Investment Thesis: Livechat...or should we start saying...Text.
Newsletter nº19
1.Introduction
In the thesis that we bring you today to this Substack, we return to our beloved Poland and we will talk about one of the best listed companies that we can find in the country in terms of the quality of its business and the numbers of the company. It is a software provider so that companies can interact with their customers through live chat on their website. But before diving into the thesis, our disclaimer as usual:
DISCLAIMER: This article should not be considered as a recommendation to buy or sell any type of financial asset. Any action or decision you take as a result of viewing this article is solely your responsibility. Each person has to carry out their own analysis before making any type of decision on the purchase or sale of financial assets
As many of you may have already found out, the company that we bring you today is Livechat Software, with the ticker $LVC.
Livechat Software is a Wroclaw-based company founded in 2002 by Mariusz Cieply (current CEO) and his partners and has 282 employees. The company currently capitalizes 3110M PLN (€700M), so we can classify it as a small cap. As you can see below, we are dealing with a company with a high-quality business that we can find at a very interesting price, it is the kind of company that we always want to have in our portfolio for the long term. Without further ado, let's get into the Livechat business and see what they do and why it is a quality business.
2.The Livechat business
LiveChat Software is a global provider of solutions for managing online business communications, generating leads, and selling online.
Its product portfolio includes the following applications:
LiveChat, an application for communication with the client via chat on the web
ChatBot, a framework to create bots
HelpDesk, a ticketing system for email management
KnowledgeBase, an application to develop help centers on company websites.
All products are part of the same ecosystem. As a result, their users can integrate them to improve the productivity and effectiveness of their teams, meet business needs, and enhance their customer experience. In addition, users can connect with each other and also with the Company's experts and developers in the Community.
These products are marketed under the SaaS (Software as a Service) model. They are used to manage text communication with both B2B and B2C customers. LiveChat Software's products are primarily targeted at SMEs. But by introducing new features into its solutions and flexible pricing schemes, Livechat is also reaching out to businesses operating on a larger scale. Through a progressive price list, it allows the company to generate more revenue from customers who use a more significant number of functionalities.
Livechat has a proven business model with close to zero marginal customer acquisition cost. Due to the low level of recurring expenses and no additional capital expenses, LiveChat Software maintains a high degree of scalability of its business at the same time that it maintains incredible margins as we will see when we go to the numbers of the company.
But this doesn’t stop here in those 4 applications. At LiveChat Software they are currently focusing on developing new products, updating existing ones and expanding customer acquisition channels. In turn, they are running many other projects to accelerate the growth rate of customer acquisition. These include the Partner Program which creates a partner community with marketers and agencies around the world to create new sales channels for the company's suite of products. In turn, the company also offers the LiveChat platform that allows developers to build applications using LiveChat APIs and services and monetize them through the marketplace.
2.1.The origin of the company
LiveChat Software was founded by Mariusz Cieply in 2002. At that time the company was called Livechat Sp. In the following slide we can see a fairly complete detail of the company's journey in the last 20 years.
We can highlight a series of key events in the company, such as the beginning of the commercialization of the Livechat application in 2002, or that in 2007 the company is already known as Livechar Software S.A. and 50% of its capital is acquired by Capital Partners, which would later sell to Gadu Gadu (GG). Already in 2010 the company managed to give positive Ebitda for the first time in its history, and in 2011 the management recovered the majority of the shares with 60% in its possession, buying it from GG. Already in 2014 the company was listed on the Warsaw Stock Exchange (WSE). The company will continue to grow in the following years with clients in more than 150 countries by 2016. The company would launch the following applications such as KnowledgeBase in 2017, Chatbot in 2018 and Helpdesk in 2019 to complete its product catalogue. In 2020, the company already had 30,000 Livechat customers and 1,000 Chatbot customers. In 2021 the company already had annual recurring revenue (ARR) of more than 50M USD. In 2022 the company launches the new Openwidget application and this year the transition to Text is being carried out, which we will discuss later.
2.2.The portfolio of products of Livechat
Let's go into more detail and learn more about the applications that Livechat sells.
2.2.1.Livechat
Livechat is the flagship of the Livechat Software catalogue.
