slowdown having followed LOGM and having gone through the earnings report and call are:

  1. YOY and sequential growth has had an exchange rate challenge to deal with. Apparently the 18% would have been 27% on a constant currency basis. They are targeting full year revenue growth at constant currency at 27%

  2. They are moving to subscription model and also concentrating on billings not just recognized revenue. Their deferred revenue growth is up by 26%

  3. They have some very strong growth numbers 30%+ on their new/smaller revenue streams with a slower growth rate of ~12% on their established lines. The high growth areas are coming from small revenue base numbers but as these expand then the overall growth should come up

  4. They launched some new services (Join.me video, Rescue lens) and software updates (Xively) late in the quarter (June and March respectively). These should continue to drive up growth going forwards

Having said that Saul - your eye and discipline makes an incisive point - the numbers need watching carefully.

Ant

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BTW Saul was this the post?

I was quoting the analyst newswire results flash verbatim there so not necessarily my cheerleading although I was impressed and did post…
http://discussion.fool.com/logmein-results-31842796.aspx

Here’s the actual release…
http://seekingalpha.com/pr/14186325-logmein-announces-second…

And here’s the earnings conf call…
http://discussion.fool.com/logmein-results-31842796.aspx

Regards
Ant

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Ok the quant and qual factors you may be missing from looking at the growth slowdown having followed LOGM and having gone through the earnings report and call are:

Thanks Ant, I find it interesting. I first got interested in June and here are the notes I wrote to myself at that time:

June 2015 – My Take
Logmein looked interesting and I started looking into it. Its sudden growth in 2014 though could be partly due to the discontinuation of its free service and the migration of the free users to paid users. Since this pool no longer exists, growth may slow again in 2015. For example, last year in the June quarter their adjusted earnings went from 13 to 29 cents, up 123%, and up 32% sequentially. This year they are forecasting 34 cents at the midpoint, up from 29 cents. This would be up only 17%, and up 3% sequentially. Now they are probably underestimating by 3 cents, and will come in at 37, but that will still be NOTHING like last year. Meanwhile, at the current price about $64, the PE is about 50.

For the year their estimates are for $1.40 at the midpoint, which is undoubtedly underestimating, but if they make $1.55 they’ll still have a PE of 41, a rate of growth of earnings of 31%, and a 1YPEG of 1.32. I’m afraid that they are a little overpriced.

Then I read another take by okapimoon, which made me reconsider. Here is my precis from my own notes:

Its sudden growth spurt in 2014 though could be partly due to the discontinuation of its free service and the migration of the free users to paid. Since this pool no longer exists, growth may slow again in 2015.

Yes, this has been addressed and acknowledged by management. Although in 2014 when the free version of logmein was transitioned, those who migrated to pay were given a 50% discount for the first year. That means, in January of 2014 when they made their first annual payment, it was $50.00. Then, in January 2015 if they chose to renew, their 2015 annual payment would be $100. So there still should be a little carry over from the migration this year.

Also consider, JoinMe, the collaboration portion of their business is the biggest growth engine at present. This still has both a free and pay version. Although there are no plans at present to discontinue the free version, consider that they are getting ONE MILLION NEW users for the free version PER MONTH. And they are continually adding new innovations to the pay version as well, I believe of instituting tiered pricing for different levels of the pay version. Some of latest innovations to pay version:

  1. vanity URL instead of 9 digit code
  2. ability to record meeting
  3. unlimited conference calling
  4. ability to swap presenters in the middle of meeting

Also keep in mind that JoinMe is disrupting 2B collaborative market because due to proprietary software, joining meeting is both “drop dead simple” and instantaneous.

LogMeIn is likely to be disruptive in other areas as well. Currently, with products such as Xively, they are leveraging their connectivity expertise to help their clients roll out connectivity to their own users. In a recent presentation, the Director of Investor Relations explained about a consumer facing company that wanted to become internet enabled but didn’t currently have internet capability. They hired another company and asked them to do a simulation to scale. The other company ran into a number of complications, so the first company asked LogMeIn if they could do a simulation using their platform. The simulation they requested was for two million connected devices sending off 30,000 messages per second for three hours. LogMeIn was able to do this using four servers and using only 5% capacity with no messages lost. The company shown the simulation was almost in disbelief as the first company had required 100X the servers to complete (poorly) the same task.

