LOGMEIN INC LOGM S
February 06, 2012 - 1:04pm EST by
buggs1815
2012 2013
Price: 42.00 EPS $0.67 $0.79
Shares Out. (in M): 25 P/E 62x 53x
Market Cap (in $M): 1,054 P/FCF 30x 23x
Net Debt (in $M): -185 EBIT 25 29
TEV ($): 869 TEV/EBIT 35x 30x
Borrow Cost: NA

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  • Competitive Threats
  • Software

Description

LogMeIn is about to experience something that has happened to a lot of tech companies over the years.  It is about to have its main (and really only) product bundled into ubiquitous Microsoft products for free.  This occurence did not end well for Lotus,  Wordperfect, Netscape, and a host of others.  I suspect it will also end badly for LOGM.

Business Description:

LogMeIn is a provider of remote access and collaboration software online.  Its key products are as follows:

LogMeIn: A remote access program that allows users to access a device from another device.  It is free, but the premium version (LogMeIn Pro) allows for sound and file transfers among other features for $69.95 / yr.  The file transfer seems to be the key feature of LogMeIn Pro that users are willing to pay for.

LogMeIn Rescue: Similar to the other LogMeIn product, but it caters to IT support professionals who want to access client devices.  It costs $1188 / year.

Join.me:  This is LogMeIn’s remote conferencing platform.  It offers the opportunity to display your desktop to up to 250 people with just a few clicks of the mouse.  Like LogMeIn, you can upgrade to Pro for $150 per year which will allow you more professional features.

Investment Thesis:  LogMeIn is going to face a dramatic increase in competition in the coming months and is therefore a short.  This competitive threat is the primary reason to short LOGM. 

In the consumer/smb space (90% of LogMeIn’s revenue), LogMeIn has been the go to free service.  However, competitors are emerging.  Most notably, Microsoft offers remote access functionality through Windows Live Mesh for free.  This will be incorporated into Windows 8 later in 2012 (see http://news.cnet.com/8301-10805_3-20106037-75/microsoft-touts-skydrive-integration-in-windows-8/ or http://www.liveside.net/2012/02/05/windows-8-and-windows-phone-8-and-the-future-of-syncing-and-sharing/).  Apple recently released the iCloud which should reduce the need for file transfers via LogMeIn Pro.  Even Google is entering this market with remote desktop for their web browser, Chrome , which is now in BETA.  Meanwhile, there are also a host of online file lockers (and not just the illegal Megaupload type) from competitors such as Dropbox, Google Docs, Microsoft Skydrive, Amazon, etc. all which will reduce the need for remote access to a desktop to get files which is the key feature of LogMeIn Pro – the product which generates the vast majority of LogMeIn’s revenue. 

The net effect of all this competition should be reduced use of LogMeIn Free as integrated solutions from the big guys (Apple, Microsoft, and Google) show up.  This will lead to less LogMeIn Pro subscriptions over time.  As online file lockers become more popular, the primary reason for using LogMeIn Pro (file transfers) will also go away so the percentage of Free users that will be willing to upgrade to Pro should also decline over time.  The company currently has 915k premium subscribers on 13.2 million total users.  The proportion of pro users to free users has risen to 6.9% from only 3% a few years ago.  It seems likely that increasing competition could reverse this trend with negative effects to LOGM’s revenues.  Meanwhile, user growth at LOGM has significantly outstripped revenue growth over the past couple of years, suggesting substantial pricing pressure is a persistent problem.  The company acknowledges low barriers to entry in its risk factors which does not bode well for long-term pricing power.

In the enterprise space (10% of LogMeIn’s revenues) there are well established competitors like Citrix (GoToMyPC) and Cisco (WebEx) that offer remote presentation and access.  This area will remain competitive as the existing giants won’t give up share easily.  LogMeIn seems unlikely to make substantial inroads in the enterprise.

 

Other red flags for LogMeIn’s business are as follows:

  • Intel, who was a venture investor in LogMeIn, used to have an agreement with the company to market their software with minimum contractual sales values.  They terminated this agreement in 2010 before its 2011 completion, even though they had to pay a $2.5 million break-up fee to do so.  When an early partner turns its back on you like that, it is not a good sign.
  • Insider selling is rampant.  Indeed, after its July 7, 2009 IPO at $16.50 per share the company did a secondary in November 2009 (mostly for existing investors) at $18.50 per share.  Insiders have recently been selling about several million per worth of stock per month (as the blackout window allows).  All the major executives (CEO, CFO, CTO, General Counsel, VP of Sales) have been sellers on the open market as well as the VC firm Prism VentureWorks which sold a reasonable chunk at current prices in December.
  • LogMeIn seems to have weak IP.  They have had to settle a patent lawsuit and they have never asserted claims against WebEx or Citrix even though they have very similar products.
  • Their successful iPhone App,Ignition, just changed its model to freemium in December.  This switch is likely not the sign of a product that is getting the kind of traction they were hoping for.
  • While not a significant issue yet, LogMeIn just started to capitalize software development costs.  Good software companies expense everything their accountants will allow them to.  This is an area in software that often is abused to boost near-term earnings numbers.  The growth in capitalized development expenses will merit watching, but is not significant yet.

Risks:

  • LogMeIn is still growing.  Should the competition take longer than expected to have an impact, the stock may rise for a while yet.  Indeed with a subscription model like they have it may be a year before we see the full impact of the new competition emerging (in particular iCloud in October 2011 and Windows 8 later this year).
  • Acquisition risk is twofold with LogMeIn.  First, LogMeIn could be acquired by someone who wants to enter their market.  Second, LogMeIn may use its $184 million cash pile to buy a business that has more staying power than the current one.  One example is their recent acquisition of Bold Software which enhances their corporate help desk abilities.  Even though, they don’t currently have a great business, they may just get lucky and buy one.
  • Watch out for new products like LogMeIn Rescue and Join.me.  While I think they are niche for now, they could grow into something more.

Valuation:

LOGM has clearly been lumped into the “cloud computing” valuation basket.  It trades at 53x 2012 street earnings.  If you use EV/EBITDA it is similarly insane at 25x 2012 street estimates.  This is very interesting because it is actually the cloud that is going to destroy LogMeIn’s business in the end.  Valuation alone is never a good reason to short, but with the aforementioned competition catalysts in the next year and a nosebleed valuation, LOGM seems a good risk reward here.

 
 
 

Catalyst

Increased competition from Apple's iCloud, Windows 8 with its Skydrive integration, Google, and online file lockers.
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