Boku is one of THE best growth sto­ries on the stock mar­ket to­day

This is a su­perb way to play the surge in con­sumers pay­ing for dig­i­tal goods and ser­vices

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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 run­rate 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 paid­for 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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