Other areas LogMeIn is helping companies with connectivity, with regard to internet connected products. Rob gave an example from his own personal experience. He’d just bought a Nest, however it was not drawing enough power to work. He called the service department and was told to disconnect the Nest from the wall and send it back to the company for service. “You’d think,” he said, “with a connected product on my wifi, why wouldn’t they be able to do trouble shooting in real time?”

Along these lines, they have just been hired by Lutron (lighting) to set up new homes with internet connected lighting. Lutron first thought they would set connectivity for the lights themselves, which they did okay with single homes on WIFI, but once they got to setting up thousands and ten thousands of homes with 3G and 4G, they realized this was beyond their ability to scale and hired LogMeIn.

If you listen to any of the presentations on Investor Relations website, you’ll hear about more areas of innovation that are thrillingly (in MHO) potentially disruptive. So, although it’s true, they may currently be overpriced, I think the company is one not to rule out, but to continue to keep apprised of and to keep on one’s horizon. (At least I will…)

This post by okapimoon got me enough interested to take a tiny look-and-see position, but as it was one of my lowest conviction stocks, when I was looking for money for something else, I sold it off. The market saw something as the price shot up in spite of mediocre earnings growth, so I’ll take another look. Thanks for your suggestion. (Do you have the number of your recent post about earnings that I couldn’t find?)

Best,

Saul

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Sorry Ant, I see you have already posted the link to your post.
Thanks

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No No - thank YOU Saul!
Ant

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Hi again Ant,

Well, I read their conference call transcript and they sounded terribly enthusiastic. Revenues increasing, new products, increasing margins, etc. To hear them, you’d be expecting huge, HUGE, revenue growth and happy clients. So I was surprised to learn that they only have an annual renewal rate of 80% of clients. That means they lose 20% of their clients every year! Why? That sounds like a lot.

I was also surprised that they are targeting only 20% revenue growth (27% with constant currency). That would be totally great for an industrial type company, but for an internet company at a PE of 55.5 that says it’s booming, it’s a bit underwhelming.

They also raised their yearly earnings outlook to $1.54 at the midpoint. Assuming they beat that and come in at $1.60, their year over year gain would be 1.60/1.18 or up 35.6%. At today’s price of $72.20, they’d still have a PE of 45.1 and a 1YPEG of 45.1/35.6 or 1.27 (which of course is higher than we’d like to see).

I really have wanted to like this company and take a small position, but I’m having a tough time.

Saul

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I hear you Saul. It isn’t a slam dunk for me either but I’ve erred to the on side. I agree it would be a candidate to cut if I needed to raise cash for re-allocation into a preferred holding (prime targets would be IBNK and KMI right now and possibly ARM and SWKS if they continue to fall with Semicons).

Ant

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So revenue growth is slowing quite rapidly too. How are they going to grow into that 55 PE ? I’m just wondering what I’m missing?

Well, here are the thoughts of, admittedly, a beginner at evaluation (who appreciates both the fact that you felt one of my arguments supporting the stock was worthy of consideration, as well as your thoughts and comments adding a grain of salt to my enthusiasm and the enthusiasm expressed by management.) (And of course, keeping my “beginner” status in mind, you can also take the thoughts added here with a grain of salt.)

First, admittedly, there does appear to be a slowing down of current revenue growth. However, even so, as reported by TheStreet regarding the most recent earnings release, revenue growth came in higher than the industry average of 4.8%. Secondly, overall, in spite of current quarterly slowdown, I do believe revenues are still on a fairly good growth trajectory. Let’s look instead of only at the latest quarterly growth, at the recent annual revenue growth, as well.


