Description

Long LVOX

LiveVox (NASDAQ: LVOX) is arguably the most compelling name I have found this year: 1) inflecting fundamentals, 2) rock bottom valuation, 3) a high chance of a take private and 4) a tactical setup begging to decapitate some stale shorts. As the cherry on top, this is my preferred way to play the AI theme from a deep value lens. Given the limited trading volume it is reserved for PAs, but I believe the risk/reward skew and unfiltered upside are too unique to pass up.

LVOX is a cloud-based, CCaaS platform that integrates omnichannel communications (voice, email, chat SMS, etc.) with CRM, AI and WFO tools. It trades at ~1.6X NTM Sales (98%+ of sales are recurring), has a net clean B/S and can realistically grow topline at a low-teens CAGR through the medium-term.

LVOX was founded in 2000 and its legacy focus was on outbound calling applications. During the 2008 crisis, LVOX gained significant traction within the consumer finance space and it has since evolved into an all-in-one platform for BPOs, enterprises and collection agencies. At the core of the platform is a database layer that functions as a repository and orchestration layer for customers and their records. Their native CRM offering provides relevant customer details, expedites calls through a shorter authentication/verification process and provides access to prior interactions across all communication channels for agents to review. This allows for a single view of customers by eliminating data silos between disparate solutions/messaging channels. Integrations with WFO partners ensure compliance and improve agent performance with tools like call recording and speech/text analytics. I will discuss LVOX’s AI offering in its own paragraph, but it essentially automates workloads and combats staffing issues. They have been investing in their AI capability for years. All this is to say LVOX effectively provides an “operating system” for contact centers at a lower TCO compared to legacy on-premise solutions.

Cloud-based solutions represent only a fraction of the total CCaaS market opportunity. The consensus quoted ~$4bn in cloud-based spend compared to $27bn for the overall CCaaS market in 2022. From Avaya alone, which has been a perpetual share donor, ~1mm seats are available (compared to the ~60K seats LVOX currently serves). Industry estimates say ~10-20 million on-premise seats are coming up for grabs as workloads gradually move to public cloud environments. Frost and Sullivan expects the North American market to grow at an ~11.5% CAGR and the Global market to grow at a ~13.2% CAGR. Cloud-based solutions have largely achieved technical parity (i.e. security, compliance and government requirements) with their on-premise counterparts in recent years. This has removed a key friction point in the purchasing debate between on-premise and cloud.

LVOX was acquired by Golden Gate Capital in 2014 when it was a sleepy, BPO-focused organization doing 11% in topline growth with a net retention figure at ~90%. Under their operational guidance, LVOX accelerated topline growth to a high teens CAGR through 2021 and net retention averaged ~115% between 2017-2020. It peak-timed the SPAC offering in June 2021 and went public at ~8X NTM Sales, receiving a ~$118mm cash infusion. Golden Gate cashed out a minor portion of its equity stake through this endeavor and they retain ~77% ownership of the company today.

As a former SPAC, projected growth targets were delusional and topline growth in 2021 was 16% (vs. the 26% pitched to the public). The macro proceeded to fall apart -> topline guidance has decelerated to MSD growth for FY23, revenue from a core vertical has yet to normalize, and it remains in a cash burn state. Today, ADV is <$50K and as a disgraced SPAC, it is your quintessential orphaned security. It is unsurprising that the sellside is asleep at the wheel. Which begs the question, why is LVOX even public?

Several things excite me about LVOX going forward. First, LVOX appointed John DiLullo as the new CEO in November 2022. My view is John is overqualified for the job and his past experiences tell you all you need to know about Golden Gate’s intentions. Previously, John was associated with Francisco Partners and joined their portfolio company Forcepoint as CRO. During his tenure, Forcepoint accelerated topline before being sold to TPG within two years for more than double their purchase price. Operationally, John oversaw the launch of Forcepoint’s cloud-native security platform and investments in the company’s Global Partner Program. Before that, John was appointed CEO of Lastline, which was subsequently sold to VMware at a premium to its prior Series C valuation.

