- 2023 cash profit guidance half of analyst estimates
- Brokers cut 2024 cash profit forecasts 39 per cent
Aim-traded Bango (BGO:112p), a mobile payment platform provider, has effectively downgraded earnings guidance for both the 2023 and 2024 financial years, prompting a sell-off that led to a 39 per cent plunge in its share price.
Although revenue increased 62 per cent to $46.1mn in 2023, the result was 6 per cent shy of joint house broker Stifel’s forecast. The group’s payments business traded in line with expectations, but longer customer launch cycles led to lower revenue recognition. Revenue from Bango Audience insights and data analytics services came up short, too.
Moreover, annual recurring revenue (ARR) from the group’s Digital Vending Machine (DVM) service, which enables customers of telecom operators to manage and pay for all their subscriptions in a single place and one bill, missed Bango’s $10mn target. That said, the unit still increased ARR by 76 per cent to $8.8mn, which excludes an additional $2mn of ARR from the launch of Bango’s third Tier 1 US telecom customer in the first half of 2024.
The impact on cash profit was more dramatic, with the directors reducing their 2023 guidance to $5mn-$6mn, significantly below Stifel’s $11mn previous forecast. Around $2mn of the shortfall related to a small unexpected non-core direct barrier billing service within Docomo Digital. Having acquired the loss-making global payments business of NTT Docomo, a Japanese mobile network operator with 85mn subscribers, and signed a long-term platform deal to provide payment services in Japan for the world’s largest merchants, Bango has been taking costs out of the business to transform its profitability. Bearing this in mind, around half the $2mn shortfall will recur in 2024. There was also a $1mn hit to profit due to non-cash market-to-market of intercompany loans within Docomo Digital. Stripping out these two elements, underlying cash profit of $7mn-$8mn was still well below analysts’ forecasts.
In isolation, the 2023 earnings miss should not have rattled investors to the extent that led to such a hefty sell-off. That's because Bango’s management has always guided investors to expect the real upside from the Docomo Digital acquisition in 2024. At the interim results in September, Stifel was forecasting cash profit of $27.3mn on 16 per cent higher revenue of $57.2mn in 2024.
The broking house included Bango as one of its top share picks in 2024, noting that “following the [Docomo] integration, we expect a near halving of the cost base and a considerable uplift in margin”, adding that “it should enable Bango to move to a cash-generative position during 2024, providing it with the funding, flexibility and broader reach to focus on its DVM licencing business”.
Higher operating cost forecasts lead to 2024 downgrades
Stifel is comfortable with its 2024 ARR revenue estimate of $16mn for the DVM business, noting that Bango signed nine new DVM contracts in 2023 with five closing in December and the third US telecom operator launching in the first half. Analyst Bridie Barrett is maintaining Stifel’s 5 per cent growth forecast for the DCB business, too.
However, reflecting the weaker than expected performance from Bango Audiences, Stifel has cut 2024 revenue estimates from $57.2mn to $53.1mn, and also notes that “to support its early success with the DVM, management plans additional investment into sales and marketing, account management and product support for larger customers”.
Stifel estimates additional operating costs of $5mn which, combined with the profit shortfall on lower than expected revenue, led the broking house to slash its 2024 cash profit estimate by 39 per cent from $27.2mn to $16.6mn. The new forecasts embed a cash profit margin of 31 per cent, well ahead of the 12 per cent margin earned in 2023, but below Stifel’s previous 48 per cent estimate.
Based on revised estimates, Stifel now forecasts 2024 adjusted pre-tax profit and earnings per share (EPS) of $3.6mn and 4.6¢, respectively, or 75 per cent below its forecasts at the time of the interim results (‘Exploit Bango’s glaring valuation anomaly’, 18 September 2023). In addition, analysts now expect the business to be broadly operating at cash flow break-even in 2024 rather than delivering $7mn of cash generation.
In my view, the lower than expected level of profitability and the hefty profit downgrade to 2024 forecasts explain why Bango’s share price crashed. It also raises concerns regarding both the upfront and ongoing costs of supporting large telecom customers and the margin to be earned from DVM customers in the longer term.
The other important point to note is that there was no mention of the hefty 2024 earnings downgrades in Bango’s trading update. Effectively, the board has reset the bar, but not communicated this to shareholders directly. Clearly, the house broker's massively revised estimates for 2024 are based on discussions with the directors.
That said, I see no point bailing out at such a depressed level. The £86mn market capitalisation company is rated on less than seven times downgraded 2024 cash profit estimates to enterprise valuation, a multiple that has scope to expand and drive a share price recovery assuming Bango converts its pipeline of DVM opportunities. Hold.
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