Boku — Simplifying mobile commerce

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

In January, Boku reported headline figures and announced the proposed sale of the Identity business so that it could focus its investment on the Payments business. Revenue was 23% higher y-o-y (Payments +21%, Identity +37%), adjusted EBITDA grew 31% (Payments +20%, Identity loss reduced by 26%) and normalised operating profit grew 33%. Our forecasts are for the Payments business only as the Identity disposal completed on 1 March and we treat it as discontinued. While our forecasts show a 2.4% decline in group revenue in FY22 due to the sale of Identity, we forecast 8.8% growth for the continuing Payments business. To reflect the loss of business from Russian carriers, we have cut c $1.5m in revenue and EBITDA from our FY22 and FY23 forecasts. We forecast normalised group EBIT margins to grow from 22.3% in FY21 to 28.1% by FY24 and we forecast continued growth in cash over the next three years. For normalised EPS, we forecast a CAGR of 13.7% from FY21 to FY24e.

On EV multiples, Boku is trading at a discount to payment processing peers. If it traded on the average peer EV/EBITDA multiple of 34.5x for FY22e, it would be worth 216.4p per share. We estimate that the current share price is factoring in only 5% revenue growth from FY25 which, considering the opportunity in the wider alternative payments market, appears overly conservative. Key catalysts for the share price would be a growing contribution from local payment methods 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 wallets 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 five billion global mobile phone subscribers. Evolving from the platform that the company built to support DCB, Boku’s Mobile First (M1ST) network connects more than 330 alternative payment methods (ie not debit/credit card) with more than 500 merchants, enabling those merchants to offer their customers local payment options such as eWallets, real-time payments or DCB. Boku manages the payment transactions on behalf of the mobile network operators (MNOs) 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 more carriers, eWallets and merchants join the network. The company consolidated its position in the DCB market with the acquisition of Fortumo in mid-2020.

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 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. On 1 January 2019, Boku acquired Danal, a US-based provider of identity verification services, for $25.1m (sold on 1 March for $32.3m). In July 2020, Boku acquired Fortumo, an Estonia-based DCB provider, for an enterprise value of $37.8m. The company has c 350 employees, with its main offices in the UK, US, Germany, Estonia and India.

Boku’s mission is to grow and monetise transactions for billions of consumers around the world. It aims to do this by building the company into a mainstream fintech payment platform specialising in mobile-native, next-generation payments.

With a wide network of carriers and a growing number of digital wallet 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 carriers and wallet providers. With Boku and Fortumo operating as one integrated payments unit, Boku plans to grow its business in mainstream payment methods by:

While Boku has more than 500 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:

The members of Boku’s board and senior management team have many years of experience in the payments industry. Non-executive chairman Mark Britto is chief product officer at PayPal; Mark is stepping down from the role at the AGM in May and will remain as a non-executive director. CEO Jon Prideaux’s previous experience includes roles as the deputy CEO at SecureTrading (a privately owned payment processor) and as EVP of marketing at Visa Europe. CFO Keith Butcher previously held the role of CFO at Optimal Payments, which became Paysafe, and DataCash Group, which was acquired by Mastercard. Jon and Keith are supported by chief operating officer Chris Newton-Smith, chief business officer Mark Stannard and chief product officer Adam Lee. Non-executive directors Dr Richard Hargreaves, Stewart Roberts and Charlotta Ginman bring experience in venture capital investing, the payments industry, technology and telecom companies and AIM companies. Dr Richard Hargreaves will take on the role of chair from the date of the AGM.

Boku’s original focus was on the direct carrier billing market. This is still the main revenue and profit generator for the group, but the company now also supports digital wallets and real-time payments as payment mechanisms 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 330 payment methods across 91 countries. This includes DCB, eWallets and real-time payments. Boku estimates it has access to seven billion user accounts via these payment methods (four million for DCB and three million for other payment methods). Boku’s aim is to support merchants to acquire, monetise and retain mobile-first customers.

The company had 32.3 million monthly active users (MAUs) at the end of FY21, up from 28.8 million at the end of FY20. For the first time, it disclosed the contribution to MAUs from eWallets and real-time payment accounts, making up 1.1 million/3.4% of the total and growing ninefold over the year. New users totalled 28 million for the year, with 2.7 million (9.6%) from eWallet and real-time payment accounts. Growth from local payment methods has continued year to date, with 1.4 million MAUs in February, up 10 times y-o-y.

On an ongoing basis, the company works to improve the platform, and is currently focused on settlement capabilities, resellers and improving the onboarding experience. It recently transitioned from its two data centres to cloud-based infrastructure (AWS).

The company connects all merchants, carriers and wallet providers to its M1ST (mobile first) payments network. Exhibit 3 shows the main functions of the platform and Exhibit 4 shows how the network works.

The merchant makes its connection to M1ST; carriers and wallet providers separately connect in via application programming interfaces (APIs) and integrate with their own billing systems. This process can take three to six months and tends to be done on a country-by-country basis within a carrier group. Typically, a merchant specifies which carriers/wallets it wants in which geographies and will develop a roll-out plan with Boku. In some cases, Boku suggests to merchants that certain carriers or wallets should be considered. Boku will also suggest merchants to carriers/wallets.