It is an application for quick contact between customers and the company through a chat application integrated into the company's website. The solution is mainly used for customer support and online sales.
The company offers mobile applications and desktop versions of the product and it is also possible to use it in the form of a browser. This gives product users the ability to chat with customers virtually anywhere, anytime.
The LiveChat solution can facilitate sales processes in electronic commerce, serve as a support tool for recruitment in education and human resources, and as a contact channel in industries that require personalized communications, such as real estate.
LiveChat offers numerous functionalities, not only making it easy to chat with customers, but also making it easy to manage communications. Users are offered features that engage their customers, generating automatic invitations to start a conversation with potential customers visiting the web, a ticket system that makes it possible for customers to leave a message after hours, tracking behavior of web visitors and an analytical panel. All the data collected through the LiveChat application is an attractive source of knowledge of potential customers, to be used in the sales, service and customer service process.
The LiveChat application offers the following features and functionality:
Live Chat: Allows website visitors to initiate real-time conversations with customer service or sales agents. Agents can answer questions, provide support, offer product recommendations, and resolve issues directly through live chat.
Personalization and branding: The LiveChat application can be customized to reflect the brand image of your company. You can adjust the layout, colors, and welcome messages to suit your communication style and tone.
Simultaneous Chat: Agents can handle multiple chat conversations at the same time, improving efficiency and productivity. Furthermore, users can also have multiple open conversations with different agents if required.
Chat transfer: If an agent is unable to resolve a specific issue, they can transfer the chat to another agent or a specialized department for further assistance.
Predefined responses: The LiveChat application allows agents to save and use predefined responses to common questions or frequently asked questions. This streamlines communication and helps provide consistent and accurate responses.
Monitoring and analytics: You can track real-time chat metrics like wait time, response time, and customer satisfaction. In addition, you can also access more detailed reports and analytics to assess the performance of your customer service team and make data-driven decisions.
Integrations: The LiveChat app integrates with other popular tools and platforms, such as customer relationship management (CRM) systems and web analytics applications. This allows for seamless data synchronization and better management of customer information.
In the following video of the company you can see a review of the product.
The company markets the application under the SaaS modality as a monthly subscription for SMEs from €20/month to €59/month per agent depending on the type of subscription and options we want to use. For large companies they already offer another type of annual subscription tailored to the client. One point we love is the company's pricing power. Last October, subscription prices rose 25% and the result is that they have hardly noticed any impact on customers, they maintain a churn rate of 3%, a pretty good figure.
This program, with its successive improvements, has been running for 20 years and is already used by 37,765 clients in 150 countries.
We have several success stories with Livechat Software customers using this app. An example is that of the company PlasticPrinters.com,
PlasticPrinters is a plastic card printing company in Hastings, Minnesota, that has been able to reduce the cost of acquiring new customers by using LiveChat. According to Nate Johnson, marketing director of PlasticPrinters, their goal is to help their customers grow their businesses. When it comes to reaching a larger number of customers, traditional forms of communication like phone and email can be a bit slow and cumbersome. Who has time to wait for a response after leaving a message or sending an email? Johnson believes that customers first moved from phone to email and now from email to chat.
When you have everything you need to help your customers, but get discouraged by all the emails and calls, it can all go to waste. Johnson added, “We have an innovative product line and a helpful staff that is second to none. Our problem was that we spent our days sending emails and leaving voicemails.” Since chat communication allows instant interaction without interruption, PlasticPrinters decided to try LiveChat.
After starting with one agent at one website, PlasticPrinters soon expanded its deployment to five agents at five sites. Their initial goal was to offer a more convenient way for their customers to get in touch with them. The company used personalized invitations on its website that fire after 20 seconds to achieve this goal. It is one of the most useful features, and since agents started using it, its use has multiplied.
With this new way of engaging customers, PlasticPrinters was able to increase the number of customer interactions. LiveChat allowed them to connect with hundreds of additional potential customers each week.
PlasticPrinters increased the number of engaging leads on a weekly basis and saved quite a bit of money that they would normally spend on advertising and lead acquisition. Johnson added that a small investment in installing LiveChat turned into a colossal profit. ”Compared to our pay-per-click spend, the additional leads we now get easily equate to a savings of over $12,800 per month for the cost of a LiveChat seat. These leads bring in an additional $65,000 of business each month.”
