Shares in conference calling service LoopUp Group (LSE: LOOP) fell by almost 50% when markets opened this morning. They’ve since recovered somewhat. At the time of writing, the LoopUp share price is down almost 43% at 89p.
Today’s slump was triggered by a profit warning from the firm, which says competition is getting tougher outside its core professional services marketplace. In this piece I’ll explain what’s happening and what it could mean for shareholders.
Difficult market conditions
LoopUp provides cloud-based conference calling and telephony solutions. The firm’s selling point is that it provides an easy-to-use service with high levels of security, call quality and reliability.
Unlike rivals such as Zoom and Skype, which have targeted the mass market, LoopUp’s focus is on professional services companies — especially law firms. Even before the pandemic, LoopUp was shifting its focus away from more non-professional services customers.
Unfortunately, the pandemic has accelerated this shift. Non-professional services clients are calling less and often making cheaper calls. They may also be migrating to cheaper services such as Zoom.
Even the firm’s core professional services clients are enjoying cheaper calling rates. LoopUp says that per-minute costs have fallen by 24% this year, due to a shift from pay-as-you-go to subscription pricing. International call volumes have also fallen.
As a result of these changing usage patterns, LoopUp expects revenue and earnings to be lower than previously expected this year.
Take a step back: LoopUp is still growing
It’s worth remembering that it’s been a good year for this business. Even after today’s fall, LoopUp’s share price is still 50% higher than it was one year ago. The business is still growing quite strongly too.
Today’s guidance from the company indicates that 2020 revenue should be at least £50m. That’s an increase of 18% on 2019.
EBITDA (earnings before various deductions) is now expected to rise by 134% to £15m in 2020.
After today’s share price fall, this business is valued at roughly one times forecast sales. For a profitable, growing business, that might not be expensive. To put this in context, US-listed Zoom is valued at 38 times sales. That is expensive, in my view.
LoopUp share price: what happens next?
2020 has been a good year for companies that provide software that’s essential for working at home.
But with vaccines on the horizon and at least a partial return to the office likely in 2021, the challenge for companies such as LoopUp will be to keep hold of the customers they’ve gained this year.
Ahead of today, broker forecasts suggested that LoopUp’s revenue would be broadly flat in 2021, but that profits would fall significantly. I expect these forecasts to be trimmed after today’s news. But LoopUp says it’s still winning new business, including three recent wins with global top-100 law firms.
LoopUp’s pipeline of contract opportunities has an annualised contract value of £16m. Even if only some of these opportunities convert to orders, they could add significantly to the firm’s sales.
