LogMeIn Logs a Strong Third Quarter

This week LogMeIn Inc. (LOGM) reported earnings for the first full quarter that the company was public.  The stock has been a rousing success with the initial investors receiving stock on July 1 at a price of $16.  Initially, the stock began trading near $20 for a 25% initial premium to the deal price.  As is usually the case, the stock backed off a bit once the hype of the deal dissipated, and by August the stock was testing the $16. IPO level.  By the middle of this month the stock had successfully tested the initial price and broke to new highs in the low $20’s which is where the stock was positioned coming into the earnings announcement.

The third quarter looked very positive with the company reporting revenue of $19 million which is up 32%.  Earnings were also strong with non-GAAP earnings per share of $0.12 compared to $0.05 last year.  During the quarter the company generated operating cash flow of $7.1 million compared to $4.3 million last year, so the business model is certainly strong with the only question being how quickly and effectively management can scale in the future.

Investors appear to have been disappointed with the company guidance for the fourth quarter.  Management is guiding revenue expectations toward a range of $19.6 to $19.9 million which is 22% growth over the fourth quarter last year.  Earnings should come in between 11 and 12 cents per share so the high end “only” represents a 100% increase over last year.  Considering the last 3 quarters have shown a minimum of 200% growth in earnings per share, this number could be disappointing to investors who have bid up the price of LOGM based on aggressive growth assumptions.

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Looking at the financial strength of the company, it appears that LogMeIn is in a great spot to capitalize on growth opportunities with a strong war-chest of capital.  Currently the company is sitting on cash of $121 million which includes $84.5 million which was raised in the IPO transaction.  In the prospectus for this offering, the company announced that it intended to use the capital for development of new services, sales and marketing activities and capital expenditures.  These investments should continue to assist the company in growing its customer base and developing strong revenue growth.

One of the newest products (LogMeIn Central) appears to be generating revenue and strong interest within the firm’s customer base.  Michael Simon (President and CEO) had this to say about the new product’s performance in the third quarter:

We are particularly pleased with sales generated from the recent release of LogMeIn Central, a web-based console that complements LogMeIn Pro2, Hamachi2 and Free products. While it is early in the release and sales cycle for LogMeIn Central, we are encouraged by the initial adoption of Central by both our premium and free users. ~Michael Simon, President and CEO

Analysts are currently only forecasting 9% earnings growth in 2010 which leaves expectations at $0.59 per share.  However, with a significant amount of cash, a positive operating business model, and growth initiatives underway, I expect these expectations to prove conservative.  Employers are continually looking for ways to make their workforce more competitive and efficient and LogMeIn provides some excellent tools to drive these initiatives.

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Thursday’s trading has LOGM rebounding after two days of selling.  It appears that investors are being offered a chance to buy stock at a discount before the stock continues to run ahead of company growth.  I am strongly considering adding a position in this hot technology company to the ZachStocks Growth Model as we have a significant amount of cash on the sidelines waiting to be put to work.  The stock certainly carries some risk with the high price tag, but based on management’s ability to grow earnings, I believe this could be a strong position for 2010.

FD: Author does not have a position in LOGM

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