The Livechat application accounts for 92.6% of the company's revenue.
The company's goal is to continue creating more apps and improving existing ones, but Livechat continues to account for the vast majority of revenue.
2.2.2.Chatbot
LiveChat's ChatBot app is a tool that allows you to create and manage custom chatbots to interact with visitors to your website or messaging platform. A chatbot is an artificial intelligence program designed to simulate a human conversation and provide automated responses to user queries. The application works through a decision tree that the client configures at his discretion.
The LiveChat ChatBot app offers the following features and functionality:
Visual Chatbot Builder: Provides you with an intuitive visual builder that allows you to easily create and design your chatbot's conversation flow. You can set the questions the chatbot will ask users and the answers it will provide based on the available options.
Library of predefined responses: The application includes a library of predefined responses that you can use to speed up the setup of your chatbot. These predefined responses cover a wide range of common topics, such as frequently asked questions, product or service information, and basic support.
Integration with knowledge bases: You can link your chatbot with the LiveChat knowledge base to provide more complete and detailed answers to user queries. This allows the chatbot to provide links to relevant articles and help users find additional information.
Real-time assistance: The ChatBot app allows you to set up rules and conditions to send conversations to human agents when the chatbot is unable to provide appropriate responses or when users request personalized assistance.
Analytics and metrics: You can gain insight into the performance and effectiveness of your chatbot through analytics and metrics. These reports help you evaluate chatbot performance, identify areas for improvement, and make data-driven decisions to optimize user experience.
Integration with other tools: The ChatBot app integrates with other tools and services, such as CRM and ticketing systems, allowing you to synchronize data and provide a more consistent customer service experience.
We can say that the ChatBot application allows you to create and manage custom chatbots to interact with the users of your website or messaging platform. Chatbots automate common responses, offer real-time support, and improve the user experience.
In the case of ChatBot, the purchase of the product is also through a monthly subscription from $52 a month to $424 a month and then for large companies with a fixed price contract. At the end of June 2023, a total of 2,804 customers pay for ChatBot services.
In the following video you also have an explanation from the company itself of how the product works.
2.2.3.Helpdesk
The Helpdesk application is a tool that allows you to manage and follow up on support requests and queries from your customers in an organized and efficient manner. It is a comprehensive customer service solution that helps you provide high-quality service and maintain fluid communication with your customers.
Some key features and functionality of the LiveChat Helpdesk app are as follows:
Ticketing: The Helpdesk application allows you to centrally receive and manage support tickets. Each support request is converted into a unique ticket containing detailed information about the customer's issue, including previous messages, contact details, and priority.
Team collaboration: You can assign tickets to different support agents, which facilitates team collaboration and allows for an equal distribution of workloads. Agents can communicate internally regarding tickets and share notes or comments to resolve customer issues efficiently.
Automation and rules: The Helpdesk app allows you to automate tasks and actions by configuring rules. For example, you can set up rules to automatically assign tickets to specific agents based on problem category or agent availability.
Ticket history and search: You have access to a complete ticket history, allowing you to review past conversations and the resolution status of each request. Additionally, you can perform advanced searches within the ticket database to find specific information or common patterns.
Integration with other tools: The Helpdesk application integrates with other popular applications and tools, such as CRM (Customer Relationship Management) or project management systems. This makes it easy to sync data and collaborate with other areas of your business.
Reports and analytics: You can generate reports and metrics on the performance of your support team, including average response time, customer satisfaction, and other key metrics. These reports help you continually evaluate and improve your customer service operations.
In short, LiveChat Helpdesk App is a powerful tool to efficiently manage support requests and inquiries from your customers. It allows you to maintain fluid communication with your customers, collaborate as a team, automate tasks, and provide quality customer service.
In the case of Helpdesk we have two types of subscriptions, Team for $29 per agent, and the Enterprise subscription for larger companies.
In the following video you also have an explanation from the company itself of how the product works.
2.2.4.Knowledgebase
The Knowledgebase application is a tool that allows you to create a knowledge base or help center for your business or website. It is an efficient way to provide information and answers to frequently asked questions from the customers.
