Stock Pitch - LoopUp (LON:LOOP)

20th Oct '20 by Jack Brumby

79 comments 8997 reads

[UPDATE - the club stop loss was triggered on November 20th at 172p. The Club sold for a loss]

Loopup (LON:LOOP) was pitched to the Stockopedia Staff Investment Club in early October and shares were purchased on Monday 12 October at 221p.

LoopUp has seen a big gap up in StockRank this past month, from 59 to 93. This jump in Ranks is driven by some eye-catching half-year results which show it has directly benefitted from accelerated work-from-home trends in the first half. This performance was covered in Paul's recent SCVR update, here.

The group generates around £50m of annual revenue but is targeting a multi-billion dollar market. This opportunity, coupled with recent strong trading, has led to impressive one-year relative strength of +301%.

There might be profit-taking along the way - Jupiter Asset Management has been selling shares - but if the group can translate its 'healthy new business pipeline' into additional H2 sales then there is a fair chance of further upside surprises.

This is not a given though. Analysts are being cautious and the company has disappointed in the past. It's a Highly Speculative software company benefitting from a once-in-a-lifetime opportunity, but can this temporary tailwind be converted into more lasting value?

TLDR;

LoopUp's half-year results are striking - its best ever by some distance - so can the group use this as a springboard to future success, or is it just a flash in the pan?

Bull Points: LOOP is a covid beneficiary, it is targeting a growing c$2bn professional services remote communications market, and has an influx of lockdown cash being deployed into a potentially a Microsoft Teams opportunity that takes its total addressable market to an estimated $10bn by 2024.
Bear Points: The company has a patchy profitability record and there is the threat of technological obsolescence (for example, the rise of Zoom). The group's pivot to a recurring revenue model might reduce near-term revenue (but improve visibility). A COVID boost now might lead to moderating growth rates later. It is an illiquid, volatile small-cap, with a premium tech valuation. There may also be profit-taking after a recent strong run.

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Loop Up is listed in the Technology sector and makes enterprise conference call software that integrates with Microsoft teams to provide straightforward and secure external communication.

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timarr

28th Nov '20

Very much admiring Ed's self-control in not saying "I told you so" :-)

RE: Loopup (LON:LOOP)

Pulling the numbers apart is a bit like pulling teeth (painful, but necessary) - I don't think it's possible to work out the full year breakdown, but given we know there are quite a lot of bonus pandemic earnings in there it probably doesn't matter. There's a £16 million one off windfall bonus in the FY numbers which means, at least, that they're less indebted than they were.

What we can look at are the figures for 2019, H1 2020 and the projected ARR for 2021 and see how the mix of business is changing. It's quite dramatic, this is not the same business it was a year ago.

That won't be accurate, but I reckon it's good enough (no guarantees, though, DYOR). The 2021 ARR can only be a projection of the full year, with windfall earnings stripped out.

The startling figure is the collapse in non-professional services (NPS) work. That's a combination of the fact that for most businesses Zoom is good enough plus a lot of those customers are facing very difficult times. I'd expected this to happen but not at anything like this speed - I guess times are tough out there. That drop - which was visible in the H2 figures - was the canary in the coal mine for anyone who wanted to see it.

Which leaves the professional services (PS) business which is going very well - but clearly can't compensate for the fact the company will have lost 40% of last year's business. That can't happen again because PS is now 70% of the revenue, up from 32% last year. If we factor in the 6% growth in PS and the 32% fall in NPS mentioned in the trading update that roughly gets us to the Numis forecast of £35 million revenue for next year.

Is the PS business at risk? Probably not, at least not immediately, as the customers in that space will tend to be sticky and the move to longer term subscriptions, while it reduces revenue in the short-term, will help with customer retention.

Should this have been flagged at the half-year? Yep, you'd have thought so. That was two months ago, midway through the second half:

This instability makes it difficult to provide more specific guidance on near-term market expectations beyond our July trading update, other than noting recent forex changes and continued momentum towards committed term contracts.

The July trading update noted merely that revenue tends to be H1 weighted, but otherwise was blank on current trading. And, at that point, it probably was too early to know much.

