Boku — Making payments pay

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Boku

Making payments pay

FY17 results

Software & comp services

11 April 2018

Price	84.5p
Market cap	£181m
$1.41:£1
Net cash ($m) at end FY17		16.2

Shares in issue	213.7m
Free float	35.4%
Code	BOKU

Primary exchange	AIM
Secondary exchange	N/A

Share price performance

%	1m	3m	12m
Abs	2.4	0.6	N/A
Rel (local)	2.4	7.0	N/A

52-week high/low

86.0p

59.0p

Business description

Boku is the largest independent direct carrier billing (DCB) company. DCB uses a consumer’s mobile bill (pre-paid credit or post-paid monthly bill) as the means to pay for digital content or services. Boku operates a billing platform that connects merchants with mobile network operators (MNOs) in more than 50 countries. It has 148 employees, with its main offices in the US, UK, Germany and India.

Next events

H118 trading update

July 2018

Analysts

Katherine Thompson	+44 (0)20 3077 5730
Alasdair Young	+44 (0)20 3077 5700

tech@edisongroup.com

Edison profile page

Boku is a research client of Edison Investment Research Limited

Boku’s FY17 results confirmed growth in all metrics, as new merchant connections helped drive a more than doubling of monthly active users and a tripling of payment volumes. With underlying costs actually falling year-on-year, the company significantly reduced losses and is on course to generate positive operating profit and EPS in FY18. FY18 outlook is unchanged and our forecasts are substantially unchanged. With net cash of $16m, the company is in a strong position to fund future growth, with products under development to use carrier data to optimise e-commerce.

Year end	Revenue ($m)	EBITDA* ($m)	EPS* ($)	DPS ($)	P/E (x)	EV/EBITDA (x)
12/16	17.2	(12.3)	(0.08)	0.0	N/A	N/A
12/17	24.4	(2.3)	(0.03)	0.0	N/A	N/A
12/18e	32.7	4.9	0.01	0.0	133.7	49.0
12/19e	40.1	11.6	0.03	0.0	36.7	20.6
12/20e	47.8	18.5	0.06	0.0	20.6	12.9

Note: *EBITDA and EPS (diluted) are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

FY17 results in line; strong growth in all metrics

Boku reported FY17 results in line with our expectations: strong growth in monthly active users (+141% y-o-y) generated growth in total payment volumes (TPV) of 207% y-o-y which, once taking into account the mix of transaction types, resulted in revenue growth of 42%. Better buying power and lower underlying operating costs led to a substantial narrowing of the EBITDA loss from $12.3m in FY16 to $2.3m in FY17, with positive EBITDA in H217. As a result of funds raised in the November IPO, the company closed the year with a net cash position of $16.2m.

Positive FY18 outlook; development of new products

The combination of new connections, growth in digital content, and growth in user numbers from recent connections support our revenue forecasts in the short to medium term. Longer term, Boku is looking to supplement its payment solutions with new products relating to customer registration, authentication and location. As management expects FY18 TPV and revenue growth to be in line with market expectations, we make no changes to our revenue and EBITDA forecasts. Small changes to operating profit and net income relate to revised amortisation forecasts.

Valuation: Reflects strong growth potential

Near-term EV/EBITDA and P/E multiples are at a premium to peers, but in our view are justified by the company’s strong sustainable earnings growth potential. Data points to evidence that Boku is meeting or beating its current plan include updates on new major merchant wins, existing merchant roll-outs to new carriers and/or new geographies, TPV growth, and tracking the performance of current key merchants. In the longer term, we expect to see new products developed to extend the services that can be offered by merchants and MNOs, and could see bolt-on acquisitions to acquire technology or customer relationships.

