Buhr: Sounds like the products are interesting. What do you think of the company's business?
Garcia: Well, I think that the technology behind their offerings is impressive. It has allowed the company to offer its services for free to a large customer base. In terms of the technology, it's impressive. Going forward is going to be interesting to see, if they are able to convert some of those free users into paying customers, which is the big question.
Buhr: From a valuation standpoint, you pegged LogMeIn's fair value estimate at 14 dollars per share. It priced last night at 16 dollars, and this morning it was pretty strong out the gate. The last I checked, it was around 20. Obviously, you are a little more pessimistic than the market right now. What are the some of the assumptions that go into your evaluation?
Garcia: Right. First of all, I think that there are so many things going on in the stock market in the short term, so it is really hard to know what is driving the stock price during the first days of the IPO. However, I think that my assumptions are fairly aggressive. If you look, the company has been growing exponentially; one million dollars in revenues from 2003, all the way to $50 million dollars in revenue last year. Going forward, I'm assuming that the company will grow revenues at 22% on a compounded annual growth rate over the next five years, including almost 60% revenue growth this year.
In terms of operating margins, the company has been profitable for a while. They became profitable two quarters ago. I'm projecting that the company will be able to post operating margins in the mid 20's over the next five years.
Buhr: What are some other risks that you could see standing in the way of the company's long term success?
Garcia: Well, my main concern is the company's ability to convert some of those of those free users into paying users. For a while, if you look at the whole user base, 90% of those users don't pay for the services. Only 10% of those users are supporting the whole company. Going forward, if they are not able to convert some of those free users into paying users, they will run into trouble.
Buhr: Rafael, thanks for joining us.
Garcia: Thanks for having me.
Buhr: So, LogMeIn now in the books. Looks like the IPO market might take a little bit of a breather. Check back with us soon, as we will provide insight on future IPOs as they come to market. With Morningstar, I'm Bill Buhr. Thanks for watching.