The LiveChat Knowledgebase allows you to create and organize articles and information resources into different categories and subcategories. You can customize the design and appearance of your knowledge base to fit your brand image.
Some important features of the LiveChat Knowledgebase app include:
Content Editor: Allows you to easily create and edit articles using a rich text editor. You can add text, images, videos, and links to provide detailed instructions or solutions to common problems.
Search: Visitors to your website can search the knowledge base to find relevant articles. The quick search feature helps users find answers quickly and reduces the need to contact customer service.
Categorization: You can organize your articles into logical categories and subcategories to make browsing and searching easier. This helps users quickly find the information they are looking for.
SEO-friendly: The LiveChat Knowledgebase app is optimized for search engines, which means your articles can appear in search results and drive organic traffic to your website.
Live Chat Integration: You can link your knowledge base with LiveChat's live chat feature. This allows customer support agents to share links to relevant articles during chat conversations to provide quick and accurate responses.
In short, LiveChat Knowledgebase app helps you create an easy-to-use and interactive knowledge base to deliver information and answers to your customers efficiently, reducing customer service workload and improving user experience.
In the case of Knowledgebase, there is only one type of subscription and is $59/month.
In the following video you also have an explanation from the company itself of how the product works.
2.2.5.OpenWidget
In November 2022 LiveChat launched OpenWidget, a free online application that allows business owners to add sections on their websites with the following:
Contact forms that allow website visitors to submit questions via email.
Website visit counter
Instagram Feed to display your Instagram content on the web.
Show Google reviews on the web
Product cards promoting the best deals in stores
Frequently asked questions sections to give visitors self-help.
Product Recommendations
E-commerce companies can easily install OpenWidget by copying the ready-made code and pasting it into the HTML of their website. Installation of the app is also possible on eCommerce platforms including Shopify, Squarespace, or WooCommerce.
2.3.Sectors & Geographies
If we start to study the sectors and geographies where Livechat operates, we can see that it is a company with a global presence and in many different sectors.
Regarding the sectors in which Livechat clients operate, the bulk of clients come from the IT sector, followed by other sectors such as retail, education, marketing, gaming, betting, automotive, entertainment, financial services, health or tourism.
Regarding the geographic location of its clients, Livechat has a global presence with clients in more than 150 countries. We see that most of the recurring monthly revenues come from the United States with 34.3%, followed by the United Kingdom (9.1%), Australia (4.9%) and Canada (4.5%). Revenues from Poland only account for 1.5% of the total.
2.4.Clients
Let's see now who are the clients of Livechat Software and its different applications. At the end of June 2023, the number of clients of Livechat amounts to 37,765, we can see how in the last 4 years the number of clients has increased by 42%.
In the case of ChatBot, in the last 4 years the number of clients has multiplied by 6, reaching 2,804 clients at the end of Q1 2023/24.
Its clients include both SMEs and large companies such as Paypal, Ikea, McDonalds, ING, Adobe, Mercedes Benz, LG..
Another important fact is that among its clients there are more than 25 companies on the Fortune 500 list.
2.5.Competitive advantages
One question that we should always ask ourselves when analyzing a company and seeing if we are dealing with a quality business is to see what competitive advantages it has, what makes a customer choose this company and not another for the use of their applications. And the truth is that at first glance one might think that a chat application to interact with customers on the web should be easily replicable and any company could eat Livechat's cake. But it is not that easy, let's see the reasons below.
LiveChat has been on the market since 2002 and has established itself as one of the best known and most trusted live chat solutions. Its long history and reputation give it a solid user base (more than 37,000 clients) and confidence in the quality of its service.
LiveChat offers a wide range of advanced functionalities that improve the user experience and the efficiency of the service. These features include predefined responses, chat forwarding, proactive support, integrations with other tools, and more, providing a rich experience.
The applications are designed with ease of use for both agents and website visitors in mind. The live chat widget is easy to set up and deploy, and the intuitive user interface makes it easy to navigate and manage chat conversations.
LiveChat allows you to customize the design and appearance of the chat widget to fit your company's brand identity. Colors, fonts, logos, and messaging can be customized to create a consistent branded customer experience.
