Blue Prism has been around for some time, having launched a commercial version of its software product in 2008 and spent four years developing it with a number of blue-chip customers, including Barclays (BARC), Co-operative Banking Group, Telefónica O2, RWE npower and Shop Direct. These enterprise-scale deployments demonstrated the compliance, resilience, scalability and security of Blue Prism's software, an “industrialisation process” that has created a significant barrier to entry into this market. It’s a market with significant growth potential too.
A 2013 study by Oxford Martin School, University of Oxford, on the effects of computerisation on US jobs found that 47 per cent were at a "high risk" of being replaced by technology with a further 19 per cent at a "medium" risk. This analysis was echoed last autumn by Andrew Haldane, the Bank of England chief economist of Monetary Analysis & Statistics, who commented that 15m jobs in the UK could be at risk of automation. The impact of robotics on the workplace was the main theme of the 2016 World Economic Forum in Davos, which described the advent of economy-changing technologies such as RPA as "The Fourth Industrial Revolution".
The growth potential of the market was clearly evident in Blue Prism’s maiden first half results following its flotation on the Alternative Investment Market in March. Underlying revenue increased by 60 per cent to £4m in the six months to end April 2016, deferred income more than trebled to £5.9m, and recurring revenue almost doubled to account for 83 per cent of total revenue. The monthly exit run rate of recurring license revenue has risen from £252,000 to £662,000 since April 2015, and total billings and future contracted revenue has soared from £6.6m to £14.8m over the same 12-month period.
In the first half, the company signed 64 new license contracts compared with 40 for the whole of the previous financial year and won 33 new customers to take the total client base to 90. Most of these are blue chip companies who sign three-year license agreements through Blue Prism’s 26 channel partners. Chief executive Alastair Bathgate says that the average new client will start off signing a license for 10 robots at £8,000 per robot per year, and having got the clients on board the company then tries to upsell more licenses in the future. It’s succeeding as there were 28 upsells to existing license commitments and three renewals in the first half.
The key here is driving further strong license sales through a network of 26 strong channel partners which consists of alliance partners Accenture, Deloitte and the four big consulting firms, and value added resellers. The bigger deals are done through the alliance partners who typically take a selling commission of 15 percentage points on the value of the contract. Resellers take around 40 percentage points. Notable new contract wins in the period include BNY Mellon and two Swiss banks. The current pipeline of leads exceeds the level at the time of the flotation three months ago, highlighting the strong growth potential.
But is it all in the price?
True, the company is loss-making and analyst Roger Phillips at Investec Securities predicts an operating loss of £4.3m on revenues of £7.7m this year, a reduced loss of £3.6m on revenues of £10m in 2017, and a loss of £1.6m on revenues of £13m in 2018. However, with net funds of £11.2m in the bank, the company is well funded to potentially achieve cash profit break-even as early as April 2018. Mr Phillips notes that “sales momentum is way better than expectations”.
It’s worth noting that the company pays out commission on new contracts when the first annual invoice is settled so cost has to be incurred ahead of revenue. But with churn rate virtually non-existent, this creates a high quality recurring revenue stream and means that if the company continues to grow as rapidly as it has been doing then there should be upside to the above forecasts. Indeed, the monthly recurring revenue run rate at the end of April already underwrites £8m of the £8.4m recurring licence revenue embedded in Investec’s total revenue forecast of £10m for the 2017 financial year, leaving scope to outperform.
Moreover, given current levels of demand, Blue Prism is bringing forward its sales and marketing spend from next year into the second half of this year to exploit the market opportunity it’s seeing. It’s well funded to do so, having earmarked £4m of the £8.8m of cash raised for the company in the IPO to underwrite investment in the business. Investec forecasts net funds of around £9m at the end of October 2016, and cash levels above £6m at the end of the 2017 and 2018 financial years.
The company has a solid shareholder base, and reassuringly the directors have substantial shareholdings. Chief executive Alastair Bathgate, and co- founder David Moss who is chief technical officer, hold 16.6 per cent of the share capital between them and non-executive chairman Jason Kingdom holds a 10 per cent stake. Institutional investors Rising Stars Growth Fund, Schroders and Hargreaves Hale control 29.4 per cent of the shares in aggregate. This means that 56 per cent of the share capital is in the hands of six shareholders and offers a degree of stability to the share register.
Admittedly, the shares are well up on the 78p a share placing price in March having commenced trading on debut at around the 100p level. At the current price the company is valued at £68m. The question is whether 110p a share is a fair price to pay as it represents a 41 per cent premium to the March placing price, albeit the shares have retreated from a post-IPO high of 129p. Mr Phillips has a target price of 150p a share.
It’s clearly an exciting story, but I would prefer to see more evidence of the contract momentum building, and hopefully exceeding forecasts, before getting involved. So I will keep the shares on my watchlist with a view to initiating coverage as and when the risk:reward ratio becomes more favourable.