So how does this look now, as an investment proposition? Well, I don't think the 50% fall in share price was unwarranted. There's certainly the possibility of growth that was thrown out at the end of the trading update but it's cashflow not forecasts that drive businesses forward and Loopup (LON:LOOP) will almost certainly make a loss next year. Still, the stickiness of the PS customer base ought to make the Numis £35 million revenue forecast easy to achieve - and if it's missed then you have to reckon that the proposition is a bust.

Put it this way - having run these numbers I wouldn't buy more. On the other hand, if you believe in the PS business then you probably don't want to sell either. There's not much left to lose in the NPS business, at at the current rate of attrition that will be contributing a negligible amount towards earnings by the end of 2021. Overall it's a better business than it was pre-pandemic, with less debt and an enriched sales pipeline but also a baseline of lower but more sticky earnings.

You have to think that they should probably have raised money while the going was good, I'd much prefer to see them going into the next stage of development with a full war chest.

Could there be another profit warning? Well, not on the same basis. Something else would have to go wrong for that to happen. Which is clearly not impossible, but is also not predictable.

Hey ho, investing is a game that punishes hubris like no other. Nothing is ever certain and risk management is always essential. But I still don't like automated stop losses ... :-/

timarr

PrattJones123

Thanks Timarr. Whilst I agree with most of the analysis, the ARR for next year assumes no new business, including the PoC with the bank going on now, which they may convert. You'd assume Cloud Telephony will bring something more into the hopper too. So I d argue that ARR is perhaps worst case.

Moreover, the PS sector with enhanced focus now, can only get bigger I'd have thought? With the permanent shift (perhaps!) to ways of working, I would've assumed a lot more of that pie to target, hence tap into that 2bn+ market.

At sub 50m market cap, will there be a bid from anybody in the sector I wonder? Is there anything proprietary worth bidding for? Who knows anymore. Sigh.

The Directors, as terrible as they are, have some skin in the game too, so I really hope they do something about current state of affairs. Ridiculous erosion of shareholder value, and the lack of transparency in the last few months is appalling.

Momoko Miyamoto

Where's the Moat?

other than client inertia, I'm struggling to see what the competitive advantage / niche is. The other providers could easily roll out a premium security enhanced offering and could afford to undercut Loopup (LON:LOOP) indefinitely. Takeover is a possibility but doubt any big player would overpay as they could develop their own product easily.

So I d argue that ARR is perhaps worst case.

Not necessarily. The NPR and Cisco business could go lower than predicted. The PR business could come under attack from richer competitors.

I think the former's quite possible, the latter less so in terms of existing customers, who don't appear to be price sensitive. Could impact future growth though.

As a wise man once told me - no matter how far a share has fallen it can still go down another 100%.

dodge1664

timarr,

I'm not sure how you get the numbers you have for the breakdown of the 2019 revenue. The 20.8 for NPS looks very high to me.

Gromley

Tim,

That is an excellent view (if accurate).

I have to admit that, despite having a telco background, I still have not gotten around to working out precisely what LoopUp (LON:LOOP) actually do. So what follows is just based on your breakout.

This looks like a company that could post-rationalise it's strategy as :

We built volume by being an early mover in a market in which we had no sustainable competitive advantage and in which there may be no sustainable margin opportunity.
This enabled us to build the capability to engage with our core market (PS in your breakout) in which we have a sustainable advantage and can deliver healthy margins.

I have no idea whether this may be :

a - totally inaccurate.

b- accidentally accurate. (Covid accelerated the demise of NPS & the growth in PS)

c - The original plan all-along (but accelerated by covid)

d - something I have not thought of.

What does seem apparent to me though (and I have to repeat my almost total ignorance of this company) is that this business is a substantially different beast than it was thought to be a few days ago,

It is starting to intrigue me now - but I am doubtful that the past numbers can be much of a guide,

Hi dodge

You may be correct, it may be that I'm not comparing like with like.

However - Loopup (LON:LOOP) had total £42.5 million revenue in 2019. In their full year results they state that Professional Service revenue was £13.6 million and that Cisco revenues were £8.1 million. So, naively, subtracting 42.5 - 13.6 - 8.1 gets me to £20.8 million.