The application in turn offers a wide range of data in the form of analytics in reports that provide a lot of information about the performance of your customer service team, response time, information about customers, customer satisfaction and other key metrics. . This data helps to continually evaluate and improve customer service.
LiveChat integrates with a wide variety of popular tools and services, such as CRMs, e-commerce platforms, and analytics systems. This allows data synchronization and greater efficiency in the management of customer information.
LiveChat customer service and support has a technical assistance available 24 hours a day, 7 days a week. In addition, they offer training resources, tutorials, and an active community to get the most out of the platform.
We can say that Livechat's product is very complete and that after 20 years it continues to maintain its leadership. There are other competing products that are cheaper than Livechat but are not as complete and widely implemented as Livechat, so they can maintain a certain level of pricing, key to consider it a quality business.
2.6. Industry outlook
Another of our premises for investing in good companies is that they operate in sectors that have tailwinds to continue growing in the future.
According to Verified Market Research, the size of the live chat software market was valued at $794M in 2021 and is estimated to reach $1.6B by 2030, implying a CAGR annualized growth of 8.59%, not bad..
The thing is, the global live chat software industry is expanding due to its growing popularity, as a certain segment of the population prefers live chat for online shopping questions. In addition, the growing need to improve customer relationship management (CRM), which is critical to effective revenue generation in any business, as well as the number of advantages of live chat software over traditional customer support. They drive market growth.
In the live chat sector we have big players like tawk.to, which is the leader with 21.41% of the market, followed by the Facebok Customer Chat plugin with 18%, Zendesk with 8.46%, Tidio with 8.09% and Livechat with 6.03%. The data was extracted from the website of Statista.
We currently have the TawkTo application on 171,224 websites, while Livechat is on 61,619 websites
We see two clear variants in this sector. The first is free apps like tawk.to, which is obviously the cheapest version, but it's much less complete than other paid apps like Livechat or Zendesk. For small businesses, a free version with fewer features may be sufficient, but larger companies have no problem paying for this type of application. At Livechat we have a product that is not the cheapest but it is one of the ones with the best features, and the customer pays for it, let's say it's a premium service and that's where Livechat operates.
And it is the fact of positioning LiveChat in the premium category and developing its position in the market based on characteristics such as the variety of features and integrations available, the quality of customer service, the reliability and security of the data instead of a competition based on prices, makes the company resistant to the pressure of popular solutions available for free.
At the same time, we have to take into account that the SaaS (software as a service) sector, which is where Livechat Software operates, is growing very quickly. Also keep in mind that live chat for the enterprise software segment is not the same as the SaaS market. Some of Livechat's competitors are offering their services in a less efficient traditional model. However, according to the directive, the SaaS model has by far the best growth prospects and therefore the market share of the companies that offer their services is expected to grow using that model. This creates enormous growth potential for the entire sector.
It is also worth noting what the company says in its latest reports about the Kenneth Research report, which indicates that the value of the "Conversational Artificial Intelligence" market, which includes, among other things, virtual assistants and chatbots, will grow by 30% in annual average during the years 2019-2024 and will reach the value of USD 15.8 billion at the end of the period. However, according to Grand Review Research's forecast, the market value of chatbots alone will already reach $1.25 billion by 2025 (assuming 24% average annual growth).
It is also interesting to bring a comparison of live chat companies from the G2.com website, where 508 companies in the sector are listed and we can see Livechat among the best valued applications in the sector, as one of the leading products, with high performance and good position in the market.
3.The management
It is time to review the company's board of directors and see if it is aligned or not with the shareholders.
For this we have to resort, how could it be otherwise, to the CEO, founder of the company and main shareholder Mariusz Cieply.
Mariusz Cieply is 42 years old and is a computer engineer with a specialty in information systems from the Wrocław University of Technology.
Mariusz Ciepły founded LiveChat in 2002 together with Maciej Jarzebowski and Jakub Sitarz. Currently Mariusz has 13.07% of the shares.
Mariusz Ciepły has held the position of CEO and Chairman of the Board of Directors since 2010. He is also a member of the supervisory boards of companies such as Brand24, Venture Inc. or TimeCamp.
