The markets are near all-time highs, earnings season is going reasonably well, and it’s summertime!
What could go wrong?
As always, a lot of things. But, despite the pullback yesterday (specifically in tech stocks) the market appears to be in bull mode. Small caps have been toying with breaking out of their 2017 trading range (see chart below), but haven’t made a convincing move just yet. Keep an eye on the 870 level on the S&P 600 Small Cap Index.
As far as small-cap performance relative to large caps over the last week, it’s been pretty even. We outperformed in a few areas, but underperformed by a small amount in most. Still, over the last week, both small and large caps haven’t moved much.
Taking it all in, it still makes sense to proceed cautiously and not get too caught up into thinking we’re all amazing investors. We’ve had the wind at our backs, and frankly, it’s been hard not to make some money in this market.
Two of our companies reported this week, and we have a bunch more reporting next week. I’m also working on the next Issue of Cabot Small-Cap Confidential, which will come out next Friday.
As always, please send me an email if you have any questions!
Updates
Airgain (AIRG) Shares of our antenna stock are still moving sideways, but at least we now have an earnings date. Management will report Q2 earnings a week from Monday. And two days later, it will present at the Oppenheimer Technology, Internet & Communications Conference. I’m interested to hear how the Antenna Plus acquisition impacted results (it should add roughly $7.5 million in revenue over the next four quarters), as well as an update on the trend in average sales price per antenna (Antenna Plus should pull this higher). Average price in the last quarter was up 8% to $0.86, but some products from Antenna Plus go for close to $100. It still seems to me that the stock is cheap, growth is solid, and Antenna Plus contributions aren’t factored in to analyst estimates. Keeping at Buy. BUY.
Announced earnings date: August 7
AppFolio (APPF) AppFolio develops cloud-based software for property management firms and small law offices. The stock remains underfollowed by analysts, but that’s not stopping it from grinding higher. It hit another 52-week high late last week (36.53) but has leveled off a little since. Look for some support around 34. Still no earnings date yet, but obviously that will be a major determining factor as to where shares go next. Keeping at Buy for smaller positions. BUY.
Asure Software (ASUR) Our workforce management software provider has had a tough couple of weeks. It fell 10% last week on the surprise news of the CFO’s departure to re-join a private equity group that he worked with in the past. It then stabilized just above 13.5, but broke through that level yesterday. The next support zone to watch is 12.75. We’re up around 20%, and given the stock’s trend, I’m keeping at Hold until the tide turns. HOLD.
AxoGen (AXGN) Our nerve repair specialist fell back to near its 50-day line this week (a 7% drop) as the broader healthcare group moved lower (by around 2%). Earnings will be out next Wednesday, providing our first major update since I recommended the stock at the beginning of this month. BUY.
Announced earnings date: August 2
BioTelemetry (BEAT) Our digital heart monitoring play held up relatively well this week and even hit an intra-day 52-week high on Wednesday (35.75). Still no earnings announcement date. Remember that the LifeWatch acquisition makes this company roughly 50% bigger, so this earnings update will be significant in terms of framing the future of BioTelemetry. BUY.
Everbridge (EVBG) The company announced this week that it’s critical events management and enterprise safety apps are being used at all 25 of the busiest airports in the U.S. And that Nvidia just deployed its software for mobile employees. I don’t see these as major events, just an effort to communicate with subscribers. Keep holding half. HOLD HALF.
Announced earnings date: August 3
LogMeIn (LOGM) LogMeIn reported a very solid quarter yesterday with revenue just shy of expectations (not a big deal), but EPS and acquisition synergies all came in ahead. Factoring in the GoTo acquisition, revenue was up 209% to $257 million. EPS of $1.01 (up 106%) beat by $0.08, and the company now expects first-year synergies at around $90 million versus prior expectations of $55 million. Management isn’t yet willing to say total synergies will top its previous guidance of $100 million after year two, but it seems clear to me they are (as they should) guiding so they can under-promise and over-deliver. It sounds like tremendous progress has been made integrating the two companies’ sales forces, mapping out territories, cross selling products (over 90% of sales reps cross-sold in the quarter), moving all product development to central Europe (low cost), and integrating common business practices (like moving to annual subscriptions at GoTo versus the monthly model it was previously on).
Sales in the quarter broke down according to this chart, by product line. As you can see, Collaboration Cloud is the biggest by far (55% of revenue). International revenue was 23% of the total, and gross renewal rates are consistent with prior quarters at 75%.
Management updated guidance for 2017. It sees revenue around $1.014 billion, adjusted EBITDA around $357.5 million, and EPS around $4.05. That revenue figure is slightly above consensus, but the EPS figure is well above consensus of $3.87.