2012  139M
2013  166M
2014  222M
2015E 264M

5 year annualized growth rate: 24.4%

Also note, the company has zero debt, lots cash on hand, 12% cash flow growth rate.

Granted, EPS has not been salutary, and this is certainly a concern (how much is going to compensation rather than bottom-line?) However, a good portion (IMHO) is going towards future growth.

LogMeIn bills itself as an innovation company. Their business is based not only on each year improving their product and spending on marketing to gain customers, but also on expanding breadth and depth of product base. You mentioned in one of your posts some of the new products discussed in the recent earnings transcript. Join.me their collaborative platform is the biggest growth driver at present. This spring they introduced video and white-boarding to join.me. Also the one-touch video phone connection. These (again IMHO) are very innovative products that have only been just newly introduced to market. The white-boarding allows you in a video conference to create a white-board via your ipad, draw and write on it, add a photo to the board, and to share it during the conference so that others can also contribute and add to that board. Interactive collaboration. It can also be saved or shared or sent later. All this with ease of use, quick connection, and low cost. This is only one of the newer products recently introduced.

In one of the presentations I listened to when doing my report for Neil’s Investment Analysis Club board, management was talking about Xively and also the security and password management programs and the potential future market for each. Yes, this is kind of story stocky, in that it’s enthusiasm for future success, not a discussion of current profit. But I think it’s easy for anyone to understand and acknowledge how IoT is only going to continue to grow, how business is going to continue to shift their focus (or increase and enhance their focus) on connectivity, and how the importance of quick connection, easy connection, safe connection, all areas in which LogMeIn focuses and excels are only going to grow, and probably exponentially.

This month, LogMeIn was named a finalist in the 18th Annual Technology Leadership Awards by Mass Technology Leadership Council “in recognition for the company’s continued growth, innovation and success,” in the following three areas:
• Public Company of the Year
• Innovative Technology of the Year, Internet of Things (Xively)
• Innovative Technology of the Year, Mobile Technology (Rescue Lens)

Some of the former awards won:
• Best Cloud-Based Technology for Mobile [2014, GSMA Mobile World Congress]
• The Worlds Top 10 Most Innovative Companies in IoT [2014, Fast Company]
• Finalist in 2015 MITX Awards for Best in B2B Tech for password manager

I think all of these factors will contribute to future growth and are part of the reason for the current enthusiasm of analysts who in spite of slowing revenue in recent quarters and lack of exciting EPS currently have, in majority, upgraded the stock after recent quarter. (And of course, the fact that they almost always beat expectations, 24 out of the past 26 quarters, I think it is now, doesn’t hurt). I also believe these these are some of the arguments that go towards making (still) a company to keep a watch on, even if tempered, by needing, also, to keep a close watch on the numbers and looking (or waiting) for signs of a better return for investors.

Company Mission: Simplify how people connect to each other and the world around them.

Because: Simplifying how people connect creates endless possibilities.

Or: When everything is connected, anything is possible.

okapimoon—>Who still likes the company, but hasn’t yet invested in it.

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Hi okapimoon, I did take a try out position in June (based on your write-up, actually), but sold in July for cash because of having higher conviction places I wanted to put my money. Right now, I’m still watching them, but that 80% renewal rate REALLY worries me, as it seems to throw their entire thesis in doubt. Why? Because they lose 20% of their customers each year, which makes it a lot harder to grow their customer base, and the larger they get the harder it will become to replace 20% of their customers. Could you imagine AMZN or FB or CRTO or ANET or INFN or EPAM or… having 20% of their customers not renew each year??? The other reason it throws their thesis in doubt is because if they are as valuable as they say, and their customers are as ecstatic with their services as they say, they wouldn’t have 20% not renew. Which implies that perhaps, just perhaps, their services aren’t as good as they say they are, or their customers aren’t as happy as they say. I don’t know, but at a PE of 55, and slowing growth, I’m not buying yet.