Mariusz's annual salary in 2022/23 was €392,000 base and €403,000 variable.
Another key position on the Management Board is Urszula Jarzębowska, CFO of Livechat
Urszula has been working at LiveChat since its foundation in 2002 and since 2010 she has been a member of the Management Board.
Urszula Jarzebowska graduated from the Oskar Lange University of Economics in Wroclaw and has a postgraduate degree in Controlling from the Wroclaw Schools of Banking and in International Accounting Standards (IAS/IFRS) from the Kozminski University in Warsaw. She has also worked at Bankier.pl and at Internet Works.
Urszula's annual salary in 2022/23 was €262,000 base and €259,000 variable.
The following organization chart shows the members of the Board as well as the directors of the different areas of the company.
On the Supervisory Board we have the other two co-founders Maciej Jarzebowski and Jakub Sitarz, as well as Marta Ciepla, Marcin Mandziak and Marzena Czapaluk.
The founders and managers of the company made a an agreement of Shareholders and they currently hold the 41.7% of the shares.
We can conclude that we are facing a directive with a fairly obvious skin in the game.
As for the company's employees, they closed the financial year 2022/23 with 282 employees, which represents an increase of 5.2% compared to the previous year.
4.Transition to TEXT
Last December the company bought the domain Text.com and it turns out that the Board plans to change the name of the company to Text. The change will be proposed to the shareholders for approval at the next Annual Meeting. This change will affect the companies that are part of the group, but not the products themselves, the Livechat application will continue to have its name.
But this change is not a simple "rebranding" of the company. It is the company's focus, they are specialists in text technology, they know that it is the main language of online communication and they want to get all the potential out of it to fully automate customer service. At the same time they want to reinforce the complete suite of applications of the company, all under the umbrella of Text.
Past: Customer service manual. It was a high cost and low efficiency service.
Present: AI-assisted customer service. Data collection from all Livechat applications and training of that "2nd brain" to support the agent in charge of customer service.
Future: Automated customer service. The agent is now the 2nd brain trained and capable of serving a greater number of clients, giving rise to a more economical and effective service, only automation supervisors will be necessary.
5. The numbers of Livechat
Now it’s time to dig into the company numbers and see what we have around here. In the previous sections we have seen the qualitative part of the thesis and we see that it seems that we have a quality business. The numbers that we are going to see below will only show that we are right. If we first look at the evolution of revenues and profits in the last 5 years, we see that the company has been growing at a 30% CAGR in both revenues and profits, and an Ebitda margin of around 63%.
If we go back a little further, we see that the evolution of the company's turnover is spectacular, its income did 28x in the last 10 years.
As we previously mentioned, more than 90% of the group's income comes from the Livechat application. This percentage has been slightly reduced in recent years. On the other hand, little more than 7% of the income comes from the rest of the applications.
Regarding the company's margins, we see that they have been able to maintain a very stable Ebitda and net margin level, around 63% and 53% respectively. Livechat drives a high margin thanks to a Saas model and with a very unique way of acquiring customers, with many different channels that generate traffic and new customers for the company.
Two KPIs that the company manages are the MRR and the ARPU.
MRR (Monthly Recurring Revenue)
MRR or Monthly Recurring Revenue is a measure of the predictable total revenue generated from all active and paid subscriptions in a given month. Includes all recurring charges but excludes one-time (annual) fees
As can be seen in the lower graph of the company's presentation, the MRR has been growing uninterruptedly for 4 years to USD 6.40M in March 2023. We see a significant step between September and December 2022 due to the increase in prices in the subscriptions of 25%.
ARPU (Average Revenue Per User)
The ARPU is the average revenue per user in a month, calculated on the basis of MRR
ARPU = MRR/ number of users
Initial ARPU is the average value of monthly revenue per user at the time the user initiates the paid subscription, that is, the first payment customers make.
As can be seen in the lower graph of the company's presentation, the initial ARPU grows slightly but it is well below the ARPU (75USD vs 160USD on March 23), but it is not problematic since we see that the ARPU grows at a good pace and we see the step in October 2022 with the price increase.
If we have a look at the returns that Livechat gives, we find spectacular values, with a return on invested capital (ROIC) of 100% and a return on equity (ROE) of 106%.
