Weekly Reports | Mar 12 2021
This story features LIMEADE, INC, and other companies. For more info SHARE ANALYSIS: LME
Tim Boreham puts the spotlight on employee engagement as workers return to their offices, highlighting locally listed stocks in the space.
By Tim Boreham, Editor, The New Criterion
"Employee engagement" emerges as a hot listed sector as workers straggle back to their offices
Most employers would like to think that their workers are champing at the bit to return to more normal conditions after a bout of pandemic-induced soul searching about their career direction.
In truth, many will be reluctant to return to the physical workplace, having grown attached to leisurewear and liberated from dealing with malodorous colleagues at close range.
According to an eyebrow-raising global survey from insurer Willis Towers Watson, 69% of workers polled said they “lacked a strong sense of purpose” at their place of employ.
For these reasons and more, large workplaces will need to devote more attention to employee engagement with a genuine eye on the physical and mental wellbeing of their staff.
It’s not about altruism, either. “When people perceive that their company cares about them, they perform better and are more loyal and healthier,” says Limeade ((LME)) chief executive Henry Albrecht.
Workplace disruption bodes well for Limeade, which specialises in the hot area of workplace communication and employee wellbeing and engagement.
The Seattle-based outfit doesn’t facilitate team-building paintball sessions or employee rev-up sessions directly. Rather, it provides a cloud-based subscription platform for large companies to disseminate their messages to disparate workers.
So while it’s basically a messaging platform, Limeade also boasts “science-based” content such as dealing with covid-induced social isolation or even correct hand washing and mask wearing techniques.
Limeade also offers proprietary employee survey and assessment tools.
“We use all that information to create dashboards for the company so they can have a pulse on the health of their culture,” Albrecht says.
“We also use machine learning to predict burnout and turnover, which are the trends HR departments want to know about.”
But while employee engagement is a hot space, Limeade’s share price is anything but. After an indifferent initial reaction to the company’s results on Friday, February 26, the stock tumbled -30% on the following Monday (and is yet to recover).
Turnover was also elevated: three million shares versus the daily average of 109,000.
The key culprit appeared to be not so much the results, but pre-IPO investors queuing to sell after their escrow period expired at Friday’s closing bell.
On the buying side, Perennial was hoovering up shares to increase its Limeade stake from 8.5-12.59%.
“The release of these escrows represented the first chance for liquidity for some shareholders in many years,” Albrecht says.
As with fellow Seattle denizen Bill Gates, Albrecht started his company in his basement, 15 years ago.
The enterprise was supported by angel investors and then venture capitalists initially, but Albrecht sought a listing to keep closer control of the company’s destiny.
Albrecht discovered the ASX – or the ASX discovered him – and Limeade listed in December 2019 after raising $US56m ($72m) at $1.85 apiece.
Despite the share rout, Limeade is still valued at $230m – just over three times revenue – but remains little known by local investors. One reason for this obscurity is that most of the company’s revenue is derived from US and European companies with more than 5000 employees.
As for the results, Limeade reported calendar 2020 revenue of $US54.9m, down -12% and a $US1.2m underlying loss.
Management guides to current year revenue of between $US50-53m, with an underlying loss of -$US5-8m (It is not usual for expanding cloud subscription businesses to be unprofitable, given the cost of acquiring customers who later generate annuity revenue).
The company cites a $US226m pipeline of new work, 20% higher than a year previously. However elevated churn means that customer numbers have shrunk from 173 to 150, with the decline mainly reflected in partner.
(Limeade’s direct customers include Washington State’s public servants, $US6bn a year hospital operator Kindred Healthcare and diversified manufacturer Wabash National).
During the pandemic, Albrecht says, Limeade was influenced by two “counterbalancing influences”.
Initially, orders locked up “like an ice floe on a river” as HR budgets were slashed. After the initial panic, the long-term demand became evident.
“Many of our big customers are planning to introduce radical new flexible work schedules and divest massive real estate investments,” he says.
“We need to keep a pulse on not just whether they like their jobs, but how stressed are they and whether they have personal struggles.”
Despite Limeade’s lackluster results, the market for employee engagement tools is expected to expand not just because of the pandemic, but the need for large companies to abide by good employment practices such as fostering diversity and inclusion.
The big providers are alert to the trends; with Microsoft last month entering the $US20bn employee engagement software sector, by way of its Microsoft Viva platform.
“Experience management” software provider Qualtrics listed on the Nasdaq in January and is currently valued at $US20bn. A spin-off of German software giant SAS, Qualtrics delves more on the customer rather than the employee side.
Albrecht notes that as a cloud-based subscription business, 97% of revenue is recurring (as long as you keep the customer).
Ironically, most of Limeade’s processes are automated.
“We are a tech company,” he says. “If it involves too many human beings to deliver our services it doesn’t fit with our business model.”
Then there are the many workers who don’t so much want to feel loved by their employers but value being paid accurately and on time.
An efficient payroll function is often an overlooked aspect of managing "human capital" – even if employers have the best intentions. But with myriad software available, there’s no excuse not to get it right.
As its name implies, PayGroup specialises in payroll management, mainly for multinationals. Currently, the company services 247 employers in eleven countries and processes more than 5.4m payslips a year.
PayGroup had an Asian focus but has expanded its wares via the acquisitions of Astute One (labour hire), Payroll HQ and Talent OZ. The latter expands PayGroup’s scope to “hire to retire” functions such as booking leave, expense claims and learning and development.
PayGroup reported a covid inspired leap in December (third) quarter customer receipts, to a record $4.63m, with a positive operating cash flow of $4.9m.
Transacted contracted value has doubled to $8.2m.
As with Limeade, PayGroup shares wouldn’t exactly impress the boss performance-wise, having retreated from 70c to 56c over the last month.
The shares listed in May 2018 at 50c apiece.
PayGroup’s modest $46m market cap is supported by $4.9m of cash, so perhaps therein lies an opportunity.
While PayGroup doesn’t have a directed ASX-listed peer it shares characteristics with Elmo Software ((ELO)), which provides technology for HR and payroll functions.
Disclaimer: Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.
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