LiveTiles: A cultural analysis

Since writing The changing face of investing (read part 1, part 2and part 3), I've been hunting around for a suitable candidate to test the London School of Economics' Unobtrusive Corporate Culture Analysis Tool (UCCAT).

If that sounds dull, believe me it isn't. LiveTiles has it all, from a flavour-of-the-month business model and a share price that's almost doubled in two years, to legal disputes (with some fascinating supporting documentation) and a colourful chief executive.

Founded in 2014, the company landed on the ASX in 2015 through a backdoor listing. It sells a software-as-a-service (SaaS) product selling to large enterprises which, in the words of the company, 'empowers [them] to create their own intelligent workplace experiences'.

This is drag-and-drop software that brings together disparate corporate information, sitting on top of Microsoft Sharepoint and Azure, tailored to each user and supported by artificial intelligence (see video introduction).

A sales person, for example, might use LiveTiles to access documents produced in Microsoft 365, track their monthly sales from Salesforce and lodge sick days and holiday requests, all in one place using artificial intelligence (AI) software.

So that's Livetiles. For its part, UCCAT has six 'dimensions', each containing 10 unobtrusive indicators of organisational culture or 'UICs'. As a young business, not all of these apply, but there's plenty to be going along with.

1. Customer focus

UICs: CEO customer focus; Company website; Customer engagement: Twitter/Facebook/Phone/Twitter; Customer satisfaction: Facebook; Market-focused language; Performance in customer survey; Regular customer survey.

Let's begin where every successful company starts, with happy customers. As an enterprise software company, it's hard to glean much from social media but customers appear to like the product. On Capterra, a software user review site, 25 entries give LiveTiles an average score of 4.5/5.

Dominic D's review is typical: 'Our employees are now able to do things that they could never do prior... Also, the BOT platform and the ease of creation and deployment has raised our bar for technology, collaboration, and information retrieval.'

The feedback from clients on various sites regularly praises the quality of support and the website does a good job of explaining the products and capturing leads.

A broader search, however, reveals a fragmented, competitive market. LiveTiles is up against Igloo, ThoughtFarmer and Jostle, all with products that score similarly, and Owler lists 10 similar businesses.

Chief executive Karl Redenbach's customer focus isn't much in evidence but LiveTiles was awarded the Microsoft US Partner Award for Modern Workplace Transformation, recognising "LiveTiles' leadership in customer impact, solution development, deployment and the exceptional use of Microsoft's advanced features".

2. Employee focus

UICs: Employee-focused language, profit-sharing, representation on the board; Employee satisfaction, strikes, training and turnover; Espoused values of diversity; Rating of employee focus; Women in the workforce.

LiveTiles' page on Glassdoor, a site where employees anonymously review their employer, features 33 staff reviews, with 81% approving of the chief executive, 71% with a positive business outlook and 70% happy to recommend to a friend.

The reviews suggest a workplace that employees either love or hate, one noting that 'if you like change, fast moving developments, and rolling up your sleeves - then this is one heck of a rewarding place to work. For those who cannot evolve with rapid change, recalibrate and leave sacred cows in the dust, then this is not a place to be.'

This comment may or may not apply to Anthony Girand, a former employee in the company's New York office who is currently suing LiveTiles for AU$33m*.

Girand's court submission describes an 'alcohol-fuelled work environment'. On his first day he was invited to lunch, where 'Redenbach ordered four "roadies" for himself and another employee, so they could continue drinking on the cab ride to the airport'. Coincidentally, travel and entertainment expenses were nearly four times IT expenses in 2018.

Almost all Girand's allegations are denied by the company and not much should be read into them. Some people like such a culture, others don't. What is beyond doubt is the sales-orientated nature of the organisation.