Review of FY17 results

Exhibit 1: FY17 results highlights

$m	FY17e	FY17a	Diff	y-o-y
Revenues	24.0	24.4	1.8%	42.0%
Gross profit	22.0	22.1	0.6%	58.2%
Gross margin	91.8%	90.7%	-1.0%	9.3%
EBITDA	(2.5)	(2.3)	7.1%	81.1%
EBITDA margin	-10.4%	-9.5%	-8.7%	61.9%
Normalised operating profit	(4.0)	(4.0)	0.3%	70.7%
Normalised operating profit margin	-16.8%	-16.5%	0.3%	63.5%
Reported operating profit	(6.8)	(8.4)	-23.6%	57.7%
Reported operating margin	-28.4%	-34.5%	-6.1%	81.3%
Normalised PBT	(6.3)	(6.4)	-1.7%	57.0%
Reported PBT	(9.1)	(28.0)	-206.7%	-32.3%
Normalised net income	(4.8)	(4.8)	-1.7%	57.0%
Reported net income	(9.3)	(28.1)	-202.0%	-36.4%
Normalised basic EPS	(0.09)	(0.03)	65.5%	59.9%
Normalised diluted EPS	(0.09)	(0.03)	65.5%	59.9%
Reported basic EPS	(0.18)	(0.19)	-2.4%
Dividend per share	0.00	0.00	N/A	N/A
Net debt/(cash)	(17.0)	(16.2)	-4.5%	101.9%

Source: Boku

Boku reported revenues, gross profit and adjusted EBITDA marginally ahead of our forecasts for FY17. Revenues increased 42% y-o-y and gross profit 58%. As a result of stronger buying power, Boku reduced the absolute amount of costs of goods, resulting in gross margin expansion from 81% in FY16 to 91% in FY17. Adjusted operating expenses (which exclude depreciation, amortisation, share-based payments, FX and exceptional items) reduced 6.9% y-o-y to $24.5m, as the company switched some engineering resource from the US to India. The FY17 EBITDA loss of $2.3m reduced significantly from the $12.3m loss reported in FY16. With an EBITDA loss of $2.76m reported in H117, this implies a positive EBITDA of $0.44m in H217 (3.1% margin).

Normalised operating profit was in line with our forecast, whereas a $2.2m exceptional charge for the secondary element of the recent IPO resulted in a higher reported operating loss than we had forecast. The convertible debt ($15.1m at end FY16) that converted just prior to the IPO resulted in an exceptional finance charge of $17.1m. On a normalised basis, the company reduced the net loss from $22.3m in FY16 to $4.8m in FY17. Net cash at year-end, excluding restricted cash of $1.4m, stood at $16.2m, made up of gross cash of $18.7m and short-term debt of $2.5m (the company paid down some of its facility with Silicon Valley Bank, which stood at $6.1m at the end of FY16).

Transaction-based volumes drive TPV, reduce average take rate

As previously announced in the January trading update, total payment volume (TPV) tripled year-on-year from $554m in FY16 to $1.7bn in FY17. We calculate that the “take rate” reduced from 3.1% in FY16 to 1.4% in FY17, reflecting the significant growth in lower-margin, transaction-based volumes compared to higher-margin, settlement-based volumes. Monthly active users in December reached 8.1 million, up from 3.4 million in December 2016. The company noted that the average transaction value had increased from $8 in FY16 to nearly $11 in FY17.

Positive momentum continues into Q118

The company reports that TPV in Q118 totalled $727m (+170% y-o-y) and monthly active users had increased to 9.2 million by quarter end (+138% y-o-y, +14% q-o-q). On the basis of trading year to date, management is confident that it can meet market expectations for revenue and expects to be EBITDA positive throughout the year.

Benefits of scale becoming evident

The company has managed to reduce cost of goods sold and adjusted operating expenses in FY17, while growing revenues by 42%. The company noted that the cost to implement a new connection to its platform has roughly halved over the last couple of years. This has resulted in a substantial narrowing of the EBITDA loss for the year, and a positive EBITDA for H217. With only a small increase expected in adjusted operating expenses in FY18, any additional revenues should drop through to operating profit at very high margins. Year to date, the company is EBITDA positive on a monthly run rate and we expect a full year EBITDA of $4.9m in FY18.

To cope with the increasing volume of transactions passing across the platform, the company has tested the system up to a peak volume of 400 transactions per second, which compares to the current peak of c 200 transactions per second. Storage capacity was doubled recently, significantly improving latency but with no increase in system costs.

Business update

Increasing merchant connections

In FY17, Boku added 45 Boku Account connections to a number of merchants, including Apple, Microsoft and Spotify. The company has successfully migrated EE in the UK (30 million subscribers) and MTS (78 million subscribers across Europe) onto its platform for their existing Google Play Store connections. A quote from MTS confirms that it has seen a 30% uplift in volumes since the switch as well as a more stable service. Boku started roll-out to Activision Blizzard during FY17.

