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home / news releases / LCHTF - LiveChat Becomes Text But Remains A High-Quality Company That Delivers Stellar Results


LCHTF - LiveChat Becomes Text But Remains A High-Quality Company That Delivers Stellar Results

2023-09-08 04:10:48 ET

Summary

  • LiveChat stock has performed well, outperforming the S&P 500.
  • The company has strong fundamentals with impressive revenue, EBIT, and EPS growth.
  • Customer numbers and average revenue per user have increased for LiveChat and ChatBot products.

Since the 09/03/2021, date of our last article on LiveChat, the stock has performed quite well. The stock is up +32% in local currency and +16% in USD, significantly outperforming the S&P 500 which is flat (+1% in USD) over the same period. Even though it does not impact our investment thesis or how the company will function going forward, we must mention that LiveChat renamed the company to Text (LCHTF) in order to better reflect the fact that it is no longer a one-product company.

Strong fundamentals

From a fundamental perspective, the performance is even more impressive. The LTM revenue, EBIT and EPS grew +86%, +84% and +81% versus the end of the fiscal year 2021 (ending 03/31/2021), respectively. Company's profitability has been maintained at extraordinary high levels. The gross and EBIT margins are stable at 85% and 59%, respectively. The return on invested capital reached 215% and is stable. Between the end of the fiscal year 2021 and 2023, the NOPAT and the invested capital increased by PLN 74 million and PLN 35 million, resulting in a 210% return on incremental invested capital.

Earnings growth has been accompanied by a slightly higher growth in cash flow, which shows the quality of the growth. The cash from operations and FCF increased 93% and 84%, respectively. As a result, the company continues to increase dividend payments, which enables shareholders to be rewarded with a 4.3% dividend yield.

(Source: Financial results Q1 2023/24)

Customers and ARPU

The number of subscribers to LiveChat, the company's largest product, has increased by 15%, from 32.864 to 37.765 customers. At the same time, the average revenue per user has increased from $ 115 to $ 158, equivalent to a 37% increase. The significant increase in ARPU, from the $~ 120 to $~ 160 level, is due to a price increase targeting the existing client base. Indeed, the company has made pricing changes for the first time in more than eight years in order to reflect the increase in the value of the product and the many new functionalities and integrations that have been added in recent years. Given that price increases did contribute only recently to the growth in ARPU, it means that the increase in ARPU from $~ 90 to $~ 120 was only driven by higher consumption and upselling.

(Source: Company financial reports)

ChatBot reported an even stronger customer growth with a 50% increase, reaching 2.804 customers from 1.874 in March 2021. The ARPU did progress at a similar pace, increasing from $~ 86 to $~ 122, which is equivalent to a 41% increase, but without raising subscription price for existing clients. The price of the ChatBot subscription has been raised but only for new customers, thus it has a more limited impact on ARPU. It is also interesting to note that the ARPU for ChatBot is somehow underestimated because the payments for additional interactions (exceeding the subscriber's plan limit) are not included in ARPU because they are not considered as recurring (Per company's definition, ARPU = Monthly recurring revenue / number of clients).

(Source: Company financial reports)

User engagement

Client engagement significantly increased on both LiveChat and ChatBot products. They reached 1.7 billion interactions in the fiscal year 2023, which is up nearly 150%. The growth in user engagement is twice the growth in revenue and earnings, which bodes well for the pricing power of the company.

(Source: Annual results FY2022/23 and key KPIs Q1 FY2023/24 webinar)

Customer churn

Historically, the churn fluctuated around 3%, which is good given Text's heavy exposure to small and medium businesses, which usually exhibit significantly higher churn rate (more bankruptcies, acquisitions…). Besides, customer churn further highlights the company's pricing power. Following the LiveChat product price increase, customer churn slowly increased to ~ 4% in November 2022 before slowly returning towards the 3% level in June 2023, even though it is slightly higher than the long-term average.

A strong focus on automation and efficiency

Text is a very lean organization. During the conference call, they clearly show how they are focus on efficiency and automation. For instance, they decided to shut down their social media team because they were not able to deliver satisfying results in terms of customer acquisitions. They are also trying to automatize as many tasks as possible in their day-to-day operations in order to be the more efficient possible and focus on customer satisfactions. One symbolic example, the role of chief operating officer does no longer exist and has been replaced by the chief automation officer.

Revenue recognition

The company is in the process of changing its revenue recognition policy . After listening the company explanation, we believe it is a step in the right direction, even though we are surprised by how the company was dealing with annual subscriptions. In general, customers tend to pay their subscription on a monthly basis, thus revenue is recognized when payments are received (they both match the same accounting period). However, when a client opts for an annual subscription, the company recognized all revenue when the cash is received (cash accounting approach) whereas the company should apply the accrual method of accounting, meaning that subscription revenue should be evenly split over the year (it does not matter when the payment is received).

Even though it may seem worrisome, we are confident that it is not a red flag because Grant Thornton, a well-known auditing firm, issued a positive opinion about company's financial statements and, more important, the cash flow generation is strong and stable over time, which reduces the risk of earnings manipulations.

(Source: Company financial reports & author)

(Source: Independent Auditor's Report on Annual Consolidated Financial Statements)

Conclusion

We remain positive on the company and believe that current valuations do not reflect company's prospect and excellent executions. Indeed, the stock trades at a FCF yield of 4.6% and a P/E of16x. The balance sheet is strong with a net cash position. We believe that a double-digit is still possible over the coming years.

For further details see:

LiveChat Becomes Text But Remains A High-Quality Company That Delivers Stellar Results
Stock Information

Company Name: Livechat Software S.A.
Stock Symbol: LCHTF
Market: OTC

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