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No Organic Growth Turns Limeade Into A Target

Small Caps | Mar 09 2022

This story features LIMEADE, INC. For more info SHARE ANALYSIS: LME

Broker opinions vary widely on the outlook for Limeade after FY21 results highlighted a lack of organic growth but with emerging positive signs.

-Limeade shares have materially de-rated as the promise of organic growth remains unfulfilled
-The key catalyst for a turnaround
-Opportunities and risks posed by the customer base
-Cheap valuation, post sell-down, might turn Limeade into a take-over target

By Mark Woodruff

In a world where covid-19 has highlighted the importance of employee welfare, ASX-listed Limeade ((LME)) provides software for immersive employee well-being and engagement.

While the company has existing enterprise customers in North America, Europe and the Asia Pacific region, the overall opportunity is immense with a total addressable market of $70.6bn, underpinned by a compound annual growth rate of 12.5%.

Limeade has materially de-rated versus its small-cap ASX software peer group since listing in December 2019 at $1.85. After a brief flirtation above $2.00 in October 2020, the share price has ground lower since to be currently just above $0.30.

However, Shaw and Partners points out not a lot has to go right to double the value of the currently out-of-favour share price. The broker, not one of the seven updated daily in the FNArena database, has initiated coverage with a Buy rating and a $0.70 price target.

Perhaps partially chastened by a longer period of coverage, Macquarie is far less enthusiastic and has cuts its rating to Neutral from Outperform after slashing its target to $0.34 from $1.12. This comes as the analysts reduce the valuation-multiple to reflect Limeade's capital position and operating cash flow outlook.

Maybe the FY21 results that were released towards the end of February can shed more light.

Moelis notes the company was unable to achieve organic contracted annual recurring revenue (CARR) growth in the financial year. However, Shaw notes the pipeline has returned to more healthy levels, with the third and fourth quarters seeing positive additions for the first time since the fourth quarter of 2020.

As of December 2021, CARR was $56.8m. While this was an increase of 3% from December 2020, it includes the TINYpulse acquisition (July 2021) which contributed 12%. 

Meanwhile, the proforma gross profit margin declined by -2% to 76% compared to the previous corresponding period. Macquarie attributes this decline to decreased revenue and increased resources that were required to implement customer upgrades to the company’s technology platform.

The company has no drawn debt and does not intend to use its credit facility or raise additional equity capital.

At year’s end, Limeade had 832 total customers with 2.4m well-being users in over 100 countries.

Opportunity and risk

Limeade generates 95% of its revenue from subscriptions. Fees are typically based on the number of customer employees. For the enterprise business Shaw estimates average pricing is between $1.50-$2.30/per employee/month and for mid-market/TINYpulse around $5/month.

TINYpulse makes employee listening solutions for over 500 businesses and offers leaders a way to take the pulse of their workforce by collecting feedback.

Limeade’s exposure to large enterprise customers can be an attraction or a risk, points out Shaw. During FY21, the downside was illustrated when American Airlines (a top 10 customer, with $1.9m CARR) indicated its intention not to renew its contract. 

The company’s top five customers accounted for 28% of FY20 CARR, and the broker expects the renewal of a couple of large customers each year.

Reasons for optimism

FY21 sales conversion was encouraging, according to Shaw and Partners, and pipeline additions have returned to more healthy levels as previously mentioned. Moreover, the TINYpulse acquisition is performing strongly and above management’s expectations.

The broker forecasts revenue for Limeade will increase to over $80m by FY25, implying a compound annual growth rate of 10%. Cash breakeven is expected in FY24, and a return to organic CARR growth in FY22 is considered realistic.

This latter point is salient as Moelis believes a return to organic CARR growth remains the key catalyst for the stock. It’s assumed this growth will occur during the 2H of 2022 as operating conditions improve, allowing better pipeline conversion.

Guidance

FY22 guidance is for revenue of $55-58m and an earnings (EBITDA) loss of -$6-8m, which Macquarie notes is not a material improvement on the FY21 result. 

The risks to achieving the analyst’s $0.34 target price are a lack of new client wins and an inability to turn operating cash flow positive.

Microsoft Viva

In 2021, Microsoft entered the employee experience market with the release of Viva, a digital platform built on Microsoft 365 and integrated with Microsoft Teams. 

Shaw notes Limeade is front and centre as an ecosystem partner in Viva, which is considered to provide validation for the product. Apart from other advantages inherent in the relationship, being a key early partner in Viva is thought to increase the company’s corporate appeal.

For other reasons, Moelis concurs that Limeade is a potential takeover target. The current low valuation of around 1.2x forward sales is considered enticing for a suitor. The broker, not one of the seven updated daily in the FNArena database, has a Buy rating and has lowered its target price to $0.55 from $0.79.

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