When we last wrote in February,1 Apple was using Boku’s platform to offer DCB in 29 countries via 48 operators. Since then, Apple has added six carriers including EE in the UK, Orange in France and Telekom in Germany, and now serves 32 countries.

Extending the reach of digital content merchants, 28 February 2018.

The company continues to focus its efforts on signing up the largest merchants in the largest addressable markets, as opposed to adding connections to every operator in every country. We note that Netflix has a contract with Boku to trial its service and, if it decides to roll out DCB more widely, Boku should be well placed to benefit.

Product development: Registration, verification and location

While some product development resource will be focused on billing solutions, the company is also keen to widen its product range to take advantage of the platform it has built and the network of operator connections it has already made. As MNOs have access to a certain amount of information on subscribers such as name, age, postal address, email address, credit status (for post-paid contracts) and location, Boku believes it can help operators to provide services that make use of some of these data. This includes services related to registration (eg form-filling), verification (eg provision of utility bill, confirming address) and location. The company has created a new division, Boku Mobile Identity, to develop these solutions and will consider both in-house development and/or the acquisition of relevant companies to accelerate the process. The intention is that these new products would start to contribute revenues from FY19.

Changes to forecasts

We have made minimal changes to our forecasts, as the outlook for FY18 is unchanged. The table below summarises the changes. We have made small adjustments to our amortisation forecasts to reflect the amounts reported in FY17; this results in small changes to our operating profit and net income forecasts.

Exhibit 2: Changes to estimates

$m	FY18e				FY19e				FY20e
$m	Old	New	Change	y-o-y	Old	New	Change	y-o-y	Old	New	Change	y-o-y
Revenues	32.7	32.7	0.0%	33.8%	40.1	40.1	0.0%	22.7%	47.8	47.8	0.0%	19.4%
Gross profit	30.3	30.3	0.0%	36.8%	37.4	37.4	0.0%	23.4%	44.7	44.7	0.0%	19.7%
Gross margin	92.8%	92.8%	0.0%	2.0%	93.3%	93.3%	0.0%	0.5%	93.5%	93.5%	0.0%	0.2%
EBITDA	4.9	4.9	-0.4%	N/A	11.6	11.6	0.3%	138.2%	18.5	18.5	0.2%	59.9%
EBITDA margin	15.0%	14.9%	-0.4%	N/A	28.9%	29.0%	0.3%	14.0%	38.7%	38.8%	0.2%	9.8%
Normalised operating profit	3.3	3.5	6.2%	N/A	10.2	10.4	1.5%	199.9%	18.0	18.1	0.2%	74.0%
Normalised operating profit margin	10.0%	10.6%	0.6%	N/A	25.5%	25.9%	0.4%	15.3%	37.7%	37.7%	0.1%	11.8%
Reported operating profit	0.9	1.0	13.9%	N/A	7.8	7.9	1.0%	686.5%	15.7	15.6	-0.3%	96.9%
Reported operating margin	2.7%	3.1%	0.4%	N/A	19.6%	19.8%	0.2%	16.7%	32.7%	32.6%	-0.1%	12.8%
Normalised PBT	2.5	2.7	8.1%	N/A	9.7	9.8	1.6%	264.3%	17.5	17.5	0.2%	78.2%
Reported PBT	0.1	0.2	102.6%	N/A	7.3	7.4	1.1%	2939.0%	15.1	15.0	-0.3%	104.3%
Normalised net income	2.0	2.1	8.1%	N/A	7.6	7.8	1.6%	264.3%	13.8	13.8	0.2%	78.2%
Reported net income	0.1	0.2	193.8%	N/A	6.9	7.0	1.1%	3699.3%	13.6	13.5	-0.3%	93.5%
Normalised basic EPS	0.01	0.01	8.1%	N/A	0.04	0.04	1.6%	264.3%	0.06	0.06	0.2%	78.2%
Normalised diluted EPS	0.01	0.01	8.1%	N/A	0.03	0.03	1.6%	264.3%	0.06	0.06	0.2%	78.2%
Reported basic EPS	0.00	0.00	193.8%	N/A	0.03	0.03	1.1%	3699.3%	0.06	0.06	-0.3%	93.5%
Net debt/(cash)	(20.8)	(21.4)	2.7%	31.8%	(31.9)	(32.0)	0.4%	49.8%	(49.3)	(49.0)	-0.5%	53.2%

