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Think I’m right in saying that the cash position is up c$10.5m since end of Q1 ($4m on BS and $6.5m divi). Sentiment into Q2 improving. Not too bad overall IMO.

My first post on this share. Just picking up on the point above about possible further fundraises as a reason for selling here. Whilst we are trading at a decent premium to the latest available NAV of 104p, that NAV is 6 months out of date (being 31 December). Also, if I’m not mistaken, the amount raised in the March fundraise was £153m and we’ve only seen news of £63m of that being deployed on a Tesco in Colchester. With £90m still to be deployed, wouldn’t it be unlikely that we’d see another fundraise any time soon?

The H1 growth was driven by a sudden explosion of Loop being used for internal calls, on top of the external client calls it had always had. This was in circumstances where most of the contracts were PAYG and so unlimited. This could not last as clients came to realise that they needed to bolt down their spending. So a large switch over to committed minimum spend contracts occurred, being from 13% to 30% just in a few months, having taken years to just get to 13% to that point (and it’s now at 40%). There is no surprise at all that H2 was no-where near H1 (nor did the company or the brokers ever say otherwise) because minimum spend contracts are not as profitable as PAYG (but, importantly, they are more visible and guarantee revenue going forward). As to why September and October 2020 show minimal growth to January and February 2020, I suspect that this is because of the change in the macro economic circumstances (Loop’s H2 is as much a casualty as a beneficiary of the pandemic) and also because Teams (and also now Zoom) is taking some of the internal calls back off Loop. The key for Loop is to keep the external client calls, and that’s the core point that they have gone to some lengths to bolt down with 40% committed minimum spend contracts (but at a cost of revenue and profits).

As others have said, the real issue and reason for the drop in the SP is the 2021 predictions from Numis. These are based on the ARR of £34m, which at the moment is obviously low in the context of pretty poor economic conditions in which fewer external client calls are taking place. If the economic conditions recover, then so we might expect the revenue to recover.
I very much agree that news of new contract wins, and/or director buys will give the SP a major boost. But with the Numis figures hanging over it, until such time I can’t really see any meaningful SP recovery tbh.

All the above is to say nothing of the Teams pipeline conversion (and associated costs) which is difficult to predict.

For a similar view, see also Paul Scott in 27 November’s Small Cap Report on Stockopedia at this link:

https://app.stockopedia.com/content/small-cap-value-report-fri-27-nov-2020-boo-saga-loop-rch-710888?order=createdAt&sort=desc&mode=threaded

DYOR; GLA

I’ve been reflecting on the RNS and reading the comments here before deciding what to do. Where I come out is as follows.

The core business is PS (70% in July 2019 and 86% now), and that has been moving over from PAYG contracts to guaranteed minimum spend/ 24 month contracts since before the pandemic (5% at IPO were committed; moving to 13% pre-pandemic and 30% at the end of H1 2020). See for example their £2.34m contract with Clifford Chance which switched from PAYG to committed back in January 2019. What Loop is getting from the switch is better quality, visible and sustainable income, and losing some margin in exchange (as the RNS confirms). The 40% figure for committed term contracts by November 2020 is what I was expecting (as I said here on 20 November).

There is nothing in the latest RNS that is particularly unexpected as regards this core PS business. The investment case is that this core PS business can continue to attract new PS clients as it provides high quality, best in class audio and customer service for a competitive price. If you’re a law firm, bank etc doing negotiations, you can’t realistically use Zoom etc as it isn’t reliable or secure enough. Yes the margin will be less with committed contracts, but Loop can grow the revenue with new client wins from a largely fixed cost base (as to which, see the contract wins over the summer). This is the same investment case for the core PS business as there has always been.

So I would argue that it is not really fair to savage management credibility as some are doing here, since what they are doing is transitioning the core PS business from a PAYG model to a committed term model in the face of a massive spike in competition and during the most significant economic downturn of our generation (Loop has always been exposed to the macro economic environment, e.g. 2019, even though it benefitted in H1 2020 from a sudden WFH explosion). If you believe the Loop product is the best in class, then there is a good case for staying invested here.

The 14% non-PS business is a different story for sure. The scale of the drop off here was a bit unexpected, but, with the benefit of hindsight perhaps not that surprising given the massive growth of the competition and the dreadful economic situation in 2020. To stay invested, I’d need to believe that the likely continued drop off here is likely to be compensated by sufficient growth in the PS business. That looks to me like a bit of an ask, but not undoable, especially as Loop has a good reputation in the legal sector in particular. Would I take this chance at 150p? Probably not. But at <100p, probably yes.

Overall, I’m just about persuaded to stay invested here and stick my neck out to say that I think Numis in particular has overstated the potential downside in 2021 in a big way, having said something totally different just two months earlier. To my mind it is Numis that is lacking in credibility more than Loop management at this point t

https://app.stockopedia.com/content/small-cap-value-report-mon-16-nov-2020-pauls-recent-buys-ncyt-702158?order=createdAt&sort=desc&mode=threaded

Here is the link. It’s Monday 16 November, but think he wrote it on Sunday 15 November as a list of his holdings/ buys.