The company does not usually give guidance on forecast results for the current or next year.
Last Monday the company presented the 2022/23 report (April 2022-March 2023). It must be taken into account that in Livechat the fiscal year closes in March. Let's take a look at them.
5.1.Income statement
If we go to the income statement of 2022/23, we see that the company made a revenue of PLN 315.72M, which is +41.9% compared to the previous year. EBIT was PLN 185.49M (58.7% margin) and net profit was PLN 172.36M, representing a 54% net margin and a 44.5% profit increase over the previous year.
5.2.Balance sheet
If we look at the balance sheet situation of the company at the end of March 2023, we see that the company has a very solid financial situation, with hardly any debt (PLN 1M) and with PLN 95M in cash.
5.3.Cash Flow
In terms of cash flow, we see that Livechat is a cash-generating machine, generating free cash flow of PLN 162m (51% margin), which is an increase of 64% over the previous year.
We see that an important part of the cash (PLN 121M) is dedicated to the payment of dividends, which gave a yield of 4% in 2022.
5.4 Preliminary earnings Q1 2023/24
The company published on July 4th the KPIs for Q1 2023/24 (April-June 2023). They have not yet released revenue results for this quarter as they have to make some adjustments to the revenue recognition policy following auditor feedback.
As for the MRR (monthly recurring revenue), the company managed to reach USD 6.47M at the end of July, which is +1.1% compared to March 2023 and +34.2 YoY. The QoQ revenue increase is due to the increase in customers in the Livechat app, and the YoY due to the increase in customers in all apps and the increase in ARPU.
Regarding ARPU (average monthly revenue per subscriber), Livechat's in June was USD 158.2 (vs USD 159.7 in March 2023 and USD 120.5 in June 2022). In the case of ChatBot, the ARPU was USD 122.5 in June (vs. USD 121 in March and USD 102.5 in June 2022).
In turn, the operating cash flow in this quarter was USD 20.16M (vs. USD 20.02M in Q4 2022/23 and USD 15.21M in Q1 2022/23.
6. The Livechat stock $LVC
Livechat's stock is listed on the main index of the Warsaw Stock Exchange under the ticker $LVC. Its evolution since it went public in 2014 has been to multiply the value of the share x7.
Currently Livechat's market capitalization is PLN 3,515M (€788M). 41.7% of the shares are in the hands of an agreement between the main shareholders (founders and directors of the company), while we have 13.3% in the hands of two Polish pension funds, and a free float of 45 % (€354M)
The average volume that moves per day is about 31,000 shares, which is about €900,000, it is not high but it is enough for us to see several institutional shareholders, although with small positions.
It is worth noting the shareholder remuneration in the form of dividends that the company has been paying since it went public in 2014. In 2022 the company paid PLN 4.4 in dividends (4% yield)
This past Monday, the company announced that the total payment of dividends on account of profits for the 2022/23 financial year amounts to 153M PLN (Payout of 89%), and they will pay the 2nd dividend for 1.46PLN on August 4. There would remain a 3rd dividend payment to complete the 5.95PLN of total dividend that the company will give per share.
Among the company's plans is getting listed on the United States stock market, but rather in the long term, it is not something that will happen soon.
7.Valuation
It is time to see if the Livechat stock is cheap, if it is in price or if it is expensive. We currently have Livechat trading at the following multiples (NTM):
PER: 18
EV/Ebitda: 15
P/FCF: 19
Livechat is a company that, due to its predictability of cash generation, we can make a valuation both by multiple and by DCF
If we make a valuation by multiples taking into account the historical multiples of the company, and we consider that in 2023/24 and subsequent years the company will continue to grow at 20% (In 2022/23 it has grown at 41%), maintaining a Ebitda margin of 54% (63% in 2022/23), we see that we obtain the following target values for 5 years 2028:
Valuation per PER: 301PLN
Valuation by EV/Ebitda: 282PLN
Valuation per P/FCF: 266PLN
We see that in a normal situation and with the company running as it has been up to now, the share value could more than double perfectly in the next 5 years. At the same time, we take into account the annual dividend payment given by the company, which adds 4% per year to our profitability.
