7:59 cut – LOOP

LoopUp (LOOP) – Profits warning. Following a cut in FY2019 EPS forecasts from 14p to 10p in March, today they issue a profits warning due to reduced usage from existing customers and lower availability of marketing staff.

Of these two issues, the former seems to be more worrying with 1% yoy gains giving way to 7% yoy falls. Falls in revenue of after installation would suggest a product that was sold to management / decision makers rather than bought / demanded by end-users. Perhaps the product isn’t quite as good or useful as previously thought? Apart from anything else this reduces the value of the customer base in a takeover situation. It may also be that more post-sales marketing support / spend is required to maintain usage levels. [Edit: I am of course dismissing their claim of reduced use due to macro-economic headwinds as delusional nonsense]

The second issue emphasises how reliant they are on marketing activity to maintain growth (and, given the first issue, revenue). This is perhaps inevitable, however in an ideal situation product take-up would grow exponentially through word of mouth and without large numbers of additional sales staff. Again this undermines claims of the underlying quality / utility of the product.

As has been previously flagged by Paul Scott, they capitalise a large amount of development spend. This will likely result in increasing EPS headwinds through amortisation charges over the next few years.

A severe share price reaction to this news is likely. The share price has already fallen 20% in the past few days due to what now looks like a leak from the company – it is difficult to know whether this will temper the size of today’s falls or merely add to the lack of confidence.

I currently have no position, but may investigate the company further. The company must be looking forward to their ShareSoc presentation on the 10th July with some trepidation!

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