Boku — Making the complex simple for global merchants

Boku has developed and operates a platform that connects merchants with local payment methods. This supports mobile commerce through the following routes: DCB, digital wallets and real-time payments. Key investment considerations include:

Boku reported 30% revenue growth in FY23, with 15% growth from DCB and 153% from other LPMs. EBITDA grew 27% to €25.8m equating to a margin of 31.2%. We forecast normalised group EBIT margins to grow from 24.7% in FY23 to 30.0% by FY26 and we forecast continued growth in cash over the next three years. For normalised EPS, we forecast a CAGR of 18.1% from FY23 to FY26e.

On enterprise value (EV) multiples, Boku is trading at a small premium to its payment processing peers. A DCF based on the company achieving its medium-term growth targets suggests a share price of 251p. Considering the company’s expanding LPM business, we would expect growth to exceed the wider payment processing market as it takes share from card-based payments, justifying a premium rating over peers focused on card-based processing. Key catalysts for the share price would be a growing contribution from local payment methods, including Amazon, and new major merchants signing up.

As well as the usual risk factors relating to competition, regulation and the company’s technology platform, we see potential for merchant-related factors to influence our forecasts and the share price, both on the upside and downside. For existing merchants, this includes the pace of roll-out to new carriers and countries, the adoption of LPMs as a payment mechanism, the rate of growth in the underlying adoption of digital content, the competitive positioning of major merchants, customer concentration and the fact that some contracts contain short notice periods.

Boku’s technology has been developed to support mobile commerce, which takes advantage of the more than 5.4 billion global mobile phone subscribers. Evolving from the platform that the company built to support DCB, Boku’s mobile-first network connects nearly 300 local payment methods (ie not debit/credit card) with c 300 merchants, enabling merchants to offer their customers local payment options such as eWallets, real-time payments or DCB through a single contract and a single integration.

Boku manages the payment transactions on behalf of the local payment providers and merchants but, more importantly, provides a route to market to a section of consumers who may be more difficult to reach via traditional customer acquisition methods. Boku has seen rapid growth in transactions processed via its platform and we believe this growth should continue as alternative payment providers and merchants join the network.

Boku was founded in 2008 by Mark Britto, Erich Ringewald and Ron Hirson. In 2009, Boku acquired DCB companies Mobilcash and Paymo, and shortly after launched its DCB service. The first product was Boku Checkout, which added the cost of items acquired to the consumer’s mobile phone bill or reduced their pre-paid credit. This was popular with gamers, as it enabled them to pay for games on their PCs, social gaming on Facebook and multi-player online games. In 2012, Boku acquired Qubecell, an Indian DCB company, which gave the company access to Indian mobile network operators (MNOs) and, more importantly, development resource. With the signing of Sony as a merchant in 2013, Boku enabled purchases to be made from games consoles. In 2014, Boku acquired Mopay, its main competitor, for $24m. In 2015, Boku launched its second product, Boku Account, which provides the phone equivalent to ‘card on file’, supporting upgrade and repeat purchases. In 2016, the company launched Boku Acquire, which supports the bundling of additional products and services within a subscriber’s carrier plan. Boku listed on AIM in November 2017, raising £15m at 59p per share. In January 2019, Boku acquired Danal, a US-based provider of identity verification services, for $25.1m (sold on 1 March 2022 for $32.3m). To consolidate its position in the DCB market, Boku acquired Estonian-based Fortumo in 2020 for an enterprise value of $37.8m. The company has c 450 employees across 29 countries, with its main offices in the UK, US, Germany, Estonia and India.

Boku’s mission is to build the world’s best network of localised payment solutions and its vision is to help enable borderless commerce by offering better payment choice.

With a wide network of carriers and a growing number of digital wallet and real-time payment providers connected to the platform, this offers an attractive way for merchants to access new customers. In turn, as more merchants sign up, it makes the Boku platform more attractive to local payment providers. Boku’s key strategic focus areas in the medium term are:

While Boku has c 300 merchants using its platform, we expect that the majority of revenue will come from a small number of large merchants. We see growth from the following factors:

In FY23, Boku supported 125 new payment launches for merchants including Amazon, Disney, Google, Meta, Microsoft, Netflix, Sky and Spotify.

