LoopUp Halves Revenue Prediction On Growing Client Base – What Next?

LoopUp Group PLC (LON: LOOP) shares haven't reacted well to today’s trading statement and there’s good reason for that. Essentially, LoopUp is claiming that they’re growing the business wonderfully into falling revenue. Now, this can work, if costs fall even faster than those revenues but it is a difficult trick to pull off.

LoopUp is in the telecoms business, where technological advance has been lowering the cost per minute for a full generation now. The irruption of VOIP into the market, among other things, hasn’t made life any easier for any of the incumbents.

LoopUp’s specific business is providing external – so, calls to people outside the organisation – links for those using Microsoft Teams set-ups. The market is mid-to-large-sized corporates. So far, an entirely respectable business to be in. Add in some technological advances, like using the cloud to provide it, and why not?

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The difficulty is that there’s significant competition here. Microsoft Teams might be able to link with Skype for example. Or everyone starts using WhatsApp. Or there are other cloud-based VOIP providers and so on. Intense competition during such a period of technological change tends to crater prices. And that’s the problem that LoopUp is facing.

The trading update tells us that revenues in FY 2021 will be around expectations, at £19 million and change. OK, so if it’s hitting expectations then why is the LoopUp share price down 25%? Because the same trading statement says that expected FY2022 revenue is in the £15-£16 million range. Oh, and that FY2020 revenue was £50 million.

Much of the announcement is about how the contract pipeline is looking really good, actual contracts are being won, clients onboarded. Everything’s just swimmingly good – except for those revenue figures. There’s even a certain amusement at the way that 2020 and 2021 numbers are right at the beginning of the update, the estimates for 2022 right at the end, with hundreds of words about how many contracts are being won in the middle.

That is, LoopUp faces a common enough problem in a time of technological change. However, cutting edge the company and its technology is the prices for what it is selling are cratering. It needs to have a massive client base growth rate just to keep revenues stable that is. Something which, obviously, it’s not actually achieving.

How LoopUp gets out of this isn’t obvious either. It needs either that client growth rate to soar, thus enabling the diminishing revenue per client to cover overheads, or it needs prices to at least stabilise if not rise. The increasing the client base solution also won’t work well if there are variable costs of any significance in bringing on the marginal customer.

We don’t know what the answer is here and nor does the rest of the market. The LoopUp share price will likely depend upon intimations of there actually being one.