Description

Background

LoopUp Group is a UK based provider of streamlined and intuitive conference call software. The company was founded in 2003 by Stanford Business School classmates Steve Flavell and Michael Hughes, the current co-CEOs of the company. Today, Steve and Michael jointly own 9% of the common shares. Central to LoopUp’s strategy is the belief that while feature-rich web conferencing products (e.g. Zoom) have had tremendous success with tech-savvy early adopters, over complexity generally is a barrier to adoption for the mainstream enterprise or mid-market consumer. LoopUp’s product is intentionally feature-light, requires no user training, requires no downloads (even for someone who is joining a LoopUp and is not a customer), requires no access codes, and is unapologetically audio-first.

Industry

LoopUp operates in the market for outsourced conferencing services, which they estimate to be worth 5 billion GBP based on the call volume from legacy dial-in audio conferencing products. Conference calls now account for more than 50% of all voice calls at large companies, and yet nearly 70% of all enterprise users are still dialing in with phone numbers and access codes. The time-wasting frustrations of dial-in are familiar: “That access code isn’t recognized.” “Who just joined?” “Who is it with all the background noise?” “I think you’re on mute.” And the list goes on. Research shows that people waste an average of 15 minutes on a typical conference call, whether getting things started or dealing with distractions throughout. That’s around a third of the time the business world spends on conference calls, or more than 26 billion GBP of wasted time value.

Product

LoopUp is a SaaS solution for everyday remote meetings that is designed to eliminate the common frustrations associated with dial-in conference calling while facilitating a richer meeting experience through leveraging essential software-enabled features. Some of the advantages of using LoopUp over a traditional audio-only conference product include:

§  Video Conferencing and Screen Sharing

§  Integration with Microsoft Outlook and LinkedIn profiles

§  Call start alerts

§  Ability to identify who is speaking at any time, mute a participant’s line, and click-to-record

§  No access codes

LoopUp has a base of over 2,000 enterprise customers including KIA Motors, Travelex, National Geographic, Subaru, and Clifford Chance. In addition, LoopUp has been adopted by 30% of the UK’s top law firms. Beyond its contrarian product strategy, LoopUp has an equally differentiated revenue model. LoopUp generates 98.5% of its revenue though pay-per-use contracts while virtually all conference call software competitors charge on a monthly per user basis. This even extends to specific product features within the LoopUp software. If a customer does not use the screen sharing feature or the video conferencing feature, they are not charged for it. This flexible pricing structure resonates with companies that are aware that license utilization between heavy-use and light-use employees can be dramatic.  Core to LoopUp’s product is audio-quality first. In this regard, unlike most conference call software that utilizes VoIP, LoopUp audio is always delivered over PTSN. While VoIP has come a long way and is cheaper to deliver, the audio clarity especially when connecting internationally can be unreliable. When a participant/host joins a LoopUp meeting, the software automatically dials out to a phone of their choice to connect them to the meeting. Pre-saved numbers make joining conference calls as simple as a single click. Importantly, LoopUp’s frictionless product flow and consistent user experience results in real customer adoption. Customers of LoopUp are no longer dialing-in with numbers and codes on 76% of their meetings, and 80% are leveraging the apps for Microsoft Outlook, iOS, and Android.

Competitors

LoopUp primarily wins business from legacy audio conferencing services such as InterCall, Arkadin, PGi, AT&T, Verizon, and BT. LoopUp positions itself as a premium software solution for a telco price.  However, this June LoopUp announced the introduction of its video conference feature, substantially expanding its addressable market and competitive landscape.

MeetingZone Acquisition

In May 2018, LoopUp announced that it would acquire legacy conferencing service provider MeetingZone for 61.4m GBP on a debt free basis. The acquisition would more than double LoopUp’s revenue base and was paid for primarily by issuing 12.5m shares at 4.0 GBP. The main opportunity provided by the acquisition was to transition the MeetingZone core audio conferencing customers to the LoopUp platform. Approximately 30% of LoopUp’s new business is driven by non-customer guests on LoopUp meetings, existing customer referrals, and previous LoopUp users now at new companies. As such, the acquisition would substantially contribute to increasing these network effects. Furthermore, LoopUp saw a clear path to eliminating 30% of MeetingZone’s cost base and the acquisition would provide a substantial amount of earnings to be reinvested in growth. We are now 11 of 12 months through the transition/integration, and management says that it has gone better than expected.  When LoopUp announced the acquisition, they traded at a market cap of 210m GBP. Today, the entire combined company trades for less than 60m GBP.

Operating Metrics / Pod Economics

LoopUp has 75%+ gross margins on their core product, is profitable, produces positive FCF, has grown revenue 5.5x over the last 3 years (organic growth between 20% -37%), has 5-6% customer churn rates, and has negative net revenue churn when including upselling. LoopUp utilizes a unique team based selling structure they call Pods. Unlike traditional commercial structures, the Pod make-up promotes efficiency between business development, sales, and account management activities. Pod members are recruited exclusively with no prior sales experience and are trained the LoopUp way. Pod members earn commission solely as team and are paid on the basis of new recurring revenue brought into the business. The Pod structure has demonstrated efficient and consistent results, and LoopUp plans to ramp up the number of Pods from 10 in the current year, to 16 in FY2020, and 22 in FY2021. Based on the current level of productivity and customer retention rates, LoopUp calculates that every dollar invested in Pods produces 6.0x return of customer LTV.

Mr. Market

Over the last 14 months, LoopUp group’s stock is down ~80%, after having been a 5-bagger since the August 2016 IPO. This is primarily due to a July 3rd trading update where LoopUp announced that they would be 7% under the consensus for Revenue and 20% under the consensus for EBITDA for the year. They also revised down the number of Pods they expected to have over the next 3 years due to more training than originally anticipated. Beyond this they announced an approximate 7% net customer churn figure which compares to negative net churn figures historically. Management stated that this was not a result of increased customer churn but do to a lower use of the product in the period, something that can have an impact given their revenue model. All in all, I believe the selloff has created a very attractive opportunity.

Valuation

Base Case

Bear

Bull

Risks

§  Product Development

o   While the software is intended to be simple and feature light, you don’t want to be mistaken for a cheap product. I would worry if LoopUp does not continue to innovate on the product.

§  Culture

o   The Pods based approach is very unique, but it’s possible to push your employees too hard. I would be worried if LoopUp pushed so hard on financial metrics that they destroyed their culture.

§  Market Pricing

• There is a risk that the communications software space looks more like telco economics than software economics. I would be worried if one of the large competitors decided to start substantially sacrificing profitability for market share. While the customer churn rate has been low historically, these products have low barriers to switching

Catalyst

Continued growth at attravtive LTV/CAC