At its capital markets day in February 2023, the company outlined its medium-term financial targets:

The members of Boku’s board and senior management team have many years of experience in the payments industry. CEO Stuart Neal was appointed to the role on 1 January 2024. He worked at Boku from 2012 to 2014 and 2017 to 2022 in various roles, including as CFO and head of the Identity business. CFO Keith Butcher previously held the role of CFO at Optimal Payments, which became Paysafe, and DataCash Group, which was acquired by Mastercard. Stuart and Keith are supported by Chief Business Officer Mark Stannard, Chief Product Officer Adam Lee and Chief Technology Officer Keegan Flanigan. The CEO and CFO are joined on the board by non-executive Chairman Dr Richard Hargreaves and non-executive Directors Stewart Roberts (retiring at AGM in May), Charlotta Ginman, Mark Britto, Meriel Lenfestey, Loren I Shuster and Jon Prideaux (Boku CEO 2014-2023), who together bring experience in venture capital investing, the payments industry, human resources, technology and telecom companies and AIM companies.

Boku’s aim is to support merchants to acquire, monetise and retain mobile-first customers. The company’s original focus was on the DCB market. This is still the main revenue and profit generator for the group, but the company now also supports digital wallets (eWallets) and real-time payments as payment options that merchants can offer to their customers.

Recognising that mobile commerce is the fastest growing segment of e-commerce, Boku has evolved its platform to incorporate multiple mobile payment methods with one integration, supporting nearly 300 payment methods across 77 countries. Boku estimates it has access to 7.5bn user accounts via these payment methods (split roughly 50/50 between carrier billing and eWallets/real-time payments).

Boku sees its role as helping merchants in three areas:

Mastercard and Visa-based payments (both debit and credit) have grown solidly over the last 12 years at a combined CAGR of 10.8% since 2010. In the UK, debit and credit cards made up 46% of online payments by value in 2022 (source: Worldpay Payments Report 2023) with eWallets (eg PayPal, Apple Pay, Google Pay) making up 35%. In the US, cards made up 50% of online payments with eWallets at 32%. However, looking at these statistics globally, eWallets made up 49% of online payments with card payments at 32% due to the popularity of eWallets in Asia, where they made up 69% of online payments in 2022. Popular wallets in Asia include Alipay, WeChat Pay, Paytm, GoPay and GrabPay. Exhibit 4 shows how the split of online payments has shifted in favour of local payment methods (which include DCB, eWallets and real-time payments) even while cardbased payments have shown strong growth.

While real-time payments (also known as A2A payments) make up a smaller share of e-commerce payments volume (9% in 2022 according to Worldpay), they are growing rapidly. These schemes allow consumers to make payments directly from their bank accounts, with no involvement from the card schemes, and can also be used for business-to-business transactions. Schemes tend to be country specific, for example Faster Payments in the UK, Pix in Brazil (24% of e-commerce spend by value in 2022, doubling from 2021) and UPI in India (19% of e-commerce spend by value in 2022), and therefore there is no standardisation from country to country. Boku estimates that in the longer term, real-time payments are likely to overtake eWallet payments.

Based on research carried out by Juniper on behalf of Boku, in 2023 local payment methods were used for c 50% of all e-commerce transactions globally (this excludes card-linked wallets) and is expected to rise to 58% by 2028.

The process for accepting debit and credit cards is standardised, with Visa and Mastercard setting out rules for the use of their networks and banks well integrated into these networks. Other payment mechanisms, however, do not follow such a standardised approach. This is the area that Boku is focused on, helping merchants to offer the right mix of payment options in each country, even if some of those methods are complex to integrate with. Boku works with merchants and local payment providers to integrate them into its platform, undertaking the custom work to make this happen, rather than forcing them to follow Boku’s own processes.

Initially Boku focused on DCB; this requires integration with carriers in each country in which the merchant wants to offer this as an option, and carrier back-office operations within a group can vary widely from country to country. We discuss below the DCB market and Boku’s DCB operations in more depth. Recognising that other payment methods, such eWallets and real-time payments, are also significantly more difficult to integrate with than standard card payments, Boku started investigating this area in 2019. Exhibit 5 shows the progress it has made integrating eWallets into its platform.

Boku started integrating real-time payments more recently (see Exhibit 6) so has more work to do to get wide coverage.

As DCB operates at a higher cost than other payment mechanisms such as debit cards, Boku believes there is a natural ceiling on the size of the DCB market, estimating that it is unlikely to exceed a 15–20% share of checkout. According to an Ovum report, Apple App Store and Google Play saw 15% of their worldwide revenue come from DCB after it was adopted. Considering that the digital entertainment market is worth c $500bn (source: Statista Nov 2023), this would equate to a maximum total addressable market of c $75bn. Adding local payment methods to its mobile-first network offers a twofold benefit for Boku: the company has the potential to win a greater share of the digital content checkout; and, in addition, it widens the addressable market for Boku to include all e-commerce ($6.3tn in 2023 per Statista), as opposed to just the digital content that can be acquired using DCB. In the same way that digital content merchants use Boku as a combined customer acquisition tool and payment processor, we expect offering wallets as an alternative payment mechanism will appeal to global merchants wanting to access consumers in regions with strong wallet usage such as South-East Asia. Conversely, using Boku should be attractive to wallet operators wanting to attract new merchants. As an example of the scope to grow within existing customers through supporting LPMs, one major merchant allows customers to pay for digital advertising via LPMs, with 16 connections in 10 countries by the end of FY23.

