Aim-traded Bango (BGO:89p), a provider of a state-of-the-art mobile payment platform enabling smartphone users to charge purchases made in app stores straight to their mobile phone account, has issued a robust trading update ahead of the release of interim results on Tuesday, 17 September 2019.
The company has maintained its five-year trend of more than doubling end user spend (EUS) year-on-year, reporting an increase in EUS from £220m to in excess of £465m in the six months to end June 2019. Half-year revenue rose by almost two-thirds to £4.3m, and the business is now profitable, delivering positive cash profit in the second quarter. Guidance from the directors is to expect a continuation of these trends in the second half of the year and well beyond, driven by recent contract wins of new Google Play, Amazon and Microsoft routes, and agreements signed with major media players.
Importantly, the company is operating on a cash flow positive basis, thus enabling management to fund the development of its exciting customer data monetisation business, Bango Marketplace, a product that enables app developers to direct their marketing towards selected customer audiences that are far more likely to respond, thus enabling them to choose customer segments in countries they want to focus on and generate a higher return on their marketing spend.
Chief executive Ray Anderson reports strong interest since Bango Marketplace’s launch in February with audience groups increasing sevenfold to 55 in the past four months. Mobile network operators (MNOs), payment providers and other businesses that work with Bango for direct carrier billing (DCB) publish customer segments in Bango Marketplace. So, by using Bango’s technology, they can unleash the value of their customers’ data at scale when they join the Bango-powered commerce ecosystem. It’s a market with huge financial potential.
End-user spending on apps was estimated to be US$106bn (£85bn) last year, with app developers spending around US$39bn on marketing to gain a share of this fast-growing market. However, on average, just 5 per cent of mobile users deliver over 80 per cent of revenue for app developers, so the ‘holy grail’ is to deliver these 'golden users' to app developers. By applying Bango audiences, which protect user privacy and ensure user consent, the revenue generated from app developers' marketing campaigns has been proved to more than double, which explains why audience groups are rising sharply as more mobile operators sign up to monetise customer data through Bango’s Marketplace platform.
I also understand that in addition to creating direct relationships with app developers and publishers, Bango Marketplace is attracting operators and other payment providers who want to benefit from the opportunity to turn payment data into valuable insights for developers. This boosts the potential pipeline of customers as Bango seeks to migrate a greater proportion of EUS over to the Bango Platform.
Management confidence well founded
The confidence of Bango’s management has merit. That’s because having doubled total EUS to £558m in 2018, and exited 2018 at an annualised EUS run rate of £772m, I feel that today’s trading update is supportive of Bango booking £700m of additional EUS in 2019. The transactional business generated a revenue margin of 0.94 per cent in 2018 and that margin is unlikely to be materially different this year, albeit Bango would clearly offer a discount to lock in a massive contract win. The last reported near-term pipeline of EUS spend being targeted from 45 potential customers was in the region of $6bn (£4.8bn). Importantly, there are no financial concerns as Bango ended 2018 with net cash of £3.8m and is now operating on a positive cash flow basis.
Bango’s board sensibly parted company with former house broker Cenkos Securities at the end of last week, undoubtedly a consequence of the brokerage’s misconstrued earnings downgrade at the time of the annual results which I covered in detail (‘A misconstrued earnings downgrade’, 19 March 2019). New corporate broker finnCap has yet to publish forecasts, but in any case Cenkos would have had to raise its profit forecasts materially if Bango continues to win new business at close to last year’s revenue margin.
The bottom line is that Cenkos’ now withdrawn forecast that suggested Bango would only report a cash profit of £2.7m and a pre-tax profit of £200,000 on revenues of £12.5m from EUS of £1.26bn in 2019 look woefully short of the mark. I expect the company to beat Cenkos’ withdrawn estimates handsomely. This is a company that has passed the inflexion point where operational gearing is set to kick in big time. That’s because with a stable fixed cost base and the business generating cash, a high proportion of incremental gross margin earned on rising revenue is set to convert into profit.
And that’s simply not being priced into the company’s enterprise valuation of £60m. If Bango can maintain the current EUS run-rate then it will be generating in excess of £2bn of EUS in 2020. Moreover, with a stable cost base and a stable revenue margin, operating profits should soar and warrant a target market capitalisation more than double the current level.
So, ahead of the half-year results and the introduction of profit forecasts by newly appointed house broker FinnCap, I maintain my view that the shares, which are trading around the entry point when I first initiated coverage ('Bang on the money', 26 Sep 2016) and also when I covered the annual results (‘A misconstrued earnings downgrade’, 19 Mar 2019, are well worth buying. I also note that Bango’s share price appears to have formed a multi-month chart base formation with key support successfully tested at the 80p level on five occasions. Strong buy.]
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