Source: Edison Investment Research

Valuation

We have compared Boku’s valuation metrics to the wider payment processing market on a two-year view – by FY19, Boku is trading on an EV/EBITDA multiple of 20.6x, compared to the peer group average of 16.4x. By FY20, we expect this to reduce to 12.9x. Over this period, Boku is forecast to grow revenues faster than the peer group average. On a free cash flow basis, we forecast that Boku will be yielding 4.4% in FY19 compared to the 6.1% average for the peer group (excluding First Data, which is heavily indebted). As Boku moves into FY20, we forecast a free cash flow yield of 6.9%; only limited consensus data are available for this period.

Exhibit 3: Peer group financial metrics

	Share price	Market cap	EV	Rev growth			EBITDA margin			EBIT margin
	List ccy	List ccy	Rep ccy	2017	2018e	2019e	2017	2018e	2019e	2017	2018e	2019e
Boku	84.5	181	238	42.0%	33.8%	22.7%	-9.5%	14.9%	29.0%	-34.5%	3.1%	19.8%
Bango	157.5	110	105	58.2%	97.5%	53.0%	-55.6%	23.2%	46.2%	-93.7%	15.9%	N/A
Ingenico	67.88	4,233	5,750	8.6%	11.0%	7.0%	19.2%	19.9%	20.3%	14.8%	16.2%	16.9%
Safecharge	296	438	510	7.3%	14.2%	13.0%	26.7%	29.3%	29.3%	22.1%	24.9%	24.9%
Worldline	41.1	5,463	5,329	21.7%	7.1%	6.9%	17.3%	22.3%	23.3%	11.6%	17.0%	17.9%
Wirecard	101.25	12,511	11,739	43.9%	27.4%	21.3%	27.8%	28.6%	29.8%	22.3%	23.3%	25.0%
FIS	97.15	32,177	40,351	-1.3%	-6.2%	3.4%	31.6%	36.6%	37.3%	16.4%	28.5%	29.5%
First Data Corp	15.845	14,717	33,489	3.7%	-3.0%	4.8%	34.3%	42.2%	42.6%	21.1%	26.5%	28.0%
Fiserv	71.02	29,334	33,909	3.5%	3.0%	4.3%	34.5%	36.3%	36.6%	26.9%	31.2%	31.9%
Global Payments	110.37	17,607	21,737	37.2%	-0.7%	9.9%	25.4%	34.0%	34.6%	14.1%	31.4%	32.1%
PayPal	76.59	91,884	87,261	20.8%	16.4%	15.9%	22.4%	26.3%	26.5%	16.2%	20.1%	21.1%
Square	47.07	18,645	18,144	43.3%	36.0%	29.5%	14.1%	18.8%	24.6%	-5.5%	0.2%	7.2%
Worldpay	80.65	25,235	30,884	11.5%	82.3%	9.5%	39.6%	46.8%	50.1%	24.6%	41.9%	47.1%
Average payment processors				21.5%	23.8%	14.9%	26.6%	30.4%	33.4%	16.8%	23.1%	25.6%

Source: Edison Investment Research, Bloomberg (as at 9 April)

