Small Caps | Aug 17 2023
Expectations are on the rise for Life360 following second quarter results.
-Life360 displays strong second quarter operating leverage
-Management delivers on positive free cash flow
-Prior FY23 earnings guidance achieved in six months
-Preparing for broader international expansion in FY24/25
By Mark Woodruff
Location-based services provider Life360 ((360)) now enters its seasonally strongest period with good momentum, according to Goldman Sachs, after delivering on sales and exceeding expectations for operating leverage in the second quarter.
Morgan Stanley even suggests there is room for more positive earnings revisions depending on back-to-school and holiday trading.
Adding more fuel to the fire, an international expansion also awaits.
Expectations had risen prior to the result, as shown by a strong share price performance in the lead up, which jumped a further 12% upon the quarterly release.
The market wanted assurance of sustained positive free cash flow (FCF), Morgan Stanley explains, and Life360 duly delivered positive FCF and operating cash flow (OCF) of US$3.7m.
Bell Potter notes this outcome was consistent with management guidance of becoming cash flow positive from the second quarter onwards.
The company’s global family safety subscription service aims to protect people, pets and "things". Features of the Life360 mobile app range from communications to driving safety, as well as location sharing.
While FY23 guidance was retained for revenue, cash flow, hardware and other revenue, adjusted earnings guidance proved the highlight.
Given adjusted earnings of US$6.2m were realised in the second quarter (compared to the Goldman Sachs forecast for US$2m), and as the company hit guidance within six months of trading, management raised the FY23 bar to US$9-14m from US$5-10m.
It is Goldman Sachs' view this outcome provides the company flexibility to reinvest into growth, with management planning to launch full membership in the UK in the fourth quarter of FY23, followed by multiple other geographies in FY24/25.
Monthly active users (MAU) growth of 24% in the US, and 29% overall, continues to defy the law of large numbers, according to Morgan Stanley, and 62,000 net paying circle growth also exceeded expectations.
The one area of softness in the second quarter was price.
The analysts point out average revenue per paying circle (ARPPC) was softer by comparison with the first quarter exit rate in the US, despite an April Android price increase, while the ARPPC for International was softer primarily due to adverse currency movements.
A reduced loss
The second quarter statutory earnings loss of -US$14.6m was much better than Bell Potter’s forecast loss of -US$20.4m, largely due to a gross margin of 75.3% compared to the broker’s prior estimate of 70%, which drove a comfortable beat for gross profit.
As a result of the strong first half result, the upgrade to 2023 adjusted earnings guidance and the shift to positive earnings and cash flow, Buy-rated Bell Potter now applies a higher multiple to its forecasts earnings and raises its target to $10.50 from $9.25.
Life360 remains undervalued compared to domestic and global peers, according to Goldman Sachs, particularly in light of the long-term growth opportunity and transition from pre-profit to profitable technology baskets.
Given volatility in Life360’s hardware sales and the softer macroeconomic outlook, Morgan Stanley was unsurprised FY23 guidance was left unchanged (apart from earnings).
Nonetheless, this broker sees positive early signs for hardware now that it is being included in bundling packages and believes company-wide revenue will be durable based on global MAU growth of 29% and monetisation catalysts via membership expansion into new countries.
The key metric for the third quarter is again the growth in paying circles, and Bell Potter expects a growth number up around 100k or more.
This broker highlights such an outcome would not only represent a return to the sort of growth recorded in the first three quarters of 2022, but would also be more impressive given the material price rises put through in the second half of 2022 and the first half of 2023.
FNArena’s daily monitoring consists of Overweight-rated Morgan Stanley and Bell Potter (Buy) who actively cover Life360.
The average target price rises to $10.50 from $9.38, suggesting around 22.50% upside to the latest share price.
Goldman Sachs is not monitored daily. This broker retains its Buy rating and raises its target to $10.50 from $9.20.
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