Parts III and IVThis will have to be abbreviated due to time...

Parts III and IV

This will have to be abbreviated due to time constraints.

Capital markets place a high value on recurring SAAS revenues. Rightly so, they are long term, predictable and considerably less cyclical and volatile than license income or professional services income.

Here is a table of valuations that US Capital markets place on recurring revenue, growing , enterprise software companies.  US markets are relevant in this case because although this company was founded in Australia by Australians, the headquarters are in New York City and it is a global business. The US is LiveTiles largest market (41% of revenues) and Australia is less than 18% of revenues. If LiveTiles continues its present path of growth it will inevitably be discovered by US tech' investors.  Management are part of the US tech' community and investors keep an eye on who is drawing attention at conferences like Ignite etc. Thus far a "lead steer" US investor has not appeared on the publicly disclosed list of shareholders on Bloomberg but when they have a position, they will likely let it be known.  It is one of the catalysts that could impact the share price.


    A word of caution about this peer group. Peer Groups have a selection bias because they are only in peer groups because they have succeeded.  In other words, if we screen the US market for software companies with revenues of over $100 million, and growing faster than 25% then we are going to end up with a sample of very successful companies and the valuations are going to reflect that. So the way to look at this, is not to say "This is what LVT is worth" but instead to say "This is what LVT could be worth if it continues to grow and reaches cash flow breakeven"  We used EQS on Bloomberg to screen for mid cap companies with revenues over $100 million, growing revenues at over 20% per annum in the enterprise software sector. We excluded the mega caps because that is a different market. We excluded all the cyber security stocks which is a hot sector at present and not what LVT is about. We excluded payments solutions companies , again a different vertical.This left us with a list of about 17 names. We looked through about 10 of those names focusing on those which are clearly Cloud based SAAS models and found four.  We ran out of time, so we still have 7 more companies to look at which may add a few more names to the list.

To the list of four midcaps, we used our subjective judgement to add two large cap names that we are familiar with, simply because we are experienced investors and spotted the similarities and think they make useful benchmarks to contrast and compare.  We think that anyone looking at LVT might find it useful to look at the history of WorkDay. The growth rate and the numbers for WorkDay in its early years look very similar to Live Tile. In 2010, Workday had recurring revenues of $68 million and had grown revenues by 170% from the year before. Cash burn had been increasing each year (sound familiar). . 2010 was an important year because it was the "inflection point" of operating cash flow.  Although the company continued to have negative operating cash flow , 2010 marked the trough (the inflection point) and the operating cash burn decreased each  year thereafter. However, Workday was capitalizing some of its R&D and had genuine CapEx so it is also important to look at Free Cash Burn after CapEx which reached an inflection point in 2014 and the cash burn decreased rapidly each quarter until 2016 when WorkDay finally went cash positive.

This isnt a thread about WorkDay but suffice to say it is a terrific company with a subtle competitive advantage that allowed it to take on and disrupt large legacy software suppliers in the HR and Finance space. It is a benchmark for Live Tiles because it is a SAAS model providing cloud based applications to enterprise customers.  After passing the cash burn inflection point in 2010 (but before they became free cash flow positive) WorkDay went public in November 2012 with 2012 revenues of $134 million and prospective 2013 revenues of $274 million.  It came public with an IPO valuing the company at approx $4.6 billion (35 X current years revenues and 17 X 2013 revenues).  From 2012 to 2014, revenues were growing at 100-70% and the cash burn was decreasing and the stock traded at 30-35X revenues.  By 2016, the company had reached cash flow break even, revenues had reached over $ 1 billion, and the growth rate had matured to a more sustainable (but still impressive ) 35-45% per annum and the valuation settled in somewhere around 14X sales.  Anyone who had invested in WorkDay had made a great deal of money.  We are unlikely to find the next WorkDay but it doesnt stop us looking.   If LiveTiles hits A$100 million of revenues in 2021 and cash burn is declining each quarter or possibly even cash flow break even, people are going to draw comparisons. We will not be concluding they are the same because, currently we do not think that LVT has the same Total Addressable Market (TAM) so we do not expects LVT to be trading at 35 X ARR when they reach $100m. But 10X or even 15X may be possible.

In contrast we also included OpenText because in many ways OpenText includes legacy businesses that LVT is threatening to disrupt. OpenText is a Canadian company and it is well liked by many investors. It is not cheap.on earnings but it has lower margins than Cloud SAAS businesses and has negligible organic growth , relying substantially on acquisition growth. Only 29% of revenues are cloud based subscription services. 55% of revenues are customer support and professional services and I suspect that includes building intranet portals the good ole fashioned way. Full disclosure, one of OpenText's acquisitions includes a business that we sold to Open Text . It was basically an outsourced fax business, well managed (after some changes) and we sold it for 3.5X what we paid 2.5 years earlier.......but at the end of the day it was faxes and you dont put those kinds of businesses on  SAAS multiples. But as I say, people like it and it calls itself the "The Information Company".    

We think that Smartsheet is an interesting comparison to LVT and there are some similarities. Both companies sell cloud based , subscription software to enterprises to enable the work place to become smarter, more efficient and better at sharing. Both sell software that is "sticky" with a very low churn rate. Both exploit a vigorous "Land & Expand" strategy.  They both are prepared to land an account at a large enterprise selling only a few seats to get inside the door and then become enmeshed and essential within the organization so that the organization adds more seats every year.  We like Smartsheet. Its selling at approx 13X recurring revenue. Here is what Mark Murphy of JPM has to say about valuation  
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"Our price target of  is based on ~10x EV/CY19E recurring revenue, which is at a 1.5turn premium to its comps. The premium accounts for Smartsheet’s higher revenue growth rate (40% vs. 27% for comps), high subscription mix, and better gross margin profile. Additionally,we believe there is potential upside bias to the model that could be driven by acceleration in expansion dynamics and international traction",  Could the same be said about LVT or is it too early to tell?

I have to wrap up now and what I have to say is incomplete but in summary.

SAAS cloud based subscription software revenues which are enmeshed in the client's intranet are valuable. The valuation depends on three factors
1. The gross margin.  LVT has an attractive gross margin 
2. The Growth Rate. LVT is still growing very quickly
3. The TAM.  Based on the current product wardrobe, LVTs TAM is much smaller than Workday,. However the core position of LVT's product at the employee's portal into the organization's intranet makes it well placed to add a multitude of AI products to its offering which could grow that TAM over time.

Looking at the history of other successful SAAS companies, the catalyst for valuation occurs BEFORE cash flow break even. The key event seems to be when cash burn "inflects"......that is to say when cash burn stops increasing , turns, and starts to decrease .

Which brings me full circle to why I believe that March numbers are so important. In December the cash burn plateaued.  In March we get to see whether it has started to decrease.