Saul

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2012 139M
2013 166M
2014 222M
2015E 264M

5-year annualized growth rate: 24.4%

Hi again okapi moon, There’s another way to look at that.
In 2013 they grew 19% over 2012.
In 2014 they grew 34% over 2013 (They closed their free service so people had to start paying).
In 2015 they will be back to growing at 19% over 2014 (according to the estimated figures you gave).

It can look like 19% is their normal growth rate (no more people being converted from free to paying). Just wondering, but that just doesn’t seem like an exploding internet company to me.

Saul

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There’s another way to look at that.

Yes. Good point, Saul. (Good points.) Will just keep watching for now!

Thanks.

okapimoon

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Saul and okapimoon:

I have no particular opinion of LOGM as an investment, and no position, but my company was a client for quite a number of years, and I found their products to be very good. We ended up getting paid licenses for most of the computers in the company, and renewed every year. We just cancelled this year because we were going out of business (but we didn’t account for 20% of their business! :-))

John

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I have no particular opinion of LOGM as an investment, and no position, but my company was a client for quite a number of years, and I found their products to be very good. We ended up getting paid licenses for most of the computers in the company, and renewed every year.

Thanks for input John. And as I also reported in an earlier post, I use LogMeIn regularly to do the bookkeeping for BF’s small business on Quickbooks on his computer at work via logmein on my own computer at home (where I can sit in the comfort of my own home and sit at the dining room table or in my own home office with the added bonus of being in the company of dogs). (See profile picture to see one of the dogs.) We have used it for several years now and renew every year. It’s been great and well worth the small renewal fee we pay each year for easy convenience and great customer service (when needed) it provides. Was interested in trying out join.me via the free version and to check that out too, but have not quite managed to do that yet.

okapimoon

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Oh, and additionally (also noted in earlier post), that same license that allows me to tap into BFs computer from home also allows him to connect to Quickbooks on his computer (and access his full customer contact list, all business records, invoices, etc.) anytime, anywhere from his phone.

okapimoon

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Hi okapimoon, You keep tempting me, but with that good experience you’ve had, why haven’t you taken at least a small position? Is something holding you back?
Saul

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You keep tempting me, but with that good experience you’ve had, why haven’t you taken at least a small position? Is something holding you back?

Oh, let me count (list?) the reasons. Well, not all, but the main ones.

First reason: I did my initial investigation as part of the analysis practice on Neil’s Investment Analysis Club board. The reason for analyzing a new stock each week for me was not to find investment ideas, but to practice business & financial analysis, a skill I want to build, and not currently a strength. So goal was practice, not fishing for ideas. I want to improve my stock analysis and buy and sell decisions but didn’t think starting off by buying would be as profitable as getting more practice under my belt first.

Second reason: As part of my current “trying to become a better investor” plan, have been reading and studying your board. As part of that focus, I’ve been trying to reduce the number of companies I hold (a large bevy). I’ve made some initial easy cuts letting go of some of the poor performers I was waiting for and hoping would come back. But past that, I’m finding it very difficult to choose or cut the cord. Adding new darlings doesn’t quite fulfill the goal of creating portfolio of a number I can really pay attention to studying. (Since starting Neil’s board, I’ve been managing to study a new company each week, but haven’t even yet gotten to adding “beginning to do a deeper dive on all the companies I own.” (Which would likely make it easier for me to decide which to cull.

Third reason: Since I have been inspired by this board to better learn to evaluate, some of the areas LOGM does not quite meet your general guidelines does give me pause, although my enthusiasm about what LOGM offers and it’s growing value in the connected world at the same time does push me towards loosening some of those parameters.

Fourth reason: I do tend to get excited about tech. (Even though I am not an overly techy person.) Actually, I think one of the reasons I tech inspires me is because I think of myself as tending to be a spiritual person (not religious spiritual, more “Zen-ish” spiritual which holds that there is an unified force underlying and connecting all life. (Pretty Quantum-ish, too.) But I see the growing connectivity of the internet as a symbolic physical manifestation of the world’s growing recognition of the inner underlying connection between all and get very excited by that. As a result of that, my portfolio tends to be rather tech heavy (helped also by my oversize NFLX position bought at 10 and 14 many years ago — much has been sold, but what’s left still makes it may largest position.)