According to Girand's document, his target bonus would double his base salary. In the company's 2018 annual report commission expenses rose from $0.8m in 2017 to $2m. Glassdoor, meanwhile, lists 20 LiveTile job ads posted in the past month, ranging from a front-end developer in Ireland to a customer success manager in Oregon. Eleven are in sales, five in customer service and four in engineering. If you want employees focused on sales, LiveTiles is pulling all the levers.

This is a narrow definition of employee focus, of course. There is no employee representation on the board (unusual in Germany, not Australia) and nothing on espoused values of diversity. This shouldn't be a surprise. LiveTiles appears so focused on sales growth it has little time left for much else. 

3. Adaptability

UICs: Acknowledging the need to adapt; Adapting to negative events; Awareness of future challenges; Capital expenditure; Innovation focused language; Patents granted; R&D intensity; Responsiveness to negative events; Understanding success; User ratings of company apps.

The company's ability to adapt has yet to be tested. What we do know is that LiveTiles is investing in its product - contractor expenses rose from $0.8m to $5m last year - although not as much as in sales. One current employee wrote on Glassdoor that LiveTiles has 'too much focus on Sales and Marketing and not enough on product'.

This might be a necessity. There is a viral component to Xero and Atlassian that means their products sell themselves to a large degree. LiveTiles lacks this advantage. To meet a growth target of 59% a year for the next two years it must invest heavily. This is one of the principal reasons why a business that saw revenue grow $3.8m in 2018 also witnessed a $16m rise in expenses.

The company owns three patents but, if it is aware of future challenges, makes no reference to them. We'll be in a better position to assess LiveTiles' adaptability if sales growth fails to meet expectations.

4. Transparency 

UICs: Accessibility of communications; Availability of company information; Clarity of annual report; Clarity of press release archive; Intelligible CEO pay; No evasive discourse; Reporting incidents; Responding to questions; Transparency in press releases; Uninterrupted earnings calls.

Karl Redenbach's interview with Alan Kohler offers a revealing insight into these issues, particularly the means by which LiveTiles likes to be framed by those that run it.  

With revenue last financial year of $6.4m and operating expenses of $25.9m (requiring a $20m capital raise in February 2018) LiveTiles might be viewed as a business yet to fully prove itself.

Redenbach frames it differently, comparing LiveTiles with Australasia's two most successful tech stocks: 'We've benchmarked very, very well to both Atlassian and Xero. In fact from our numbers we're in front of them in growth rate at our age.'

There's a difference between a favourable comparison early in the life of a business and scaling to multi-billion-dollar valuations. This framing asks us to draw a direct line between those two things, as if one naturally follows another.

Redenbach then doubles down: 'In fact, the only company we're aware of that's grown faster than us to date is Slack which is about to IPO with very high multiples.' Slack posted revenues of over $400m in the fiscal year ended 31 Jan 2019 and has over 100 million daily active users.

The pumped-up messaging continues. In the 2018 annual report, Redenback talks of an agreement with N3, an outsourced sales and marketing agency: 'Already, N3's dedicated 60-person team has generated over $15 million of sales opportunities since late May 2018.' There is no elaboration on the meaning of 'sales opportunities'. Still, $15m eh?

There's also this: 'LiveTiles is perfectly positioned to capitalise on the growing AI market, which is expected to increase over 20 times between 2015 and 2024 to US$3 trillion'. There's that issue of framing again - point to the size of an opportunity and avoid mentioning the thousands of companies fighting over it. Big numbers do not equal big opportunities.

There are two obvious risks with LiveTiles. Revenue rose $3.8m in 2018 but expenses rose $16m. Thanks to a capital raise the company has cash of $17m but suffered an $18m outflow. If the expected revenue growth doesn't materialise the company will need more cash. 

The second risk is that the business is predicated on Microsoft not building its own competing product. There are 41 mentions of Microsoft in the 2018 annual report; none relate to this issue. Microsoft may not excel at user experience but that didn't stop it from developing Microsoft Teams when it could have bought Slack.

