Q2/F24: A KITCHEN SINK QUARTER
THE TD COWEN INSIGHT
The Q2 results were messy, driven by the highly complex Motive/Axyom carve-outs, with the related significant miss likely to result in near-term share price weakness, in our view. However, management reiterated its confidence in these deals, and we believe its proven M&A track record helps support its more positive outlook. The decrease in our target is due to our reduced estimates.
Impact: NEGATIVE
Lower-than-expected carve-out contributions drive revenue miss. Q2 revenue of $162.8mm was well below our $182.4mm estimate. There were significantly lower-than- expected contributions from the Motive/Nokia ($21.4mm) and Axyom Core/Casa ($1.6mm) carve-outs due in part to shedding (unprofitable) contracts/projects. Accordingly, organic growth was -12% y/y (but maintenance and other recurring revenue organic growth was flat) with the 25% y/y revenue growth driven by M&A.
EBITDA and FCFA2S also miss. EBITDA of $38.9mm was well below our $55.3mm estimate, driven by the lower-than-expected revenue and significant Motive/Axyom restructuring expenses. Consequently, EBITDA margins fell to 23.9% (vs. 33.0% LQ and 29.7% LY).
FCFA2S of $2.8mm was also well below our estimate, given the lower revenue/EBITDA and an increase in DSOs (Nokia is collecting customer payments and then remitting to Lumine as part of the Transition Services Agreement) negatively impacting working capital.
Leverage remains low. Net debt increased to $133.4mm from $7.2mm in net cash last quarter, as LMN used its debt facilities to fund the Motive/Axyom carve-outs. Leverage was ~0.8x.
Heavy lifting at Motive/Axyom. LMN is spending a lot of time and resources strengthening the Motive and Axyom businesses, as both are among its most complex deals and Nokia being one of its biggest too. Customer contract/project reviews and restructuring activities are ongoing and could continue into Q4, but margins are expected to improve q/q and possibly reach pre-Motive/Axyom levels in Q4 (>30%). Despite these initial headwinds, LMN remains confident that the investment thesis for both carve-outs remain intact.
Encouraging signs at Axyom. Despite generating just ~$1.6mm in revenue in Q2 (two months contribution) due primarily to the bankruptcy process, LMN is optimistic on significant growth in the quarters ahead, based on close conversations with anchor customer Verizon.
Healthy M&A pipeline. LMN noted that M&A activity has been seasonally slow, but its pipeline remains solid. It continues to see little competition for carve-outs, which is likely to dominate near-term deal flow.