Boku has already made good progress with LPMs. By the end of FY23, there were more than 100 live connections for LPMs, including a large games merchant connection with Alipay and WeChat Pay in China. All of its major merchants (ie Amazon, Google, Meta, Microsoft, Netflix, Sony and Spotify) are currently or contracted to be customers for both DCB and LPMs. In the charts below, we show the progression in monthly active users (MAUs) and new users for the group and for LPMs. LPM MAUs now make up 10% of total MAUs and more than 20% of new users. LPM revenues increased 153% in FY23, growing to 20.4% of group revenue from 10.5% in FY22. LPM revenue contribution is double that of the proportion of MAUs, we assume through a combination of higher than group average take rate and larger transaction sizes, which makes sense considering that these methods do not have limits on the amount that can be spent each month, unlike for DCB.

In September 2022, Boku signed a contract to supply its digital wallet and other local payment methods to Amazon. Boku is processing payments for Amazon Prime Video subscriptions for customers located in certain countries in South-East Asia and Africa. The contract has been signed for a minimum period of three years, with annual contract renewals thereafter. The company launched 13 eWallets across six countries during FY23. As part of this contract, Boku has issued warrants to Amazon to subscribe to up to 11.2m Boku shares (discussed in more depth in the Financials section) based on Amazon achieving certain revenue targets. Boku already provides DCB services for Amazon bundling, although this is one of Boku’s less material DCB contracts. This contract provides the potential for more material revenue flows from Amazon. Management noted that this contract arose from a referral from another major merchant and was won due to Boku’s ability to manage subscriptions within wallets.

While the traditional payment processors such as Worldpay and Adyen could represent competition, they tend to focus on high-volume, standard payment methods, and expect merchants to fit with their way of working rather than the other way round. One merchant customer noted that when it moved from using a card processor to Boku, it saw more than a 35% revenue uplift on the LPM connection; another quoted a 20% uplift. Boku is more likely to see competition from local payment specialists, for example dLocal and Rapyd. Management believes its differentiators are that it has now built up a larger roster of wallet providers than the competition, with an optimised user experience and the ability to manage recurring transactions. It is willing to work with merchants so that the wallets integrate with their processes, rather than the other way around.

While future growth is likely to predominantly be driven by LPMs, DCB is still the main source of revenue and profit for Boku. We explain how DCB works and why it has proven so attractive to major merchants of digital content.

The DCB payment method uses a consumer’s mobile bill (pre-paid credit or post-paid monthly bill) as the means to pay for digital content or services. The market started before the widespread adoption of smartphones with the provision of premium SMS. DCB then evolved as a way to pay for products on PCs, mainly computer games. It offers a good way to make smaller payments as these typically do not hit carrier monthly credit limits and it provides a simpler way to pay for things than repeatedly having to enter card details. Smartphones enabled a new market: digital content consumed and paid for on the mobile. Having a simple, frictionless way to pay is even more important on a phone. Typical content that is paid for with DCB includes games for computers, consoles and phones, music, video and apps.

We summarise below the key benefits of DCB for consumers, merchants and carriers.

For content acquired from an app store using DCB, a typical revenue split could see the app developer earn over 79%, the app store 15%, the carrier 5% and Boku 1%. Both the merchant and the carrier benefit from a material proportion of the value of the content sold. Boku’s margin will vary in size depending on the work undertaken to enable the payment.

At the 2023 capital markets day, two customers of Boku’s LPM services explained their approach to selecting payment providers.

Boku signs up merchants through a direct sales approach and offers services for one-off payments, repeat transactions and bunding. For one-off payments, when a consumer reaches the payment page for an online merchant they are presented with the ‘pay by mobile’ option, which allows them to charge the cost of the item to their mobile phone bill (pre- or post-paid). Once the consumer has entered their mobile phone number, they are sent a text message asking them to confirm the transaction. The service for repeat payments is more deeply integrated with the carrier, connected to its identity verification systems. It provides ‘phone number on file’ capability, like the ‘card on file’ functionality offered by many online retailers. The consumer’s phone number is used for all subsequent purchases without confirmation needed from the consumer. It is particularly useful for merchants that want to improve their activation rates, for example merchants offering freemium subscription services can use Boku to capture consumer payment details at the start of the relationship, easing the upgrade to a paid subscription. Boku also offers a bundling service that supports carrier-led customer acquisition. This enables carriers to bundle third-party products and services into their plans. For example, several operators provide free trial periods of Apple Music or Spotify as part of a monthly plan that will hopefully result in a subscriber signing up for the paid service after the trial period.