Central to the issue of transparency is a recognition of what might go wrong in a business. In its corporate communications LiveTiles gives the impression that nothing possibly could.

5. Governance

UICs: Adjusting CEO bonus; Board independence; Board visibility; CEO long-term orientation; CEO rating by employees; Leadership stability; No related party transactions; Shareholder approval: Chairperson; Shareholder approval: Remuneration; Women on the board.

Four people sit on LiveTiles' board, including founders and executives Redenbach and Peter Nguyen-Brown. For a large listed company this would be unusual, less so for a business like this.

The board is chaired by Cassandra Kelly, who has a background in banking and management consulting, with Andy McKeon, a former Facebook customer marketing lead, as a non-executive director. We may get to see whether this composition delivers independence but at this stage one can't say. As yet, the board hasn't been publicly tested.

On leadership stability LiveTiles scores highly. Redenbach and Nguyen-Brown are heavily invested in the business and probably want to see it through - the ideal ending being a trade sale to Microsoft I suspect - and most staff seem to like and respect them.

Remuneration could be seen differently. In 2018, Redenbach earned almost $1.3m, comprising a base salary and fees of $582,856, a cash bonus of $452,555 and share-based payments of $259,623.

Note that the cash bonus, part of short-term incentives, was higher than long-term incentives. The report also says that the 'key financial measure of performance over the longer term is the increase in annualised recurring revenue and share price appreciation'.

Comparing that with Xero - as Redenbach would like us to - makes this remuneration look high. In 2011, Xero had been listed for four years and had operating revenue of NZ$9.3m, yet chief executive Rod Drury received remuneration of just NZ$256,000.

In 2018, Xero also reported that 40% of its workforce and 33% of its board were female. The gender diversity statistics in its annual report show a comparison with 2017 to see progress. Diversity does not feature in the LiveTiles annual report.

6. Planning

UICs: Accurate accounts; Clawback provisions for long-term incentives; Clear performance indicators; Foreseeing events; Forward-looking plans; Long-term orientation; Meeting performance indicators; No profit warnings; No scandals; Safety planning.

LiveTiles' key objective is to grow ARR organically to at least $100m by 30 June 2021 - implying a growth rate of at least 59% a year. The company's planning, culture and organisational structure is built around this objective. Take the back page of the latest annual report:

 'LiveTiles is a global software company headquartered in New York, with operations in Seattle, Tri-Cities (Washington State), San Francisco, Los Angeles, Chicago, Minneapolis, North Carolina, Rochester, London, Sligo, Zurich, Amsterdam, Sydney, Melbourne, Brisbane, Geelong and Hobart.'

That's 18 operational centres, staffed by a total of 176 employees (see the company's LinkedIn page) servicing 536 customers. I'm all for growth planning but a list like this makes LiveTiles looks like the corporate version of a puffer fish. No wonder rent and occupancy expenses reached $1.4m last year.

Maybe there is a contingency plan if sales fail to materialise. But with a short-term incentive plan partly predicated on share price rises, management has no incentive to make it known. The plan is to grow sales and that appears to be pretty much it.  

Conclusion

AnyIntelligent Investor analyst that spent 30 minutes with LiveTiles' latest annual report would run a mile from it. A cultural analysis would only confirm that decision. Needless to say we have little interest in covering LiveTiles on an ongoing basis.

Where such an analysis might be more useful is when a prior financial assessment reveals an opportunity. A cultural evaluation might rule out a potential buying opportunity, but is unlikely to rule one in.

This analysis was an experiment so please let us know what you think of it, and whether you'd like to see similar reviews in future, in the comments below.

* Karl Redenbach and Peter Nguyen-Brown are also involved in a court case concerning their management of nSynergy, a Microsoft reseller in which they were shareholders alongside Karl's brother Keith Redenbach and Campbell Ray. Again, it's important not to read too much into unfinished legal business. However, there's clearly been some serious disagreement and that can't be a positive for culture.