Exhibit 4: Peer group valuation multiples

	EV/EBITDA			P/E			FCF yield
	2017	2018e	2019e	2017	2018e	2019e	2017	2018e	2019e
Boku	N/A	49.0	20.6	N/A	133.7	36.7	N/A	2.3%	4.4%
Bango	N/A	55.4	18.2	N/A	787.5	31.5
Ingenico	11.9	10.4	9.5	15.6	13.8	12.3	6.3%	9.7%	10.7%
Safecharge	17.1	13.6	12.0	24.7	20.6	18.2	5.8%	5.2%	5.8%
Worldline	19.3	14.0	12.5	40.3	30.9	26.3	3.3%	5.7%	6.4%
Wirecard	28.5	21.8	17.2	46.7	35.3	27.4	4.0%	4.8%	5.8%
FIS	14.0	12.9	12.2	39.5	18.7	16.8	5.0%	7.1%	8.1%
First Data Corp	12.0	10.1	9.5	14.9	11.4	10.2	10.4%	10.3%	11.5%
Fiserv	17.3	15.9	15.1	30.7	22.8	20.2	4.0%	4.9%	5.7%
Global Payments	21.5	16.2	14.5	43.5	21.8	18.8	1.9%	5.5%	6.0%
PayPal	29.8	21.8	18.6	44.7	33.5	27.6	2.0%	5.2%	5.7%
Square	N/A	72.2	42.6	N/A	103.4	61.3	0.6%	1.5%	2.0%
Worldpay	36.8	17.1	14.6	87.3	21.7	18.1	5.2%	3.9%	4.4%
Average payment processors	20.8	23.4	16.4	38.8	30.4	24.1	4.4%	5.8%	6.6%
Exclude First Data							3.8%	5.3%	6.1%

Source: Edison Investment Research, Bloomberg (as at 9 April)

Exhibit 5: Financial summary

	$'m	2014	2015	2016	2017	2018e	2019e	2020e
31-December		IFRS	IFRS	IFRS	IFRS	IFRS	IFRS	IFRS
INCOME STATEMENT
Revenue		18.3	19.2	17.2	24.4	32.7	40.1	47.8
Cost of Sales		(4.1)	(4.0)	(3.2)	(2.3)	(2.4)	(2.7)	(3.1)
Gross Profit		14.2	15.2	14.0	22.1	30.3	37.4	44.7
EBITDA		(9.6)	(11.4)	(12.3)	(2.3)	4.9	11.6	18.5
Normalised operating profit		(9.8)	(12.4)	(13.8)	(4.0)	3.5	10.4	18.1
Amortisation of acquired intangibles		(0.8)	(1.9)	(1.7)	(1.3)	(1.3)	(1.3)	(1.3)
Exceptionals		(2.1)	(0.1)	(2.4)	(2.2)	0.0	0.0	0.0
Share-based payments		(1.7)	(1.8)	(2.1)	(0.9)	(1.2)	(1.2)	(1.2)
Reported operating profit		(14.4)	(16.2)	(19.9)	(8.4)	1.0	7.9	15.6
Net Interest		(0.6)	(0.4)	(1.2)	(2.4)	(0.8)	(0.6)	(0.6)
Joint ventures & associates (post tax)		0.0	0.0	0.0	0.0	0.0	0.0	0.0
Exceptionals		0.0	0.0	0.0	(17.1)	0.0	0.0	0.0
Profit Before Tax (norm)		(10.4)	(12.8)	(15.0)	(6.4)	2.7	9.8	17.5
Profit Before Tax (reported)		(15.0)	(16.6)	(21.1)	(28.0)	0.2	7.4	15.0
Reported tax		(0.4)	(0.4)	0.5	(0.1)	(0.1)	(0.4)	(1.5)
Profit After Tax (norm)		(7.8)	(9.6)	(11.2)	(4.8)	2.1	7.8	13.8
Profit After Tax (reported)		(15.4)	(17.0)	(20.6)	(28.1)	0.2	7.0	13.5
Minority interests		0.0	0.0	0.0	0.0	0.0	0.0	0.0
Discontinued operations		0.0	0.0	0.0	0.0	0.0	0.0	0.0
Net income (normalised)		(7.8)	(9.6)	(11.2)	(4.8)	2.1	7.8	13.8
Net income (reported)		(15.4)	(17.0)	(20.6)	(28.1)	0.2	7.0	13.5

Basic ave. number of shares outstanding (m)		21.3	27.4	140.1	150.3	213.6	213.6	213.6
EPS - basic normalised ($)		(0.36)	(0.35)	(0.08)	(0.03)	0.01	0.04	0.06
EPS - diluted normalised ($)		(0.36)	(0.35)	(0.08)	(0.03)	0.01	0.03	0.06
EPS - basic reported ($)		(0.72)	(0.62)	(0.15)	(0.19)	0.00	0.03	0.06
Dividend ($)		0.00	0.00	0.00	0.00	0.00	0.00	0.00