If we go to another valuation method such as discounted cash flows, considering a WACC of 10% and the company growing at 20% as we mentioned before, we get a current share value of PLN 180.
8.Risks
Let's see what risks Livechat faces and what we have to take into account when investing.
Macro environment and recession: Livechat is not immune to the macro environment with spending cuts by companies in fear of recession. In the case of SMEs, the company can see how, in the event of a recession, some disappear directly and no longer contract their services, but at a large company level, subscribing to livechat is a lower cost for them and due to the need to maintain a communication channel. communication with customers through the web, is not a service that they can easily do without. And that is being seen in the last quarters where the company continues to grow sequentially.
Inflation in Poland and wages in IT sector: Inflation in Poland is currently 13%, and although it is down from almost 20% at the beginning of the year, it is not having a serious impact on the company. There has also been wage inflation in the IT sector in Poland, but redundancies are already being seen in the country and this inflation should come down as well. And the point is that salary inflation is not a relevant factor for Livechat, they sell software subscriptions, not engineer hours. Apart from the fact that his team is quite small, and he has a limit of about 300-310 employees, focusing his latest hires on very specific profiles of machine learning, data experts, AI, etc.
AI Disruption: One might think that AI and apps like ChatGPT could eat the toast out of companies like Livechat. And the thing is that just in February 2023 Livechat signed a DPA agreement with OpenAI. They are currently working with ChatGPT, taking advantage of it in all applications to automate the work of agents, improve customer responses, etc. Therefore, the AI here does not represent a risk but rather an opportunity since they are collaborating with them, it is one more tool for them.
Highly Competitive Market: The market for live chat and customer service solutions is highly competitive and constantly evolving. There is a risk that new competitors will enter the market with more attractive propositions or existing competitors will improve their products, which could affect LiveChat's competitive position. For this reason, it is necessary for the company to continue investing capex in improving its applications and creating new ones to expand the catalog and offer innovative products before its competition. And it is vital that the company remains focused on providing a quality product and not competing on price.
Currency: Livechat receives almost all of its income in dollars, so the USD/PLN exchange rate has an impact on the company's results since the company consolidates in PLN.
Changes in customer preferences: Customer preferences and demands may change over time. If customers prefer other forms of communication or if new technologies emerge that displace the use of live chat, there could be a risk of decreased demand for LiveChat services. I don't see it as a risk that could materialize in the short term, but we don't have the crystal ball and we don't know what will happen in 10 or 15 years.
Regulatory Changes and Compliance: LiveChat operates in a regulated environment and is subject to laws and regulations related to data privacy, consumer protection, etc. Changes in regulation or breaches of legal requirements could have a negative impact on LiveChat's business and reputation. I have little doubt that a company like Livechat can overcome a situation like this, although in the short term the market can take its toll and the price will be affected.
Service interruptions: LiveChat depends on technology infrastructure and the Internet to function properly. We always have the risk that there may be interruptions in service due to technical problems, network failures or other unforeseen events, which could affect the availability of live chat and communication with customers.
Data Security: LiveChat collects and stores information from users and chat conversations. There is a potential risk of security breaches, cyberattacks, or data breaches that could compromise the confidentiality or integrity of customer information.
9.Conclusion
We have in front of us one of those companies that we like so much in Poland, with the founder running the company and with a high % of shares, with spectacular results with the company growing at 45% CAGR in the last 10 years, with an incredible quality business and margins above 60% ebitda, top in the Saas sector. The company is already in a somewhat more mature stage and in our future projections we manage that the company continue to grow at a rate of 20% and the numbers keep coming out.
Regarding valuation, we see that the share at a PER 18 and an EV Ebitda 15 is at a very reasonable and rather cheap price, taking into account the quality of the business we have here, for which I see a lot of potential. If this action were listed in the United States, it would trade for double perfectly.
I wanted to thank my colleague @ZipiInvestments who has helped me with some details of the company that I was unaware of. I would also like to thank all the subscribers from out of Spain whose number is increasing daily.
Great article! Most money can definitely be made in high quality small- and mid cap stocks with a lot of skin in the game.
Amazing article, really insightful and valuable. I have a question, do you have some data on churn rates for their competitors like zendesk and so on?