Boku has been successful in signing up the largest merchants in the main digital content categories. In some cases, Boku is the sole DCB provider. In others, the merchants split the carriers across two or more DCB providers. In the table below, we summarise the main content categories, the size and growth potential of each category, and Boku’s position within it.

The DCB market has consolidated in recent years, with Boku acquiring Fortumo in 2020 and Bango acquiring Docomo Digital (NTT Docomo’s DCB business) in 2022. Boku also competes with carriers connecting directly to merchants to provide DCB. We would expect more carriers to migrate to the third-party model to access merchant connections more easily.

Boku believes it has a good medium-term growth opportunity from its existing merchant base, mainly through connecting them to more potential consumers. The decision on who to connect to tends to be merchant led, but Boku also suggests new connections to merchants, both in terms of new countries and adding carriers in existing countries. Currently, merchants are connected on average to less than 10% of connections on the network. The company also continues to sign up new merchants, with a particular focus on those that have a strong position in their given market.

Growth in the adoption of digital content should drive growth in transactions. In addition, it can take 20 months for a merchant to see optimal adoption from existing carriers; initially only new users will be using the service, but as existing users’ cards expire, they are made aware of the DCB option.

Boku connects all merchants, carriers and local payment method providers to its mobile-first payments network. Exhibit 10 shows the main functions of the platform.

Boku has spent more than $150m to date to build and maintain its platform. The platform is cloud-based, hosted by AWS in two independent regions running active/active with one second failover. It has a 99.99% success rate SLA (service level agreement). The platform has seen a peak throughput of 400 transactions per second (TPS) and has capacity for more than 1,000 TPS. Each region can handle 100% of maximum capacity. The platform is ISO 27001 certified and in 2022 underwent 50 external security assessments. The company invests in continuous optimisation of the platform to improve conversion and authorisation rates.

Boku has 190 bank accounts across 34 entities and covering 35 local currencies. Its settlement operations for LPMs provide daily settlement and merchant reporting. It provides funds segregation, reporting to regulators and tax compliance, and its treasury services ensure funds are available to merchants in the right currency and entity, offering competitive FX rates.

Operating globally, Boku comes under the remit of a number of different regulatory regimes. It must also comply with anti-money laundering (AML) and counter-terrorism financing (CTF) regulations in the countries in which it operates. DCB tends to be exempted from money transmission regulations as long as transaction limits are respected. As Boku has expanded its offering to other local payment methods, it is going through the process of obtaining the necessary licences in the territories in which it operates. It can currently process regulated payments in more than 60 countries, with licences in Hong Kong, India, Ireland (passported across the EEA), Malaysia, Singapore, the Philippines, the UK and the US, and with applications and partnerships in several other countries.

Boku’s ESG strategy and measures can be found here.

Boku considers three aspects relating to the environment:

Boku aims to have a culture of respect, equity and inclusion. Initiatives include employee engagement, mentoring, training, well-being and work-life balance policies and benefits, and connecting its global workforce. The company has a diversity, equity, and inclusion (DEI) committee and a full-time resource for DEI was hired in FY23. As a technology company, management is aware of the gender diversity challenges and is focused on improving the gender balance and pay gap from entry level to senior management and the board. In FY23, women represented 33% of the global workforce, up 4pp from FY22.

For details on the business model, please see the appendix in Edison’s April 2022 report.