Paul Scott of Stockopedia says he has been buying Loop:

“Other things I’ve been buying, and why: Loop: the price got whacked recently, when the Pfizer vaccine news came through, unfairly I thought. Most recent trading news was fantastic, and I think some of that could stick, even if people do gradually go back to working in offices”. (Small Cap Report on 15 November)

The question I suspect people are asking is how much will stick? As to that, Loop said in the 23/9 H1 report that they have “Enhanced forward revenue visibility following material migration to committed term contracts (subscriptions and minimum spend) from rolling monthly pay-as-you go. As at end of H1 2020: - 30% of LoopUp business came from committed term contracts (13% at the start of the year) – Average committed term duration: 24 months”. They also said that H2 was seeing “Continued migration momentum towards committed term contracts”, so at end of H2 we might expect that figure to be 40%-50% committed term contracts. That’s a good start. Then there are the major contract wins over the summer (one top 5 global law firm and two top-100 law firms) that Loop announced.

I take from this that there are grounds for optimism that a decent amount of the increases to the H1 2020 revenues will stick, regardless of the impact of the vaccine on WFH practices. And that’s with no credit for the large Teams pipeline.

In terms of the SP, we’re now back to where we were prior to the H1 figures being announced back on 17 July, when we were in the 170s. So we’re written off all the rise on those H1 figures; the new contract wins; and the Teams news. And taken off another 10p – 15p. Just because a vaccine has been announced. That looks oversold to me, and I’ve added.

Alongside the existing business, the Teams explosion also creates a significant opportunity for Loop to offer secure cloud telephony services to Team users via Direct Routing, principally for important external calls, rather than internal calls. Loop’s product has the particular advantage that the quality of the audio is better due to Loop’s international private network, which is particularly so when there are lots of users on the call. The VoIP alternative in Teams is probably fine for 1 - 1 calls, and those internal calls where people have the patience to put up with any troubling audio. Loop’s product also does not require any downloads by those not using Teams, and Loop (probably rightly) claims to have much better customer service than Microsoft, AT&T etc etc. The pipeline of potential contracts is massive, at £25m per year. However, Loop has to invest significantly in new staff to exploit this opportunity and the conversion rate is unknown.

So taking all of this into account, in terms of comparing H2 2020 estimates with H2 2019 results, Panmure and Numis both have H2 revenue up 14.64% (23.1 as compared to 20.15), and Progressive up 13.46% (22.9 as compared to 20.15). In terms of H2 EBITDA, it’s the other way round, with Progressive up 75.8% (5.1 as compared to 2.9), Numis up 69% (4.9 as compared to 2.9) and Panmure up 62% (4.7 as compared to 2.9). I think I am right in saying that these estimates are based on the existing business alone, and give no credit for Direct Routing (which is also the case for the 2021 estimates).

In my view it is probably fair to say that these H2 estimates are conservative, because the last thing Loop wants to do is miss a target as it did in 2019. But they are probably not massively understating the position, as that would be silly given how far through the year we now are. So far so reasonably consistent across the three brokers/ analyst, and representing a consensus view.

In terms of the share price, however, I cannot identify any consensus. As far as I can see, Numis apply an 8-9 x 2020 EBITDA multiple to get to 270p and Panmure apply an 11 x 2020 EBITDA multiple to get to 324p. Progressive don’t offer a view. This is in circumstances where a not uncommon 13.5 x EBITDA multiple for small cap tech would give 424p (based on Progressive’s 17.3m EBITDA figure). Again, all very conservative, and no doubt driven by the scars of the past.

I suspect that it is the impact of this conservatism that sits behind commentators such as Paul Scott on Stockopedia saying that the “share price of LOOP has not properly reflected this stunning improvement in performance” and that “the market cap is lagging behind developments here”. ST said similar.

Obviously, DYOR.

Have been taking a look at a bit of this history and the investment case for Loop. Will share in x2 posts.

The existing Loop business based around PAYG minutes for remote calls/meetings contracts using secure telephone lines took a bit of a beating in 2019 due to macro economic factors driving down deal volumes and reducing the numbers of minutes used. Increased costs from hiring lots of sales staff also had an impact on profits.

With lockdown in March things suddenly changed for this existing business. The PAYG model suddenly became incredibly lucrative as the number of minutes being used by clients WFH exploded as they suddenly began using Loop not only for external meetings (as they always had done), but also for internal meetings (which they had not done before) as well. This drove up revenue in H1 by 43% and EBITDA by 247%. This could not last as lots of clients came to realise that a PAYG contract wasn’t the best for them in the new WFH working environment. So a rapid switch from PAYG to committed term contracts (minimum spend/ 2 years) took place from 13% to 30% by the end of H1, which consequently brings down revenue projections for H2 as compared to H1 (because H1 was exceptional as unlimited PAYG contracts suddenly took off), but not as compared to H2 2019 (because the minimum spend/ 2 year fixed term contracts still bring in more revenue than in 2019). Over the summer more contracts continued to be entered into for this existing business, including one major top five global law firm contract with a potential annual revenue in excess of £1m (judging by the existing Clifford Chance contract). In my view these new contracts show that the existing business still has good growth potential in the new WFH environment.

At the same time, the same WFH process has led to an explosion of professional services and other firms using Microsoft Teams. In terms of the impact on the existing business, Teams is taking/ will take at least some of the internal calls back off Loop, but the internal calls are not ones that Loop had pre pandemic so they don’t impact on H2 revenue as compared to 2019.