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Seeking Alpha: Can you briefly summarize your bullish thesis for readers who may not have seen it yet?

Adestella Investment Management: We think LiveChat Software is an excellent buy and hold investment that possesses many of the hallmarks of a great business. The company operates in an attractive industry niche, with a rare combination of growth and profitability, as well as a track record of execution and aligned insiders. Furthermore, there are tailwinds for increased demand from investors both on a macro (Polish pension reform) and micro level (increased awareness/recent market value increases making position feasible for more funds). Getting all of this in a business generating 100%+ returns on capital at roughly a market multiple seems like a very attractive risk-reward to us.

Much of the mispricing stems simply from the company’s home market being underfollowed relative to Western Europe, much less the United States. Poland seems to be lumped in with some of its lesser-developed neighbors and/or former Soviet satellite states despite being the only one to achieve FTSE developed market status and to grow GDP faster than the G-7 average. We think this misconception may be preventing many non-Polish investors from considering the country as one to invest in. We think it also has some elements of an orphan equity because much of its customer base (and many software investors) reside in the US whereas the business trades only in Warsaw.

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However, these dynamics have also created opportunity – you won’t find any software companies in the US growing at 30-40% with 65%+ EBITDA margins that trade at 23x P/E multiple (or anything close to it). We don’t have a hard catalyst in mind here, but we suspect that if both Poland and LiveChat continue on their current paths that increased awareness and continued cash generation (leading to enterprise value reduction) will push shares higher. In the meantime, we’re happy to sit and take advantage of the company’s consistent capital return while we wait.

SA: To follow up, this is a very under the radar idea – can you discuss your idea gen process more broadly and specifically how you found this idea?

Adestella Investment Management: For us, finding under the radar ideas is a rather unglamorous two-step process: first find a good place to hunt, and then simply turn over a lot of rocks. We had stumbled upon several articles discussing the Polish investment landscape that compelled us to research it further, and we were pleasantly surprised by what we found – both in terms of the country’s economy and its equity market. Given that we had not really examined its companies in detail before, we thought it was certainly worth sifting through them to see if what the opportunity set looked like.

Our second-step “rock-turning”, particularly for international markets that receive less attention, is often facilitated by running financial screens based on a variety of themes. LVC happened to come up on a “compounder” style screen that looked for a long-term track record of growth, attractive profitability, and closely-aligned insiders. There were a few other names that met the criteria, but upon further diligence we came to view LVC’s business quality, market opportunity, and valuation as creating the best risk-reward proposition.

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SA: Can you discuss highlights from the recent earnings? Does this validate your thesis?

Adestella Investment Management: The 38% revenue and 41% net income growth was a fine result. The nice thing about owning a business that has almost all of its revenues recurring is that much of what’s released each quarter is already largely known beforehand. We didn’t see any real surprises in the flagship Livechat segment- paying users came within 10 of our estimate (30,391 vs. our 30,400 est.), and average ARPU was actually slightly higher than what we expected. Meanwhile, the emerging Chatbot segment (which grew 249% in Q1) is well ahead of the conservative pace we estimated for the year (100%).So while this thesis did not at all hinge on the specifics of the quarter, we viewed it as slight incremental positive and still feel very optimistic about the company’s future.

SA: If the discount to peers (based on the rule of 40 score) persists, do you see a strategic or financial acquirer stepping in? What about a management buyout since you note management previously did this by teaming up with a PE firm?

Adestella Investment Management: It’s certainly possible, but we don’t underwrite either as a part of our base case. All the founders are still involved in the company, and there’s no indication any are at a point where they’re looking for a liquidity event. Furthermore, the previous management buyout came at a time when the founders had stepped back and the business was not yet operating from a position of strength (it only had around 1,000 clients back then); now that the team is already in control and LVC is firing on all cylinders, there is likely less of an impetus for something like that. We think a more likely outcome than an M&A deal is an eventual dual-listing on an American exchange that would open the company up to a wider range of investors.

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Thanks to Adestella Investment Management for the interview.

Disclosure: I am/we are long LCHTF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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