Since joining LVOX, John has laid the groundwork for several operational initiatives that I think will re-accelerate topline through the medium-term. One, LVOX is aiming to build out its network of Channel Partners. This is the same playbook John leveraged at Forcepoint, and I believe it is a cost-effective means of adding new clients to the pipeline. Two, LVOX is expanding its presence internationally for the first time. Currently, 95%+ of LVOX’s revenue comes from North America. The global market is less mature, offers more white space and is growing faster as a whole. LVOX recently entered early release status for ITU E.164 and added their first AWS point of presence in the EU – effectively opening the gates to this foreign TAM. The ITU package includes international callbacks, automated dialing, support for Spanish and French, etc. They have also integrated WhatsApp (a major SMS provider/support channel outside of North America) into the platform. Third, LVOX is moving downstream to capture middle-market clients. MM clients require less handholding (read: lower CAC, shorter sales cycle) and LVOX’s speedy implementation time and low TCO make this a good product fit for these clients. To aid in these processes, John hired a VP of Channel Sales and a VP of Sales Engineering earlier this year.

Under John’s leadership, I believe LVOX has also found religion in its expenses. This is crucial both for the margin expansion story underway and to avoid putting LVOX’s B/S in a hard place. They cut back on 16% of headcount at the beginning of this year, got rid of unused office space, moved certain roles overseas to Bangalore/Medellin and axed the former CRO in the process. John has emphasized these restructuring efforts have not had an impact on customer churn. The churn LVOX has seen in the past few quarters is heavily skewed to clients that were acquired years ago, with minimal ARR contribution. Management has stated that the ARR from their recent client wins are >2X the ARR of the churned clients. Gross margins are also expanding as they accelerate the migration of customers to the newest Versions of their platform. Newer versions (i.e. Version 17) scale substantially better; GM% has improved by over 900bps since Q4FY21.

There are several proof points that suggest to me LVOX’s turnaround is headed in the right direction. For the first time ever, LVOX was featured by Frost & Sullivan, Forrester, and Aragon in their CCaaS industry reports earlier this year. Clients highlight strengths like low TCO, simplified ease of use, robust security/reliability, and the benefits of its bundled feature sets. My takeaway is that LVOX has made significant strides within the competitive scene and is now considered a viable option. In Q1FY23, LVOX added 10 new Enterprise clients while ARPU has grown sequentially for the first time in over 5 quarters.

What’s the AI angle for LVOX? Interest in AI took off in this space when people saw the implications for large language models and pseudo-cognitive generative chat. Within a contact center, ~10% of operating costs relates to software, while ~90% concerns the payroll (i.e. the cost of staffing that contact center). A prime use case for AI concerns virtual agent technology. Clients who use LVOX’s AI capabilities can significantly reduce the agent headcount required -> improve the unit economics of each contact center -> and in turn be able to offer better pricing to their end users. AI enables a superior operating model, and other clients will eventually be forced to leverage this technology to price match their peers. Consider also that AI allows for speech transcription. As speech is transcribed, clients will have flat files they can search against. They can then start to collect every word spoken in a contextual way at any given time. This AI can then run supervised queries to discover themes and threads (i.e. why are people canceling, what are they calling about, why are they requesting returns). I see AI as the next step to better margins and deeper analytics within contact centers.

The key here is AI cannot be deployed in a traditional on-premise manner, as it requires a countless number of computers and building out massive databases. This is forcing the hand of clients who have historically used on-premise solutions but are interested in AI applications. As a large block of on-premise contracts come up for renewal in the coming years, I think an outsized number of decision makers will convert. Even within LVOX’s client base, only 1/3 of them have subscribed to the AI bundle upsell. The optionality here both for existing and new clients is huge.  

