In our top down review of a selection of small SaaS companies we noted that the most attractive thing about Livetiles ($LVT) was its exceptional growth in ARR.
Benchmarking this growth against similar sized start ups places them right at the top end of peers:
What’s more, this growth is a combination of customer growth and increased penetration at customers.
i.e. The business has negative revenue churn, a very positive feature.
However, in recent quarters, a few concerning elements have arising in relation to this ARR growth.
Firstly, cash receipts (annualised) have started to fall behind reported ASR numbers. Does this suggest a change to payment terms/pricing – either of new or existing customers.
There has also been a significant step up in the costs to acquire this ARR growth.
Represented by a step change in customer acquisition costs.
The culmination of all these factors was the recent announcement of the deal with N3. There are a number of questions raised by this deal:
- Livetiles will pay N3 ~US$9.6m p.a. for outsourced marketing expenses. Is this in addition to or a replacement of the existing cost base? Regardless if some is replacement expenditure, it appears to represent another leg up in expenses.
- LVT are booking US$2.7m of ARR by selling products back to N3. The nature of this deal is strange considering ARPU for other customers is in the order of $15k. Note that N3 receive 3.5x as much from LVT as they pay to LVT.
- Although the detail is not clear, the deal seems to represent all of the increase in ARR over the period since 31 December. It is not clear what the underlying growth profile of the business is excluding this deal.
There are enough questions raised by the above to suggest that there are some changes underway within the Livetile monetisation model.
In these situations it is helpful to remember the old English adage:
“Change is good my son, but no change is better.”
Disclosure: I direct readers to the general disclosure regarding this website. The above is not financial advice and I may trade in any of the above securities at any time going forward. In relation to the specific securities discussed in this post, I have both bought and sold shares in $LVT in the last 12 months, but no longer hold any position.