Operating globally, Boku comes under the remit of a number of different regulatory regimes. It must also comply with anti-money laundering 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 is expanding its offering to alternative payment methods, it is going through the process of obtaining the necessary licences in the territories in which it plans to operate. It can currently process regulated payments in 50 countries, with licences in the UK, Ireland (passported across the EEA), Singapore, Hong Kong, and with applications and partnerships in several other countries.

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.

Based on data from Worldpay, the DCB market makes up less than 1% of the total e-commerce payments market by value of transactions processed. According to estimates from Omdia (source: Boku annual report), the DCB market processed transactions worth $52bn in 2020 and this is forecast to grow to $77bn by 2025 (CAGR 8.2%). We summarise below the key benefits of DCB for consumers, merchants and MNOs.

For content acquired from an app store using DCB, a typical revenue split could see the app developer earn 70%, the app store 15%, the carrier 12% and Boku 3%. 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 (see page 14 for further detail on the business model).

Boku signs up merchants through a direct sales approach and offers three products:

In 2020, Boku acquired Fortumo,1 a global DCB provider based in Estonia. This cemented Boku’s position as the leading DCB provider. Fortumo had built up a network of 280 carrier connections in 80 countries, with most merchants using its platform based in Europe and Asia. It focuses on supporting small to medium-sized enterprises (c 400), although it does also work with large merchants such as Amazon, Epic Games, Google, Spotify and Tencent. Fortumo’s platform provides self-service capabilities for merchants resulting in a much lower onboarding cost. Boku typically focuses on fewer, much larger merchants, which require customisation of the service in return for providing high transaction volumes. The combined entities can now service all types of merchant efficiently. Boku is keeping Fortumo as a standalone business, retaining the current management team and the brand. A connector has been built between the two platforms so that merchant and carrier connections can be shared.

Playing to both entities’ strengths, the Boku platform in the US is focused on customised work for strategic merchants and expanding into local payment methods. The Fortumo platform in Europe is focused on DCB bundling solutions and expanding its business with smaller merchants.

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. We also include merchants working with Fortumo where relevant.

Boku competes with several third-party DCB operators (see below), as well as 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.

The company 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, particularly with merchants like Apple, which decide where they want to offer carrier billing, but Boku also suggests new connections to merchants, both in terms of new countries or adding carriers in existing countries. Currently, merchants are connected on average to only 10% of carriers in the network. The company will also continue 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. Better understanding of the risk profiles of subscribers can enable MNOs to lift monthly credit limits and therefore drive increased transaction volumes.

As DCB operates at a higher cost than other payment mechanisms such as debit cards, the company 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. Considering that the digital content market is expected to be worth $332bn in 2022 (source: Statista), this would equate to a maximum total addressable market of c $66bn. Consequently, Boku is keen to use the platform it has built to provide additional services to merchants and has identified that certain local payment methods, such as digital wallets or real-time payments, are as complex for merchants to navigate as dealing with different carriers in every country.

According to data from Worldpay, digital wallets (eg PayPal, Alipay, Apple Pay) have overtaken card payments as the most common method of payment online, used for 49% of online transactions by value in 2021, compared to 34% for cards. In North America and Europe, digital wallets such as Apple Pay, Google Pay and PayPal are growing in popularity. In Asia, where consumers are less likely to have debit or credit cards, digital wallets were used to make 69% of e-commerce payments in 2021. Popular wallets in Asia include Alipay, WeChat Pay, Paytm, GoPay and GrabPay. These wallets are not standardised and are settled locally in the wallet’s local currency – Boku is able to help merchants by dealing with this complexity. The ideal merchant for Boku typically has cross-border sales, a dedicated payments team and limited existing wallet coverage.

Adding alternative payment methods to the M1ST network offers a twofold benefit for Boku: the company has the potential to win a greater share of the digital content checkout. In addition, it widens the addressable market for Boku to include all e-commerce ($5.3tn in 2021 per Worldpay), 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.

Starting in FY19, Boku has developed a service to match local payment method providers with merchants. Boku is now processing eWallet/real-time payment transactions in 13 countries for merchants in digital advertising, streaming music/video, and games and games consoles. Exhibit 7 shows some of the current live wallet/merchant connections.

While the initial wallets signed up were all based in Asia, more recent contracts cover wallet providers in Latin America, Europe and Middle East & Africa (MEA). To start with, Boku cross-sold the wallet service to its existing DCB merchant base, but it has since signed up its first wallet-only merchants. The company is also considering other fast-growing alternative payment methods as these tend to be local forms of payment that are non-standardised and, as such, are complex for merchants to offer as payment mechanisms.

The company competes with the traditional payment processors such as Worldpay and Adyen as well as with local payment specialists such as 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.

For details on the business model, please see Appendix on page 14.