It's possible that some of the other lines they mention in the 2019 report, but not in 2020, should be allocated to PS rather than NPS. Those are "Event by LoopUp", "MeetingZone Audio" and "Enablit" which between them come to £13.3 million and are, I think, the outcome of acquisitions.

My guess is that some of those revenues should be allocated to PS rather than NPS but I can't see anything that allows me to do so intelligently. Certainly the FY20 H1 results seems to differentiate PS and Event by LoopUp suggesting the latter is in NPS. Enablit also looks like an integration capability so I'd be reasonably confident of allocating £5 million of that 13.3 to NPS.

If some of that revenue can be reallocated then the fall in NPS isn't as great and, commensurately, the rise in PS isn't as great. I think I'd rather be seeing more growth in the target area than a lesser reduction in legacy business.

There's great fiction, and there's accounts. At least great fiction bears re-reading ...

timarr

I'm sure a lot of investors are utterly baffled by the way LOOP have presented their results. But if you look at the chart on p7 of the 2019 annual report, they have £7.6m for NPS. In fact, the 2021 ARR numbers look like an acceleration of the trends seen in the 2017-2019 period. It seems that a lot of NPS customers signed up in 1H 2020, and then decided to go elsewhere, which is perhaps the main disappointment.

29th Nov '20

I'm sure a lot of investors are utterly baffled by the way LOOP have presented their results.

Indeed.

The 2019 results show £13.6 for PS and £7.6 for NPS which, plus £8.1 for Cisco gives a grand total of £29.3 million, which leaves £13.2 million unaccounted for. Which is pretty much the same figure I previously calculated for the other lines. So the relative performance of the PS and NPS lines depends largely on how those are allocated.

If all of the unallocated revenue is switched to PS then that shows that PS revenue is forecast to fall next year and probably this - which I don't think makes any sense on any reading of the trading update. But who knows?

It seems that a lot of NPS customers signed up in 1H 2020, and then decided to go elsewhere, which is perhaps the main disappointment.

To give the management a tiny bit of credit, they've been clear that the PS side is the core to the business. The NPS boost in the first part of the pandemic was a windfall, presumably companies that were desperate to upgrade their video conferencing capability and weren't too particular about price at the time.

Basically, if you're competing with Zoom et al you're in a commodity market where scale is critical because price is the key differentiator along with security and functionality as secondary differentiators.

timarr

Hi Gromley

I don't believe it is. However, this then becomes a discussion about the story rather than the numbers - so to be clear, as far as I'm concerned it's the numbers that tell the true story, not management spinning narrative webs, which is why I'm trying to figure out what the underlying financial trends are.

However, to discuss the story - in simplified terms the two lines of professional services and non-professional services can be considered as two different types of business.

NPS is operating in a commodity market where they're competing with Zoom, Teams, et al. That market is characterised by low prices and high volume and very low barriers to entry - essentially a laptop and a broadband connection. The majority of my clients use these platforms and they're perfectly adequate for most situations.

PS is operating in a higher value market where the customers require high quality and guaranteed security. There are higher barriers to entry - basically building out a switching and routing system and providing access to it without requiring internet or mobile connections.

There is a small, but very valuable, subset of customers who want that type of service - if you're a lawyer or a private equity fund manager you don't want your call cracking up at the point someone is making a critical point. So in the PS market customers are less price sensistive and ought to be less likely to churn.

However, the stickiness of PS customers comes at a price in terms of cost of sales. This isn't an easily reversed decision so customers will tend to spend more time analysing, probing and trialling the solution.

So, to my eye, the underlying story that the LoopUp management are telling has the ring of truth. The early part of the pandemic saw customers signing up for the LoopUp NPS pay-as-you-go service without much thought or analysis. They then found they were paying for a premium service that they simply didn't need and migrated away to the commodity platforms. Existing NPS customers went with them because it became apparent to businesses that Zoom was perfectly adequate for what they needed.

Basically, after the initial boost to NPS volumes the pandemic has accelerated the decline in that business.