Fifth reason: Well, no fifth reason, so, hey, I bought just a tiny nibble to watch this morning. We’ll see. Still SO SO MUCH to learn…

Now, must get back to work, log in to LogMeOn, and do some work on BF’s Quickbooks account! (Oh, but first, I’d better feed the dogs. Late this morning…)

okapimoon

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As a result of that, my portfolio tends to be rather tech heavy (helped also by my oversize NFLX position bought at 10 and 14 many years ago — much has been sold, but what’s left still makes it may largest position.)

Oops. Forgot about the recent split. So 10 and 14 price I paid many years ago, split adjusted stock prices would be $2.50 and $1.54.

okapimoon

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I bought just a tiny nibble to watch this morning.

Hi Okapimoon, I was really trying to find a reason to take a little position in LOGM too, so I looked at the 10Q for possible motivation. I read

Net cash inflows ($35.2 million) from operating activities during the six months ended June 30, 2015 were mainly attributable to a $34.3 million increase in deferred revenue associated with upfront payments received from our customers…

This is good. The six months net cash inflow of $35.2 million was roughly double the adjusted net income for six months, which means they are doing better than the apparent earnings would indicate.

We initially record a subscription fee as deferred revenue and then recognize it ratably, on a daily basis, over the life of the subscription period.

This is great, they have a lot of deferred revenue they haven’t recognized yet as revenue or profits, but it does show up in cash inflows.

Typically, a subscription automatically renews at the end of a subscription period unless the customer specifically terminates it prior to the end of the period. For the three and six months ended June 30, 2015, our gross annualized renewal rate was approximately 80%. We calculate our gross renewal rate on an annualized dollar basis across all product lines as of the end of each period. We expect our gross renewal rate to remain relatively consistent as we continue to invest in our products, customer support organization, and related retention programs.

This part is terrible. They say that customers “specifically terminate” 20% of their subscriptions over the course of the year! “We expect our gross renewal rate to remain relatively consistent”. What the heck is going on here? Combined with the apparent slowing rate of growth of revenue, I was still hesitating.

I emailed investor relations about the renewal rate and received an answer in 48 hours. Here it is:

Thank you for your email. You are correct, our gross renewal rate is 80%. We calculate that rate on an annualized dollar basis across all product lines, and it does NOT include add-on sales. To further explain, 85% of our subscribers are small and medium sized businesses (SMBs). Compared to other SaaS companies with a similar percentage of SMBs, our renewal rates are very competitive. Further, we also have freemium products that make up for some of the churn (i.e. join.me free) as subscribers can decide to stop paying and use a free version with fewer paid features. Finally, many other companies report their net renewal rates, which includes add-on sales, which is a different metric and can produce a number over 100%.

This wasn’t a totally satisfactory answer, but it helped to explain somewhat, so I broke down and took a tiny position again yesterday too, to just put it on my radar (or what’s a tiny position for me, anyway, about three quarters of one percent). It doesn’t meet all my criteria either and it’s a low conviction stock for now. We’ll see.

Best,

Saul

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My main issue with LOGM is that there are free services and software that will do all of its core features. The potential market is limited. Large companies shouldn’t be installing remote access software for fear of being hacked. Small companies and end users shouldn’t need to spend any money on achieving what they need to do. Chrome Remote Desktop lets you log in to another computer using a Google login through a web browser. TeamViewer (which I use now) is a freemium product that works very well. Windows has remote desktop built in. Unix/Linux has VNC and FreeNX. GoToMyPC advertises like crazy. Splashtop is actively recruiting LogMeIn users on their home page.

There’s very little to tie a user to the service. If you want to switch, you just uninstall the old software and install new software. You don’t lose any work or data. Having only an 80% renewal rate is not surprising. My guess is that a lot of their subscriptions are on a discount and when the full price comes up they just cancel and move on to another service (or start a new account for a new discount).

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