Livehire Healthy: We maintain the Add rating with an unchanged $0.53 target price
Livehire Healthy pipeline needs converting A largely inline quarterly with slightly higher revenue from the direct sourcing (DS) business and lower cash burn, offset by underwhelming customer growth in DS. Livehire Healthy has detailed a rather healthy pipeline in both business units.
Conversion of this pipeline is fundamental to seeing a re-rating in the stock. The US talent community continues to grow (+53% in the quarter to 1.3m applicants) signaling greater utility for new customers. Initial DS client spend ramping well, partner network continues to grow, with direct sourcing receiving greater market focus.
We maintain the Add rating with an unchanged $0.53 target price. Direct sourcing customer adds disappoint, pipeline points to an inflection point coming The next 6 months represents a pivotal period for LVH.
With the partner network established, and in the main onboarded (~10 of 13 partners being ready to sign end customers vs 4 at the beginning of the quarter) an end-market increasingly looking to adopt some form of DS capability, and Livehire being touted as a leading technology provider in the space, the scene is set for a period of strong customer additions. The pipeline in DS looks promising, with 31 live opportunities (7 in more advanced stages).
We have however, reduced our 2H21 DS customer additions (to 4 from 7) with a lengthening of the sales cycle seeing only one customer added in the quarter. Muted SaaS ARR growth belies improving fundamentals The domestic based SaaS business saw quarterly ARR growth of 3% (+23% yoy to A$4.04m). The net addition of 3 clients from 8 new logos implying the loss of 5 clients.
We understand these clients to have been part of LVH’s initial foray into the North American DS opportunity (included in the SaaS division given the nature of the initial DS model).
The upshot of this is that the domestic business actually saw no logo churn in the quarter, a welcome milestone for a business that has historically experienced high churn rates.
With over 90% of recent contract wins being on multi-year arrangements, the pipeline looking healthy (97 opportunities, 22 at the proposal stage) and consisting of larger deals, the outlook for this division is becoming increasingly promising.
Cash burn to increase next quarter, balance sheet supports current growth outlook A lower than expected quarterly cash burn is expected to increase in the 4Q with some product integrations in North America (seen as a selling point for one of their competitors so welcome) and some work around the enhanced GDPR privacy framework, falling in the quarter.
Despite this we see the current LVH balance sheet as well placed to support the growth outlook and move to FCF breakeven and beyond (expected in FY23). We retain the Add rating and $0.53 price target (39% upside) We make minor changes to our forecasts (detailed overleaf) and maintain our DCF-based target price at $0.53.
We remain attracted to the growth potential entailed in the direct sourcing opportunity and improving churn profile of the domestic SaaS business.
Company description Livehire is a provider of systems and software to the recruitment industry. The company’s current core product is the Talent Community system, which allows companies to maintain a databank of prospective employees that can be used to fill future vacancies. In addition Livehire’s technology is increasingly being used for internal redeployment and contingent staff procurement in North America.
The company sells its system both directly to enterprise customers and via channel partners such as Recruitment Process Outsourcing (RPO) organisations.
Forecast changes We detail our high level forecast changes post LVH’s 3Q update in the table below. In the main we make only minor alterations to our forecasts, with the main change being a reduction in the number of direct sourcing (DS) client wins assumed in Q4.
We believe the lengthening sales cycle to be a temporary timing issue and with 10 of the current 13 partners now onboarded and actively pitching for deals, we believe the promising pipeline should begin to convert into FY22.
Despite the underwhelming DS customer additions in the quarter, we remain confident that DS as a product offering is gaining traction (noting a soon to be released Staffing Industry Association report claiming 60% of contingent programs surveyed are likely to have some form of DS offering within the next 2 years). We also see the Livehire technology as well placed to become an incumbent provider in the space (noting a recent Ardent Partners Digital Staffing Platforms Technology Advisor report ranking Livehire as the strongest product offering surveyed).
The lower customer additions in the period have been offset by a higher than forecast revenue contribution from initial contracts, with contracts ramping quicker than expected (likely given the nature of some of the initial contracts such as the Ontario and Alberta Ministries of Health). The US talent community continues to build (+53% in the quarter to 1.3m applicants) increasing the appeal of the product offering for future clients.
Risks
• The risks to the LVH investment proposition remain around the trajectory of new client wins and the potential for LVH to fall short of expectations in this regard. The fledgling nature of the direct sourcing industry exacerbates this risk in that often clients will be undergoing some degree of operational change to their procurement processes when looking to install the Livehire solution.
• The other risk remains around continued elevated churn in the SaaS business and new client wins being at the lower end of revenue per contract expectations.
• With LVH yet to demonstrate an ability to operate on a positive cashflow basis, and with continued investment in systems and personnel required, the inability to grow as forecast would invariably place the balance sheet under pressure, this is despite the ~$16m of cash on hand seeing the company well placed in this regard.
• Despite LVH appearing to have a technology that is fit for purpose and measuring up well against existing competition, their does remain the risk of competitor activity increasing and superior technological advancements reducing Livehire’s product appeal.
– By CIMB Bank Research