Boku — Strong H1 supports future growth

Boku saw revenue growth of 66% y-o-y in H118, driven by a 153% increase in TPV. As previously explained, the relatively faster growth of transactions processed via the transaction model (where Boku is not responsible for cash flows between the merchant and operator), which are lower margin than the settlement model (where Boku collects the cash from operators before paying over to the merchants), means volume growth continues to exceed revenue growth. However, the company noted that the bulk of this shift has now happened, so we should start to see a narrowing of the gap between TPV and revenue growth rates.

We estimate that TPV was marginally higher than our forecast for H1 (153% growth vs our 145% forecast). In addition, the blended average take rate of 1.1% was higher than our 1.0% forecast. Operating costs (pre-depreciation, amortisation, share-based payments and exceptional items) totalled $13.1m, slightly higher than we had forecast. Compared to H117, the company spent an additional $0.6m on optimising data storage and processing on the platform and $0.6m on developing the Boku Mobile Identity product. The platform can now handle a peak transaction volume of 600/s, up from the 400/s that had been tested when we wrote in April. We note that compared to H217, the increase in opex was $0.6m. The company generated an adjusted EBITDA of $2.55m (15.1% margin), up from $0.44m (3.1%) in H217 and a loss of $2.76m in H117. This resulted in a positive normalised operating profit for the first time, at a 10.5% margin, and after amortisation of acquired intangibles, share-based payments and exceptional items, a small reported operating loss.

The company finished H118 with a net cash position of $28.4m. This was made up of gross cash of $29.5m, restricted cash of $1.1m and debt of $2.2m (working capital facility draw down). As the period end cash position was flattered by the timing of certain working capital payments, the company also gave the average daily cash position, which grew from $19.2m in December 2017 to $23.1m in June 2018. The company exited early from a factoring facility, incurring one-off finance costs of $0.5m.

In H118, Boku grew active monthly users to 10.3 million (+117% y-o-y), from 8.0 million at the end of 2017 and 4.7 million at the end of H117. The total number of Boku Account connections to merchants reached 127 by the end of H118.

Boku’s major merchants made good progress in H1. Apple enabled 14 more DCB connections during H118, included Orange in France and Spain, TIM in Italy and EE and O2 in the UK. We estimate this has increased the addressable market of subscribers that can use DCB on the App Store by more than 190m. Apple Music has seen growth in the number of paying subscribers; this statistic is not reported on a consistent basis, but at the end of September 2017 it stood at 30 million and by mid-May 2018 had increased to 50 million. The Apple Services business segment, which includes App Store revenues and Apple Music subscriptions as well as other services such as Apple Pay, saw revenues increase 31% y-o-y in both Q218 (ending 31 March) and Q318 (ending 30 June).

Spotify continues to grow subscriber numbers, reporting premium subscribers of 83 million at the end of Q218 compared to 71 million at the end of Q417.

Boku recently announced it had added another app store operator to its roster of merchants: it is supporting Huawei’s new app store, AppGallery, as well as Huawei Mobile Cloud and Huawei Themes. AppGallery is initially only available pre-installed on the P20 and P20 Pro, but is available to all existing Huawei smartphone models to download. In Q218, Huawei increased its market share to 15.8% and is now the second largest global smartphone manufacturer after Samsung, which has 20.9% share (source: IDC), moving ahead of Apple, which was in the number two position. In China, it is the largest smartphone manufacturer. Its app store will provide access to Android-based apps, which will be of particular interest to Chinese smartphone owners who cannot access Google Play. Boku notes that Huawei’s target markets for DCB include the UK, Sweden, Denmark, Norway, Austria, Switzerland, France, Belgium, Spain and Russia; all areas where Boku has good operator connections.

The video game market continued to be robust in H118, buoyed by the success of Fortnite Battle Royale. Initially only available on PC and console, it was made available on iOS in April. Epic Games, the developer of Fortnite, has no plans to make the game available on Google Play, instead it is available to download directly from Epic. Boku has highlighted that its technology enables the download of freemium games onto consoles and noted that it saw a notable uplift in volumes on Xbox, PS4 and iOS from the download of Fortnite.

Boku also saw better than expected volume from Facebook. As we have previously written, Boku traditionally shared the Facebook connections with Zong, the DCB platform acquired by PayPal. The Zong service has all but disappeared and consequently, Facebook shifted a number of connections over to Boku, which has provided a temporary boost in what is otherwise a declining business.

We have highlighted before that we expect longer-term growth for Boku to come from a widening of its product range, building on the network it has built connecting global telecom operators and merchants. The company noted that its development business, Boku Labs, invested in the development of Boku Mobile Identity during H1. This product aims to take advantage of the ubiquitous nature of mobile phone ownership and the relationships Boku has built up with MNOs globally.

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 develop 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. As with the current mobile billing service, Boku would act as the central access point for merchants looking to verify consumer identity, and it would pay a revenue share to any participating MNOs. This should widen the addressable market of merchants from those selling digital content to retailers of any kind.

Management expects to see continued strong growth in H218, albeit at lower percentages because of stronger comparatives, and expects to meet recently upgraded full-year market expectations. The company noted that TPV had reached $2.2bn for the eight months to the end of August, with monthly active users increasing by one million to 11.3 million. We have revised our forecasts to reflect stronger TPV and a higher take rate in FY18–20, a slightly higher gross margin in FY19 and FY20 and higher operating expenses in FY18–20. This results in an increase to our FY18 and FY20 EBITDA forecasts.

The Boku share price has performed exceptionally well since IPO. The shares listed at 59p and immediately after rose to trade around 80p. They stepped up to trade around 100p after results were reported in April. Since then, the price has increased a further 84% to 184p. In the table below, Boku is trading above its peer group on all multiples. It is, however, forecast to grow faster than its peer group and to generate EBITDA and EBIT margins at the upper end of the range.

Crucial to support this valuation will be evidence that the core business is meeting and beating our forecasts, and that the new products under development will be successfully commercialised. Data points to show 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. Merchant trials of the new products that Boku is developing will be the first step to commercialisation.