Boku reported headline revenue and EBITDA for FY23 in January; revenue was in line whereas EBITDA was slightly lower due to a change in accounting policy for certain leases (shifting from capex to opex so no impact at the operating profit level) and one-off non-contractual bonuses for staff of $0.9m, reflecting overperformance in FY23, awarded after the trading update. Revenue increased 30% y-o-y (33% constant currency). TPV increased 18% y-o-y to $10.5bn (23% constant currency) and the take rate increased to 0.79% from 0.72% a year ago, reflecting the increasing proportion of LPM transactions which are processed on a settlement basis. In FY23, operating expenditure excluding depreciation and amortisation increased 31% y-o-y. The company continued to invest in building out its platform for local payment methods which required increased headcount and costs relating to the expansion of its regulatory footprint. Opex also reflects high wage inflation and the one-off non-contractual bonus. EBITDA increased 27% y-o-y to a margin of 31.2%, marginally below the 31.7% reported in FY22. Normalised operating profit increased 30%, generating an operating margin of 24.7%. The company reported a total of $0.9m in exceptional items at the operating profit level: income from Twilio of $0.1m (now finished) offset by FX losses of $1.0m. The fair value adjustment for Amazon warrants (see below for further explanation) has been moved below operating profit – this was a $53k credit compared to a $3.47m charge last year. Normalised diluted EPS increased 41% y-o-y to 5.6c, slightly below our forecast due to the one-off bonus payment.

Boku ended FY23 with a gross/net cash balance of $129.7m (excluding restricted cash of $21.1m and lease liabilities of $3.1m). As the cash balance very much depends on the timing of payments from carriers and to merchants, Boku measures its average cash balance in a given month as this is more representative of the true cash position. In December 2023, the average daily cash balance was $131.7m, compared to $105.8m in June 2023 and $98.8m in December 2022. The company estimates that c $70.4m of its cash balance is its own cash. Excluding the timing effects of merchant/carrier payments, the company generated operating cash flow before working capital movements of $23.4m, up from $22.0m last year. Boku generated a working capital inflow of $15.9m in FY23 compared to an inflow of $27.9m in FY22, due to the timing effects described above. In FY23, Boku capitalised $5.4m in development costs compared to $4.9m in FY22.

In July 2022, the company announced 12-month £8m share buyback programme. In June 2023, the programme was extended for an additional 12 months with up to 5.25m additional shares worth up to £10.5m added to the programme. As of today, the company has bought back 7.0m shares at a total cost of £9.4m/$11.7m (£1.5m/$1.9m in FY22 and £7.9m/$9.8m in FY23). The purpose of the programme is to hold the stock in treasury to be used to satisfy future share-based payment obligations.

As part of the contract signed with Amazon discussed earlier, Boku issued warrants to Amazon giving it the right to acquire up to 11,215,142 Boku shares at an exercise price of 81.2p per share over the seven-year period to 15 September 2029. 747,676 warrants vested on the day the deal was signed (16 September 2022). For every $1m of revenue generated from Amazon, 209,350 warrants will vest, up to a maximum total revenue of $50m. The revenue-linked warrants fall within the scope of revenue recognition and financial instruments, which means that on the day the contract was signed, Boku recognised a contract asset for the fair value of the estimated number of warrants that would vest (5,049,288 warrants worth $1.756m) and a corresponding warrant liability for the same amount. On this date, the Boku share price was 77p.

We maintain our revenue and EBITDA forecasts for FY24/25 and introduce forecasts for FY26. Our normalised operating profit forecasts reduce slightly in FY24 and FY25 due to higher amortisation of capitalised development costs. Normalised PBT is slightly higher in FY24 due to the benefit of higher interest income estimates, reflecting H223 performance. For reported results, we have factored in a higher tax rate (we were already using 21% for normalised forecasts). The company restated FY22 numbers to reflect the recognition of a deferred tax asset in FY21 resulting from tax losses brought forward. This reduces the level of unused tax losses to $6m at the end of FY23 and therefore we increase our tax rate to 18% in FY24 (reflecting the use of these losses) and 21% thereafter, the standard US tax rate.

Our forecasts and the share price will be sensitive to the following factors:

The share price has gained 47% over the last year, in our view partly reflecting upgrades to forecasts but also reflecting better market sentiment. On EV multiples, the company is trading at a small premium to the average of its payment processor peer group for FY24 and FY25. Considering the company’s expanding LPM business, we would expect growth to exceed the wider payment processing market as it takes share from card-based payments justifying a premium rating over peers focused on card-based processing.

We have also performed a 10-year reverse discounted cash flow analysis; this uses our forecasts for FY24–26 and then estimates the revenue growth and margins for FY27–33 implied by the current share price. Based on a WACC of 9% and a long-term growth rate of 3%, we estimate that the market is factoring in revenue growth of 4.5% and an average EBITDA margin of 35% over FY27–33. Based on historical growth and the opportunity arising from the expansion into local payment methods, this appears overly conservative. The table below shows the valuation sensitivity to WACC and long-term growth rate (Exhibit 14).

We have also performed a DCF based on the company achieving its target of doubling revenue and reaching EBITDA margins of 50% over a five-year period (revenue CAGR of 14.9% FY22–27) with a fade period for revenue growth after that. This results in a per share value of 251p.