Valuation:

We think LVOX can reasonably grow at a low-teens CAGR from 2024 onwards and see continued gross margin uplift. Prior to the macro slowdown, LVOX was growing at a high-teens clip. Their product offering is more competitive than it was before, so we think their win rate (both against on-premise and competing cloud solutions) will trend upwards. Within their current client base, LVOX serves ~60K seats, but their client base represents a total of ~600K seats. LVOX has over 30 products available, but the average client currently subscribes to <15. I would point you to the Net Retention figure to think about upsell potential, which has largely held steady above 110% across quarters. Non-Voice revenue has grown at a ~50% CAGR in the past three years. Keep in mind as a sanity check, the projected CAGR for the industry (depending on whether you look at North America or International) is a low teens clip through 2030. As the macro improves, sales cycles for new Enterprise clients should also shorten; management stated that the sales cycle in 2022 had more than doubled in length.

As operating margins inflect from 2024 onwards, we think Adj. EBITDA margins can reach north of 20% by 2026 (adding back only SBC). Management thinks they can reach just under 10% in Adj. EBITDA margin by Q4 of this year. They have emphasized repeatedly their focus on cash preservation here. As long as LVOX does not do a stupid acquisition (unlikely considering the CEO + Golden Gate’s control of the board), it should reach FCF profitability in the NTM.

We get to ~$215mm in Sales and ~$45mm in Adj. EBITDA by 2026. How would you value a profitable SaaS solution growing at a low-teens CAGR, with Enterprise-grade retention metrics? I’ll acknowledge that SPACs receive a haircut in the markets and say 14X is my base case. That gets us to ~150% in upside. I’d also note LVOX has over $250mm in NOLs fully written off/hidden from the B/S. Applying a 21% tax rate, that represents ~$50mm+ of DTAs. We view this as a low-quality form of cash that can be realized assuming LVOX reaches cash profitability. The upside here is juiced a bit higher if you incorporate this into the capital structure. As for street estimates, the sellside has slapped on a HSD CAGR for the next three years. Considering the ADV, I’d imagine there aren’t many trading commissions to be had for this name. My impression from talking to management was that they have very deliberately sand-bagged guidance.

What is the downside case here? In the most recent quarter, the controversy was around SMS revenue as one of their Top 3 SMS text aggregators reduced delivery of messages lacking explicit consent (i.e. texts that could be interpreted as spam messaging). Management thinks this represents a ~$5mm hit to FY23 topline, while that traffic is redistributed to other aggregators. Assuming another Top 3 client reduces SMS volumes and these growth initiatives are not executed correctly, let’s say LVOX grows at an ~8% CAGR through 2026 and hits ~13% Adj. EBITDA margins. I’d point out again management thinks they can hit ~8-9% Adj. EBITDA margins by Q4 of this year. For me, a recurring revenue stream growing profitably at a HSD clip and with minimal CapEx requirements merits at least a 10X. This is me being deliberately harsh. That would equate to <10% in downside from today’s share price. The warrants on the B/S are not a concern for me, considering the lowest exercise price represents close to 300% in upside.

Another very plausible scenario is that this gets taken private before 2026. LVOX’s ADV is <$50K and the market values LVOX as roadkill. There simply is no reason for it to be public. Seeing John’s history, I would think Golden Gate hired him with this explicit intent. Management should and will more than likely be open to running a sales process as metrics inflect, especially if the market refuses to acknowledge LVOX’s turnaround appropriately. I believe the buyout multiple could easily exceed 14X. There is strategic value for this asset, as stripping out the cost synergies can get you to 25%+ EBITDA margins within two years. At <2X Sales and down >70% from its de-SPAC price, we do not need much for this to work. The equity is spring-loaded and there is a clear floor on downside here.

As a final twist, I would note that the SI is ~13% of the float. Given the low ADV, the implied Days to Cover is ~50. My impression is the short sellers here played the de-SPAC well but have held on without revising the thesis. If fundamentals were to inflect, the window to get out would be extremely tight. I am not banking on a short squeeze for upside, but it does make for an interesting scenario considering what other short squeezes have looked like this year.

Catalyst

Earnings