The bottom line is that things seem to be going well and, understandably, LogMeIn is forgoing some growth to focus on shoring up the merged businesses and getting everything aligned to get back into a more-growth oriented company. That said, we won’t be going back to 30% organic revenue growth (unless the new Bold360 CRM product totally explodes). This is more of a modest growth story with some income thrown in as well (it should be a big cash-flow generator). The company will be hosting its first Analyst Day in Boston in December and should be talking about new products and the next phase of GoTo-LogMeIn product consolidation. I think this quarter should help shares of LogMeIn retest their May high soon. But naturally, it all depends on the strength of the broad market. I continue to like the company and be impressed with the management team. Keep holding. HOLD HALF.
Earnings: DONE
MindBody (MB) Mindbody reported this week and revenue of $44 million (up 31.4%) was basically in-line, while EPS of -$0.01 beat by $0.04. As has been the story over the last couple of quarters, Mindbody continues its transition to a higher-value subscriber base after getting rid of its lowest cost solution (Solo) and focusing its efforts on high-value subscribers on its integrated payments platform. High-value subs not on its integrated payments platform are less of a priority (some have left), though the company is not pushing them out the door. The end result this quarter is that subscriber count fell by 574 (to 59,300), versus a decline of 466 in the prior quarter. Solo subs were the biggest group to leave (as expected). On the positive side, average revenue per sub was up to $244 and gross margin of 72.9% was up 3.9% (a significant amount). Consumer adoption is strong, with Mindbody now having over 6.5 million registered users, up 107% over this time last year. Consumers booked over 32 million sessions through the Mindbody app in Q2, up 63%. Integration of Lymber’s (recently acquired) dynamic pricing will happen by the end of Q3, which will make the Mindbody app like airline booking technology—pricing will fluctuate depending on a variety of factors (location, weather, hours/days before class begins, etc.).
The company is in the back half of its transition to a higher value subscriber base, and that’s a good thing. It makes the numbers a little sloppy in the meantime however. Declining subscriber growth is typically a red flag for a software company, but in this case, it’s not because the company is (in a way) doing it on purpose. The key will be a return to meaningful subscriber growth when the process is over. And that’s not going to be until Q4. We have to get through Q3 first, so the bottom line is we won’t know for around six months if this shift in strategy (which makes sense to me) is going to pay the dividends we all expect. Again, this isn’t bad. It’s just a process, and the lack of concrete answers means the stock could easily bounce around for the rest of the year—or at least until our next update on Q3 earnings.
Unfortunately, there was no mention of what the cash from the secondary stock offering is to be used for (not a huge surprise). But Pat Walravens, the analyst from JMP Group, did run through a series of questions that led down the path of breaking the business down to end market. Mindbody management said that the salon and spa market had the fastest growth in Q1 and Q2. They also said integration with Google Reserve won’t include salon and spa yet because the search engine technology isn’t yet sophisticated enough to handle all the variables of a woman booking a hair appointment (time, color, length, etc.). It’s far easier to book a yoga class, for example, so Mindbody is sticking with that vertical in Google Reserve for now. The punchline is that, to me, spa and salon remains a huge, untapped opportunity for Mindbody. And I expect they could be shopping for acquisitions in that space (I’ve speculated that Book4Time and/or Salon Iris could be on the short list).
Most analysts are leaving price targets around the 30 mark. That implies around 20% upside from here. But don’t be surprised if we bounce around for a while before there’s any real trend in the stock price. I suggest we just sit on our remaining half a position, monitor the stock’s technical signals, and, hopefully, be in it when it starts another big run in 2018 after getting through the business model transition. HOLD HALF.
Earnings: DONE
Primo Water (PRMW) Shares of our favorite bottled water company rewarded us with a 5% move higher this week, and volume yesterday was significantly higher than normal. It looks like somebody is snapping up shares ahead of earnings, which are due out on August 8. As I’ve been saying, I think the stock is cheap and the main thing holding it back is simply uncertainty regarding how the acquisition integration is tracking, what debt levels will look like, and how significant cross-selling opportunities are. BUY.
Announced earnings date: August 8
Q2 Holdings (QTWO) I read an interesting report from Thomson Reuters on M&A trends this year. Part of the report was dedicated to financial technology (fintech), and it said that, while M&A activity in fintech has leveled off this year, the market is still healthy. And that a significant proportion of investment is coming from established financial services players who are making moves into fintech, especially solutions focusing on B2B and banking services (which is what Q2 does). In general, the report supported my assertion that Q2 Holdings is well-positioned, that demand for its services will remain strong for many years, and that the company is an attractive acquisition target (if it wanted to sell), or could grow even bigger by making an acquisition of its own. We reduced our position to a half recently to take a little money off the table, so let’s keep holding the rest. Earnings are due out next week. HOLD HALF.
Announced earnings date: August 2
U.S. Concrete (USCR) Shares of our ready-mix concrete stock are down modestly (3%) for a second week in a row (down 2% last week), but they’re still holding up well and we now have an earnings date of August 8. Keep holding. HOLD.