Shares of Software-as-a-Service (SaaS) firm LogMeIn (LOGM
79.55, -24.90, -23.8%) slides to two-year lows after the company’s third
quarter and fiscal year 2018 outlook came in below market expectations.
All indications are that investors quickly looked past the second quarter beat; LogMeIn reported Q2 EPS of $1.32/share and revenue growth of 15% to $307.1 mln. Gross margins were 82% in the quarter, which were down from 83% in Q1.
Collaboration revenue, excluding the recently closed Jive acquisition, grew 2% year/year, which is a 3 percentage point decline from last quarter, mostly due to lower renewals. The company’s Identity and Access Management business grew 18% year/year and represented 29% of total company revenue. Continued strong growth of LastPass together with renewals of the company’s Access products drove the strong year/year performance. However, management highlighted on the conference call that the performance out of its traditional communications and collaboration businesses were worse than the company's expectations.
Management pointed to the combination of imperfect execution and some hangover effects of last year's merger with the GoTo business as the impetus for the disappointing renewal rates. As the company moved through the quarter, it became increasingly clear that some of the business practices it had put in place following the merger were negatively impacting renewal rates. Aggressively moving customers from monthly to annual payments, changing business terms and conditions, and barriers the company inadvertently created during the auto renewal process all contributed to friction for customers and admittedly made LogMeIn harder to do business with. In addition, the company admittedly failed to deliver some planned product enhancements and stated that it was slow to address some product quality issues that crept into the product last year as the company merged and realigned engineering teams. The impact of these issues was amplified by competitors who took advantage of these execution challenges and successfully target the company's customer base.
Heading into Q3, LogMeIn made changes in leadership and began to overhaul its business practices, make changes to pricing and packaging and increase the engineering team's focus on delivering on key product initiatives. However, the company believes it will take several quarters for these actions to meaningfully impact the renewal revenue. LogMeIn therefore expects that growth in its collaboration business will slow in the second half of the year. This performance, combined with FX headwinds impacting the company’s entire business has resulted in the company taking a more conservative view of the second half of 2018, and thus they are lowering their outlook for the full year.
Specifically, for Q3 the company expects revenue to be in the range of $302-304 mln. LogMeIn currently targets adjusted EBITDA to be in the range of $111-113 mln, and an adjusted EBITDA margin of approximately 37% of revenue. Further, the company’s net income per diluted share is expected to be in the range of $1.33-1.35.
For the full year 2018, the company expects revenue to be in the range of $1.185-1.195 bln (down from the previous $1.208-1.223 bln). Management lowered its full year revenue outlook by about $28 mln, about $9 bln due to changes in FX and the remainder due to collaboration renewals that were lower than forecasted in Q2 and which the company reduced in its second half year forecast to reflect its revised expectations. The company expects full year adjusted EBITDA to be in the range of $434-440 mln with an adjusted EBITDA margin of approximately 37% of revenue. The company’s net income per diluted share is expected to be in the range of $5.17-5.26 (down from the previous $5.20-5.31).
To boot, analysts at Piper Jaffray, RBC Capital Markets, Robert W. Baird, and JP Morgan downgraded their recommendations on shares following the report and guidance. Yesterday, shares found resistance for a fourth straight session in the 50-day simple moving average (107.38). After multiple failed attempts to break that level higher, the stock tests multi-year lows on Friday.
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