In my view, there are a few key considerations with LiveTiles (ASX:LVT).
Firstly there was the historical issue of high levels of cashburn. This shouldn't really be an issue for a SaaS company with strong unit economics (which LVT appears to have) if top-line growth is strong and the market appreciates the story to the point where the growth in market value (market cap) exceeds the dilution from capital raises. Across the early years of the company, this was indeed the case as the share price rose higher, but the narrative and market support for the company appeared to change around July 2018.
Although LVT is now closer to (but still very much distant from) cashflow breakeven (FY21 reported an operating loss of $29.5 million versus an operating loss of $31.7m in FY20), by reducing their operating loss YoY, they appear to have sacrificed top-line growth, which has now slowed dramatically. While the gradual improvement in cashburn is definitely a positive in my books, it appears to still have a long way to go before reporting a positive bottom-line profit (NPAT). Moreover, with more modest spending, it seems like the product is not flying off the shelves and for a company like LVT, profitability is only valued by investors if it is accompanied by growth. In other words, the push towards profits has significantly impacted the organic revenue growth rate.
Secondly, there is the issue of market trust with LVT. Having spoken with PNB and some of the LiveTiles team, I'm personally supportive of management and believe that they have the best interests of shareholders at heart (Karl & PNB are of course major shareholders themselves). However, the market as a whole has lost trust with management, particularly Karl. A major reason behind the lost trust was the broken shareholder promise of $100m ARR by July 2021. That video on YouTube spoken by Karl has since been deleted. Trust issues also stem from a misunderstanding of what LiveTiles offer as a company, which has been exacerbated by ongoing rebranding efforts.
So, from here I am watching on the sidelines and would consider re-entering if: a) bottom line profits are achieved (ideally NPAT not the adjusted underlying EBITDA metric), b) ongoing yearly growth in profits is recorded and c) market trust with LiveTiles management is restored. From a valuation perspective, if we assume LiveTiles reaches circa -$10m NPAT for FY22 and +$5m in NPAT for FY23, on a FY23 PE of 20, LiveTiles should be worth around $100m, which is similar to current levels. If LiveTiles achieves bottom-line profitability in FY23 and backs it up with steady profit growth in FY24, we might see a valuation closer to a FY24 PE of 30-40. So, for example, FY24 NPAT of $10m might be met with a valuation of $300-$400m, 36 months from now, if achieved.
The other valuation scenario that could be considered is a multiple of ARR, but this would only be applicable if LiveTiles once more accelerated their top-line growth (ideally without sacrificing progress in cash burn). If top-line growth resumed to 30%+, an ARR multiple of 5x or more might be appropriate. However, I consider this valuation scenario unlikely given management's stated goal of profitability and their history of being unable to sustain strong top-line growth without excess impact to cashburn.
I'm currently sceptical that LiveTiles will achieve the above-mentioned scenario of bottom line profits followed by profitable growth and thus I am going to wait on the sidelines for the moment. The only other scenario in which I might re-enter would be if a deeply low valuation is achieved (<1x ARR), whereby the margin of safety swings in favour of buyers. I hope the situation plays out favourably for them; they do have an incredible list of blue-chip customers.