Boku reported headline revenue and EBITDA for FY21 in January, at the same time as announcing the planned disposal of the Identity business. Revenue and EBITDA were therefore in line with our forecasts. TPV increased 18% y-o-y to $8.2bn and the take rate was essentially flat y-o-y at 0.75%. Payments revenue grew 21% y-o-y, despite a negative impact from the weakening of the yen and South Korean won against the dollar (the company estimates that revenue and EBITDA would have been $2.3m higher in constant currency). As the company invested more in H221 to support the platform, EBITDA grew 20% y-o-y. The Identity business grew revenue 37% y-o-y and reduced the EBITDA loss from $3.9m to $2.9m. Normalised operating profit and EPS were slightly lower than our forecast due to slightly higher than expected amortisation, with the normalised operating margin expanding 1.8pp to 22.3%.

Boku ended FY21 with a gross cash balance of $56.7m (excluding restricted cash of $5.8m) and a net cash balance of $48.8m (excluding lease liabilities of $4.8m). As the cash balance very much depends on the timing of payments from carriers and to merchants, the company measures its average cash balance in a given month as this is more representative of the true cash position. In December 2021, the average daily cash balance was $50.8m, compared to $46.7m in December 2020. Excluding the timing effects of merchant/carrier payments, the company generated operating cash flow before working capital movements of $19.5m, up from $11.5m last year. In FY21, Boku capitalised $5.0m in development costs and repaid $4.6m of debt, with debt of $7.8m at year-end. This has since been repaid using proceeds from the Identity disposal (for which $26.2m has already been received and the remaining $6.1m is due in FY23).

The consideration for Fortumo included an earnout of up to $5.4m based on EBITDA achieved in the year to 30 June 2021. The $5.4m was paid into an escrow account on completion. At the end of FY20, Boku had estimated that the earnout would be $3.24m. In FY21, the earnout was recalculated, with the Fortumo vendors entitled to a payment of $2.16m, made in September 2021. The remaining $3.24m in the escrow account was returned to Boku and an exceptional credit (classed as other income) of $1.08m was recognised in H121, ie the difference between the $3.24m contingent consideration at end FY20 and the actual payout. Boku has excluded this credit from its adjusted EBITDA and we have excluded it from our normalised operating profit and net income measures.

In January, we updated our forecasts to reflect the planned disposal of the Identity business. We had not forecast any contribution from the business in FY22. As the disposal completed on 1 March 2022, we have estimated a net loss of $1m for the two-month period prior to disposal. We also include a $28m gain on disposal (which we previously included as an exceptional gain). This results in a net contribution of $27m from discontinued operations. We include $26.2m of the disposal proceeds in FY22 (already received) and $6.1m in FY23. We forecast net cash of $88m by the end of FY22 rising to $140m by the end of FY24.

The company outlined its exposure to Russia/Ukraine/Belarus. It has no operations or merchants based in any of those countries. It has carrier connections in Russia and in FY21, generated revenue of c $1m from the region. It is no longer processing for Russian carriers and expects this to reduce revenue in FY22 by up to $1.5m. We have reflected this in our forecasts; with a close to 100% gross margin, this drops through to EBITDA. This is the only material change to our revenue and EBITDA forecasts for FY22/23. We introduce forecasts for FY24.

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

The stock has declined 26% year to date, while its peers have declined on average by 14% over the same period despite FY22 forecasts not changing materially. On enterprise value (EV) multiples, the company is trading at a discount to the average of its payment processor peer group for all forecast years. Valuing Boku on the group average EV/EBITDA multiple for FY22 would result in a share price of 216.4p compared to the current 122.5p share price and on FY23 multiples would result in a share price of 184.0p.

We have also performed a 10-year reverse discounted cash flow analysis – this uses our forecasts for FY22–24 and then estimates the revenue growth and margins for FY25–31 implied by the current share price. Based on a WACC of 8% and a long-term growth rate of 3%, we estimate that the market is factoring in revenue growth of 5.2% and an average EBITDA margin of 37% over FY25–31. Based on historical growth and the opportunity arising from the expansion into alternative payment methods, this appears overly conservative. The tables below show the valuation sensitivity to WACC and long-term growth rate (Exhibit 11) and to revenue growth and EBITDA margin for FY25–31 (Exhibit 12).

For DCB, Boku offers two models to merchants, either settlement or transaction.

Historically, Boku signed up most merchants on a settlement basis; the settlement margin is a multiple of the transaction margin. Some of the more recent merchants have contracted on a transaction basis and are driving the bulk of the TPV growth. Therefore, revenue growth has lagged TPV growth due to the lower margins earned under the transaction model. The mix of settlement versus transaction volumes will depend on new merchants’ choice of business model and the growth of volumes from existing merchants. Fortumo bills most merchants on a settlement basis, although the large app stores use the transaction basis. All eWallet flows are on a settlement basis.

For DCB, cost of sales is only a small proportion of total costs and mainly consists of the cost of messaging subscribers.

Under the DCB settlement business model, Boku receives cash from the carriers before it pays it across to the merchants, hence it operates a negative working capital model. Under the transaction model, the company records its fees in accounts receivable, and is paid according to the merchant’s payment schedule.