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This is a superb way to play the surge in consumers paying for digital goods and services
Thursday 30 Aug 2018 Author: Daniel Coatsworth

Payments firm Boku (BOKU:AIM) is an incredibly attractive investment proposition, delivering growth on multiple metrics. It is enjoying rapid earnings growth in a market which itself is growing, plus Boku’s own market share is increasing. Furthermore, its share price is also in a firm rising trend.

The £364m business is capitalising on a growing trend for consumers willing to pay for digital experiences such as games, music and films. Boku lets consumers add this cost to their mobile phone bill which can be much more convenient and frictionless than typing in a long debit or credit card number.

Its customers include large tech, media and gaming players such as Apple, Google, Microsoft, Sony, Netflix, Spotify and Activision Blizzard.

Half year results on 4 September should demonstrate to the market how the business is on the verge of a major breakthrough with its earnings.

The company has been run-rate EBITDA (earnings before interest, tax, depreciation and amortisation) positive since September 2017. Broker Peel Hunt reckons Boku will turn cash flow positive by the end of 2018.

Boku has already guided for first half revenue to be in the range of $16.5m to $17m, essentially what it achieved for the whole of 2016.

Peel Hunt forecasts the company will report its maiden unadjusted pre-tax profit at the end of 2018 at $0.6m, rising rapidly to $7.8m in 2019 and $15.6m in 2020.

Boku’s average daily cash balance was $23.1m in June.

OPERATIONAL GEARING BENEFITS

Boku’s chief financial officer Stuart Neal says the underlying billing business is a sunk cost and it no longer needs to spend a lot on the platform, nor does it need to hire lots more people. That essentially means most of any revenue increase should turn into profit and cash.

You may think adding a cost to a mobile phone bill doesn’t have a future, given how PayPal and other electronic wallet providers are gaining traction, plus debit and credit cards remain the dominant payment method digitally.

However, you have to consider that what’s happening in the UK, for example, isn’t the same as what’s happening in other countries. For example, Japan has a cultural aversion to using cards online, says Neal.

Many individuals in emerging markets don’t have a credit or debit card but do have a mobile phone. Others in developed and emerging markets simply have security fears about using their card online.

A study by Ovum found $153bn was spent on video game, digital music and streaming media (such as TV and films) in 2017, of which 11% was paid via carrier billing which is the term to describe adding the cost to a mobile phone bill.

Ovum forecasts this category of digital content spending will increase to $202bn in 2022 with carrier billing commanding a 14.3% share.

REVENUE MODELS

Boku makes money in two different ways. First is its ‘settlement model’ where it manages the flow of money. It negotiates commercial terms with mobile phone companies (known as ‘carriers’) and it offers a price to the merchant, which then lets its customers pay for digital goods and services by adding the cost to their phone bill.

Each month Boku collects money from the carriers, aggregates it and pays the necessary money to the merchant net of Boku’s and the carrier’s fees. Boku will typically earn a 2% to 3% margin. The carrier earns 5% to 25% depending on whether it is operating in a higher-risk territory and how much work it has to do dealing with bad debts.

The ‘transaction model’ involves the carrier paying the merchant directly, net of fees. Boku invoices the merchant for its fees. This is lower margin work as there is less involvement for Boku. For example, it acts as a technical partner for app stores, earning approximately 1% margin to make sure transactions happen.

While its margin figures are low, success in the payments sector is all about scale and processing large volumes of transactions. Boku’s total processed value was $1.5bn in the first half of 2018, up 153% on the same period a year earlier. It had 10.3m monthly active users on its platform in June, versus 8.1m at the end of 2017 so roughly 25% growth in a mere six months.

Boku has connections with 170 carriers in 65 countries, but not all of its merchants are live in all those territories, implying considerable growth opportunities if it can take them to new countries. And it is certainly having great success.

For example, it has added Apple’s iTunes app store to more than 60 carriers around the world, up from 35 last November when Boku joined the stock market.

‘There is a discovery curve once a merchant adds direct carrier billing to a new market with it taking two years before there is a slowdown in growth,’ says Neal.

He explains that Boku’s processing cost is expensive versus a debt or credit card but ‘very good value’ if you look at its services as a cost of new customer acquisition.

For example, Spotify saw a 20% uplift in conversions of customers from free trials to paid-for subscriptions when it added a mobile phone billing option.

NEXT PHASE OF ITS LIFE

Boku is already working on the next phase of its corporate development, looking at solutions to reduce advertising fraud, identity fraud and subscription abuse.

For example, it wants to help companies with a large customer base to clamp down on people manipulating free subscription trials such as hacking into computer chips and reselling subscriptions online.

‘Mobile phone companies know your phone number, your name and address, something about your payment history, what your device is, and where your phone is,’ says Neal.

He believes Boku can help validate where a phone is being used to authenticate areas such as online banking, verify the phone number is genuine and registered to the correct person and is a genuine phone and not something like a fridge freezer or combine harvester whose computer chips have been hacked.

Boku believes the identity solutions will help broaden its customer base and reduce concentration risk as its top four clients currently account for 67% of group revenue. (DC)

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