LoopUp looking too cheap

LoopUp's (LOOP) conference call and online meeting software is helping businesses improve global communications both between colleagues and with clients. Its remote meetings software-as-a-service (SaaS) product aims to improve the traditional conference call experience and allows hosts to share their screens securely with guests for immediate collaboration. It also assimilates into other tools on users’ computers such as Microsoft’s (US:

MSFT) email and calendar platform ‘Outlook’. Reflecting its popularity – and versatility – its 2,000 international customers range from foreign exchange business Travelex to carmaker Kia Motors America.

That said, LoopUp’s share price performance has proven lacklustre in recent months – down by around 15 per cent since the full-year numbers were announced in March 2019, and considerably below the highs seen last summer. There are reasons for such waning confidence – namely, a post-results drop in current-year consensus EPS forecasts of 28 per cent, and 17 per cent for 2020. However, much of the downgrade is due to LoopUp's plan to invest in growth. As such, we view the share price fall as providing an opportune entry point.

Revenues for 2018 soared by almost 100 per cent – bolstered by MeetingZone, which was bought last June for £61.4m, funded with a £50m share placing at 400p and a new £17m term loan. The rationale behind the deal was to move MeetingZone’s audio conferencing business over to LoopUp in order to give products more exposure (new clients often come on board after experiencing the LoopUp product as an external conference participant). 

MeetingZone has already been integrated organisationally, with cost savings “materially above” the £3m initially anticipated. However, the transition of sales staff did not go as expected. This meant that last year the group operated an average of seven-and-a-half 'quota-effective' pods (new business sales teams) versus its goal of 11. As well as this reflecting the decision not to move over any MeetingZone sales staff, the lower-than-expected pod numbers was also the result of a build-up of LoopUp’s pipeline in Australia “from a standing start” – although, encouragingly, it has won 55 clients there since entering the market in March 2018. 

The knock-on effect was for organic sales to rise by just 20 per cent; disappointing against an average of 32 per cent between 2015 and 2017. LoopUp is now focusing on lifting pod numbers which should, in turn, drive up sales. But the pod push also means upfront costs, which have hit forecasts. To this end, it has completed its inaugural ‘Pod Academy’ programme, bringing in career-change recruits with non-sales experience. The group is injecting an extra £2m into the Academy during 2019. The cost should be worth it given that historically every pound of pod investment has produced a 73p gross-margin return in year one. What's more, the software as a service (SaaS) model means the upfront cost of each new client win stands to bring a long-term stream of income if product quality means customers stick with the service.

The capitalisation of development costs – which involves recording these expenses as an asset on the balance sheet rather than a cost set against profits – is a potential issue for investors. However, as turnover grows and amortisation – the annual charge to profits related to historic development spending – catches up with annual development spending, this issue is becoming less significant. House broker Panumure Gordon calculates that the net benefit of development capitalisation to its earnings per share forecasts should drop from 19 per cent this year to 12 per cent come 2020.