Revenue growth (%)		#DIV/0!	4.7	(10.4)	42.0	33.8	22.7	19.4
Gross Margin (%)		77.6	79.1	81.4	90.7	92.8	93.3	93.5
EBITDA Margin (%)		(52.5)	(59.2)	(71.4)	(9.5)	14.9	29.0	38.8
Normalised Operating Margin		(53.2)	(64.4)	(80.0)	(16.5)	10.6	25.9	37.7

BALANCE SHEET
Fixed Assets		32.7	30.8	26.8	26.9	25.1	23.3	21.3
Intangible Assets		32.5	30.1	25.7	25.8	23.6	21.6	20.4
Tangible Assets		0.2	0.7	0.5	0.4	0.5	0.5	0.7
Investments & other		0.0	0.0	0.6	0.7	1.1	1.1	0.3
Current Assets		72.5	53.0	48.9	79.3	92.7	116.5	144.4
Stocks		0.0	0.0	0.0	0.0	0.0	0.0	0.0
Debtors		59.7	43.3	37.1	59.1	67.4	80.6	91.4
Cash & cash equivalents		12.0	9.0	11.3	18.7	23.9	34.5	51.6
Other		0.7	0.6	0.5	1.4	1.4	1.4	1.4
Current Liabilities		(69.6)	(65.5)	(61.0)	(77.5)	(87.8)	(101.5)	(112.7)
Creditors		(64.6)	(60.4)	(54.9)	(75.0)	(85.3)	(99.0)	(110.2)
Tax and social security		0.0	0.0	0.0	0.0	0.0	0.0	0.0
Short term borrowings		(5.0)	(5.1)	(6.1)	(2.5)	(2.5)	(2.5)	(2.5)
Other		0.0	0.0	0.0	(0.0)	(0.0)	(0.0)	(0.0)
Long Term Liabilities		0.0	(0.3)	(15.2)	(0.1)	(0.1)	(0.1)	(0.1)
Long term borrowings		0.0	(0.2)	(15.1)	(0.0)	(0.0)	(0.0)	(0.0)
Other long term liabilities		0.0	(0.1)	(0.1)	(0.1)	(0.1)	(0.1)	(0.1)
Net Assets		35.5	18.0	(0.4)	28.6	30.0	38.2	52.9
Minority interests		0.0	0.0	0.0	0.0	0.0	0.0	0.0
Shareholders' equity		35.5	18.0	(0.4)	28.6	30.0	38.2	52.9

CASH FLOW
Op Cash Flow before WC and tax		(9.6)	(11.4)	(12.3)	(2.3)	4.9	11.6	18.5
Working capital		9.3	11.6	(3.4)	1.0	2.0	0.6	0.3
Exceptional & other		(1.6)	1.1	4.2	(5.5)	0.0	0.0	0.0
Tax		(0.0)	(0.0)	(0.0)	0.0	(0.4)	(0.4)	(0.7)
Net operating cash flow		(1.9)	1.3	(11.5)	(6.8)	6.5	11.8	18.2
Capex		(1.1)	(3.6)	(1.5)	(0.3)	(0.5)	(0.6)	(0.6)
Acquisitions/disposals		5.9	0.3	0.0	0.0	0.0	0.0	0.0
Net interest		(0.3)	(0.3)	(0.3)	(0.9)	(0.8)	(0.6)	(0.6)
Equity financing		0.2	0.1	0.1	19.8	0.0	0.0	0.0
Dividends		0.0	0.0	0.0	0.0	0.0	0.0	0.0
Other		0.6	(0.0)	0.1	(1.1)	0.0	0.0	0.0
Net Cash Flow		3.3	(2.2)	(13.1)	10.6	5.2	10.6	17.0
Opening net debt/(cash)		(4.9)	(7.0)	(3.6)	9.9	(16.2)	(21.4)	(32.0)
FX		(1.2)	(0.8)	(0.4)	0.4	0.0	0.0	0.0
Other non-cash movements		0.0	(0.4)	(0.0)	15.1	0.0	0.0	0.0
Closing net debt/(cash)		(7.0)	(3.6)	9.9	(16.2)	(21.4)	(32.0)	(49.0)

Source: Company accounts, Edison Investment Research

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