On the other side there's also a boost to the PS side but that's a much slower and more difficult sales cycle. Revenues are growing, customers are moving and sticking but it takes time - much more time than transient shareholders are willing to allow.

All of this is happening as Loopup (LON:LOOP) moves from a pay-as-you-go-service based on minutes to a subscription model. In the longer term, if we assume call minutes will drop anyway as the pandemic ebbs then it's the right move amd promotes customer stickiness. In the short term it further reduces earnings.

So much for the story. The question is, do the numbers match it? And if they match it, is there an underlying profitable business here? And if there is, is it one that better funded competitors could come in and steal?

And even if there is a potentially valuable business here, do they have the capital to exploit it? If they'd raised money three months ago I, like, many other shareholders would be even more unhappy than we are - but the forward business case would look better and they would be funded to scale up their sales efforts.

Anyway, that's enough effort devoted to this particular topic. There comes a point when it's simply easier to think about something else :-)

Logical David

Many thanks Ed for the update.

Polar Capital Holdings (LON:POLR) has been in my Watchlist portfolio for a couple of weeks due to its low PER of 12 amongst other metrics. However, because its price is currently around 12% above its 50 day MA, I have been waiting for a pull back before I buy. Last week I almost sold some of my Liontrust Asset Management (LON:LIO) to raise some funds to buy Polar Capital Holdings (LON:POLR) because of the fact that LIO is on a much higher multiple (and 25% of my portfolio) and also to spread my rise in the financial sector because I also hold Jarvis Securities (LON:JIM) .

MiserableJacktPotato

I think you've been a bit unfair to Teams. It is almost zero comparison to Zoom. It's like comparing a cheap £15k hatchback to a premium sport estate vehicle.

Sure they both meet their design briefs, but one has much more capability, capacity and premium 24/7 support. I don't think there's much in the Loopup (LON:LOOP) solution that can't be achieved in Teams except the dial in / out functionality. But that secure dial in / out facility could be a gold mine.

Happy to be wrong.

I did buy in to Loop on Wednesday - I think the dial in / out capability is where the money is if marketed properly. Remote meetings is not what I would personally put my faith in.

I sold Loop Friday, I didn't spend enough time researching the sales mix and got burnt for that. I might look to buy back after more research and understanding of the sales model.

Also, as I stated Friday, there's loads of articles on Stockopedia that states selling on profit warnings is most often the right thing to do, even if some stocks do bounce back fast.

I think the non professional services market has plenty of scope, depends on how it's delivered.

Most companies have tons of complicated Cisco and other vendor's kit, they're paying network engineers to maintain VOIP dedicated VLANs, providing QOS limitations on other services to maintain those VLANs - but I think the Loop solution can help remove a large chunk of that complexity. Get rid of all those silly phones on desks and other dedicated video conferencing terminals and just have people with £100 headsets that USB directly into their workstation.

You could say that about most IT services. Even the Microsoft desktop isn't immune to this line of argument, losing market share to Chromebooks and other tablet type devices.

What one needs to remember is, the overall market is growing, so you can still grow sales and bottom line whilst losing share.

It's ...

The Profit Warning Survival Guide" ... you can catch up on all the content in our quick read eBook, 30 minute Webinar and accompanying set of slides.

Strongly recommended, it's saved me a ton of money.

Thanks for sharing :)

Yes herbie47, you are not wrong. The Investment Club did vote for VLX but when it came to a head to head vote between Volex (LON:VLX) or £BME , the Investment Club voted in favour of B&M. by 7 - 6 votes. I believe at some point VLX will be included within the IC portfolio.

Rusty2

Yes I think you are right about Volex (LON:VLX) Ed is keen on it and I think it will be repitched soon.

30th Nov '20

Compelling argument for Loopup (LON:LOOP) being oversold heavily on IC by Simon T. Precisely at noon today led to a big bounce. Having read his piece, I tend to agree. At current prices, I think market is baked in all worst case imo.

GLA

Kaloyan Petkov

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Stock Pitch - LoopUp (LON:LOOP)

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Jack Brumby

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